E33: Prime Accounting & Tax: How to Best Set Up as an IT Contractor in Canada

In this episode, we´ve brought in our tax partners and CPAs, Nasser Khan and Ali Qamar from Prime Accounting & Tax, to give you IT professionals in Canada all the information you need to decide between setting up as a Sole Proprietor or incorporating your business.  

We explore the critical differences between T4 standard contractors, Sole Proprietors, and Incorporated contractors in Canada, helping you understand which path might be right for you. 

Whether you're just starting your IT contracting journey or looking to optimize your current setup, this episode provides valuable insights and practical tips to help you make informed decisions and maximize your financial benefits. 

Watch the episode below on YouTube:

Topics covered:

1. T4 Standard Contractor vs. Sole Proprietor vs. Incorporated Contractor:

2. Understanding the distinctions and benefits.

3. Decision Factors: What to consider when choosing your business structure.

4. Tax Implications: At what income level does incorporation become financially beneficial?

5. Provincial vs. Federal Incorporation: Differences and steps to set up your corporation.

6. Payroll vs. Dividends: Should you pay yourself a salary, dividends, or both?

7. Working with US Clients: How to navigate taxes and invoicing when dealing with US-based clients.

8. Currency Considerations: Is charging in USD while living in Canada advantageous?

9. Legal Structures: Do you need an LLC or S-Corp in the US?

10. Tax Reduction Strategies: Legal methods to minimize corporate and personal income taxes.

Transcript:

Please note, that this transcript is automated and may have errors.

Boys, taxes.

We're back.

Okay, so the reason why we're here today, and thank you, prime accounting and taxes for coming here and doing this with us. You guys are, we'll say, a partner of Montreal Associates in a sense, where you were highly referred by a friend of ours. And you've helped people or contractors in our network actually make the transition from permanent to contract, from sole prop to incorporated, from T4 to incorporated, which they appreciate. And we've gotten great reviews.

The reason why we're having this chat today is because there's a lot of questions that we get from contractors, IT contractors, right. That's what we focus on at Montreal Associates in my division, a lot of questions I can't answer. We can't answer because we're not accountants. And the purpose of this podcast is really just to start from scratch baseline. If somebody wanted to be a contractor tomorrow, what do they got to know? And just, you know, give them the tip of the iceberg that they can then reach out to you and get some more information.

To begin, I would like to start, like I said, from the foundation. What is the difference between T4, temporary employee, like a T4 temporary contractor, a sole proprietor, or an incorporated contractor in Canada?

So, in any independent contractor, there are basically three that you just explained. So T4, a temporary contractor would be like they would get a T4 slip, right? And essentially you would be paying your EI, your CPP. You would be paying, like a regular tax right now. The two that we really want to talk about, and especially a lot of IT professionals, especially the veterans they fall under, is a sole proprietor and independent contractor.

So now when you are a sole proprietor, you are basically you have your income and your taxes. You're filing it together a T1. And essentially you're taking on the full risk. So before you set yourself up, you should take legal and financial advice in terms of what your scope or your future level of income would be like, what is your risk tolerance, and what is the kind of business that you're doing? If you are going to incorporate yourself, the biggest benefit is you disassociate legal liability of that business to your personal doing. So, if you're in a business or you're in a line of work where that is somewhat necessary, it's important that you incorporate yourself. But it comes with a lot of responsibility as well, such as annual tax filing, which you will be required to do as a corporation, and a separate tax filing for personal taxes. So a lot of individuals might be like, nah, I just want to keep it simple and I'm just going to be doing this, you know, a 9 to 5 just under a sole proprietor. And that's fine with me. And you may think it's fine and it might be fine. So it all depends on what your scope is and how you're going to be functioning and what, you know, things you're going to be doing. At the end of the day, there is liability to your personal doing on your business. If you incorporate yourself, your liabilities are detached in terms of your personal belongings and your corporation. So that's the biggest benefit. But it comes with the added work that you're doing, annual filing, and separate tax filing and some other bylaws that you need to follow.

So that goes into my next question a bit, but I want to kind of unpack this a little bit from the perspective of an IT contractor. And we say an IT contractor. This could be some kind of software architect, software engineer, business analyst, project manager. The list is basically endless working in technology. But when we look at what should be considered when deciding what route is best. You've said a couple of things where we want to look at how simple do you want your taxes to be? Clearly, the most simple would be someone who's a T4, temporary, effectively a standard temporary employee of a business. Right. And then we look at the most complex, perhaps, which is the incorporated contractor route, where you have an actual registered business. In the middle is sole proprietor. I have that correct.

That's correct.

Okay. And then you mentioned level of risk, right. When you say level of risk, can we define that a little bit further with respect to, let's say, a developer, right. Someone who's going to be programming through an agency like Montreal Associates at another client, say a big insurance company, right. What kind of risks should they be thinking about in perhaps a job like that? When you're contrasting, say, sole proprietor or incorporated?

Yeah. No, for sure. It's a good question. And there's many examples that do come to mind where this does become relevant. A lot of times in startups it is a little bit more relevant where the actual startups themselves don't have really, you know, defined roles or defined scope of roles. A lot of their contracts with the end clients are, you know, not fully all the I's aren't fully dotted, all the T's aren't fully crossed. So there's a little bit of ambiguity. And in that case, you know, it's always beneficial to our clients to be incorporated because if there is some sort of issue that can come up from lack of performance, if the contract isn't fully met to the terms of the end client, it's not really going to come back on them as an individual. Their corporation might have to be part of a settlement or some of that legal nuisance that can come about. But for the most part, you know, as an individual, they are shielded from that risk if they incorporate. So, you know, that can come into play. I don't know if you can think of other examples where.

That's primarily, especially in the industry that we're talking about. It would be more focused towards it. A legal liability can come from various different actions. Right. It's not just who you're working for, what you're doing, and the consequences of that work. Especially, you know, it could be different dynamics. Like you talked about contracts between organizations, but at the same time, you know, your scope of work also can define different levels of risks that may be exposed.

Okay. So from what you're saying, then being incorporated removes the person slightly from perhaps legal risks that if something on the job were to go wrong, they may not be personally liable, but their business could be liable. So it protects the person. Now, again, you can probably confirm this, but in an incorporation where there's only one person, which are, I would say, the vast majority of the contractors that we work with, is that separation actually valid in the court of law? Because I've heard this way too, where, yeah, you know, you have a business and it separates you if there's a hack, for example, and it could have perhaps been your fault personally, but because you have your business. It's like, oh, it could protect you as an example. Not even talking about business insurance yet because you're the only person who works for that corporation. Would it not be a little bit more difficult to because there's not a lot of process in your business where something could have gone wrong, where you can claim negligence? Is that valid?

There are layers to that. You know, I'll still say a corporation structure does shield you from some of that directly. Fair. And you mentioned the business insurance. It is there for that purpose. So it is important to get that. Then business insurance is one of the first things we recommend even for IT contractors who don't have a lot of physical risk and some of that traditional risk that a normal corporation would have. But a lot of the times you're still entering into contracts. If you're a project manager, you might be outsourcing different roles. Anytime you're signing contracts. We do recommend get business insurance. It's fairly affordable, economical for our IT contractors. So it's not a burden. And it does provide another layer of protection in case things do go awry. Another thing too is you did. It's true that a lot of your clients would be kind of one-person corporations, right? But a lot of times, you know, there are spouses or partners that are involved. There could be some other family members that people kind of bring along for various reasons. And that kind of does spread out that risk a little bit too and provide another layer of potential risk.

Yeah, for sure.

And yeah, you would need a little bit of unpacking with the legal advice on that one too. But you know just what Nasser said. But in terms of other elements, I guess, you know, there is that element where some IT contractors can be making a lot of money. And there are deferral strategies more obvious in the incorporated structure, where you can choose to pay yourself a salary or a dividend. We can break it down. Essentially, you are able to defer a lot of your taxes if you don't need to utilize all of your income.

So from a tax perspective, is there a level of income required if you did want to go the incorporated route as opposed to the other two?

There's not a hard rule per se. Generally, when clients come to us and ask us that question, we kind of look at a holistic picture in terms of what is their family income, how many kids do they have? What does their spouse do? What other tax liabilities might be out there that might impact their overall tax bill? So we do have to look at it from a holistic perspective to give them that right answer. Generally, the more you make, the more you can save from an incorporation. Once you get past that 80,000 mark, it generally starts to make more mathematical sense to incorporate. And again, the cost to incorporation, the annual filing isn't that burdensome for the simple IT contractors. That kind of salary level should impact your decision. In general, it just does make sense to incorporate.

Sure.

And the other thing I was going to ask too is with so what I take from that is, let's say someone was a permanent employee and they were thinking of going contract. They definitely could still sort out their incorporation situation beforehand and then get the contract later that they can run it through as much as it probably will cost them a little bit of money. We can talk about that later. They don't have to have a contract in hand to set up an incorporation, correct? Like they don't have to have a job in hand.

No, they don't. They can prepare everything so they're ready. And then when that right opportunity comes up, they can then decide to start working as a contractor through their incorporation.

Absolutely. And in some level of IT contracting, we've seen people hold more than one role. There are part-time roles. There are elements of that.

I was going to ask you about that.

And that makes it more easier for you to manage from an incorporated perspective. It goes back to the answer Nasser just gave in terms of income threshold, if you are holding two separate roles, you are likely going to be in that 80 or over $1,000 per annum. And then it makes sense not to be withdrawing all that income if you're not utilizing it. So deferral tax strategies definitely kick in much stronger at that level for sure.

And I mean hey, as an IT contractor, not knocking anyone who's making 80 K or below. But if you're working as a contractor, you're going to want to be per year even on one contract, well above this. And if you're not, you can talk to me. But that's a good question, though, because I've also heard from other people who are looking to be contractors. Do I need to have multiple contracts in order to be a contractor compliantly? Is that true or is that not true?

It definitely does help. We've seen the CRA definitely do a crackdown lately on those individuals who only have one contract. So the guys at the bank who do three years, 40 hours a week, and then they switch banks back and forth as a contractor. They're cracking down on some of those guys here in Toronto. It's very common, as you're probably well aware, to have those bank contracts.

Or government.

Or government. It had been going on for a while. We have seen recently the CRA is starting to send a lot more notices, a lot more pressure on them to really prove that this is actually in cooperation with the ability to handle other tasks than just the one 9 to 5 that they have. So there has been a greater spotlight placed by the CRA. So our advice to our clients has been very clear is that definitely try to diversify, mix it up. If you got a life partner, I'll bring that point up again, just try to get them going somehow as best you can. We get pretty creative with some of those things as best as we can within the limits of the CRA regulations.

That's what it comes down to is the CRA kind of changes its spotlight every few years. First it was the real estate crackdown. Right now it's the IT contractors. In a few years, hopefully the spotlight moves elsewhere. But we're definitely seeing that right now.

Interesting spotlight. So it's not a hard rule to have multiple contracts, but it definitely could avoid some hassle from the CRA. If you do have some diversity in where your revenue comes from.

The verbiage in the contract is being looked at a lot more by the CRA these days. So that is something we would advise. When you're getting that contract, get it reviewed by a lawyer or we can help in that too. Hopefully your HR is flexible enough to change a few words around to really give it that flexibility that gives the appearance that this is a legitimate contract between a corporation and the bank or the government.

Then there are certain contracts that even though it is a B2B transaction, the contract very much appears like an employment contract.

That's the problem. That's where we've seen the issues. It shouldn't appear like it. It should not, of course. It really has to appear like a business to business contract. If we look at an example, I like to use the banks and the government contracts, in this case, because that's where you may see things like that. But someone who, for example, perhaps was working three years as a contractor in the same business with the right contract, where it really does make sense, where this business has a specific ability to deliver very niche technological whatever. That's something that, even in the eyes of the CRA should fly. No, that should be fine. Because it's a B2B contract. Nothing in there has anything to do with employment or doesn't allude to a type of direct employment where if somebody were to read it, it's like, okay, no, this is clearly they’re going to effectively a consulting company to deliver a piece of work, even though it happens to be one guy.

Exactly.

Or am I wrong?

No, no. That on its own might not be enough. That's what we're seeing. There are other factors at play here. The CRA might ask, were you on-site in that same office, 40 hours a week, 50 weeks of the year, basically an employee of that company? Or did you have your own office where you worked out of and those kinds of things?

I completely understand. I have a story there. I've done contract staffing in Germany, actually, and I think the UK has a similar law now. It's called like IR35. I don't even know, not sure if that's a thing anymore, but we used to have to fill out a questionnaire that would basically deem the person a true independent contractor or not. I haven't seen this in Canada where we have to provide that with Canadian businesses. I've seen a little bit in the States with certain companies, but you're right. If this person, for example, has all the exact same permissions as permanent employees doing a very similar type of work, where people are doing that as perm, that's where it's like, okay, this is looking a little bit funny and that's where you can get into some trouble.

Okay. Very good. Now the difference between a federal Canadian incorporation and a provincial incorporation. What is the difference? Is one better than the other? Do you need to use one or the other? What's the deal with this?

Well for federal and you can be registered as federal or provincial. It completely depends on the work you're doing, the geography of where your business was going to function. It also depends on the IT worker. Do you want to be available in a province, or is your scope more of a national level? But the main difference becomes from a registration perspective it's not too different. There are a few additional, you know, you're governed by provincial laws where when you're registered federally, you're governed by CBC. Your jurisdiction is national. But at the same time, there's a bit of a different set of laws. So if you're going to be only operating in Ontario, there's very little reason for you to be federally incorporated. Keep it simple for the business. If you have any level of scope. Let's say you're doing cybersecurity for TD Bank. They’re across national. And if there is any reason for you to be geographically available or your company is going to get contracted in New Brunswick and Ontario at the same time, then, okay, maybe there's a different scope of work and a different need. But most IT contractors, I would think they're geographically localized. So it would make sense. We haven't really come into a situation where we had to tell someone, you need to be federally incorporated versus provincially incorporated. Just like I'm talking IT specific. Just because they don't have any functions outside of the province. So keep it simple. You function within that province, the provincial laws, and you don't need to be exposed to federally governed laws.

The only reason I ask is because there's a lot of contractors that want to take contracts where the head office of their client is outside of Ontario. We're in Ontario now, by the way, for those of you who don't know, Toronto. For those contractors who are trying to work with clients outside of Ontario or perhaps even the United States, does that automatically mean they should have a Canadian federal incorporation as opposed to provincial?

No, no. For IT contractors? No. The majority of our clients are provincially registered. We have a lot of clients in Alberta, BC, and Ontario. It's fine. And they can trade with clients anywhere in Canada still. And the states.

That's correct.

Okay. Cool. Yeah. There are a few steps to that. We can dive into the states. The states are a little bit different than Canada. But for the most part when it comes to providing any sort of IT service, it's fine. A lot of our clients are federally registered because they went through a lawyer. So the lawyers tend to do federal registrations. A lot of them.

Do you know why? Do they make more money that way?

I think probably a little more complicated. That's why.

And complicated for lawyers means better money.

One more billable hour.

Exactly right.

One more billable hour. No doubt. So we get a lot of those. But, to Ali's point, for your listeners, there's really probably not much reason to ever really do a federal incorporation. If they have grand plans, grand visions, grow this thing out, definitely might be something to look at.

Perhaps if they wanted to have employees eventually that are in different provinces and not their own, is that where maybe a federal could make sense?

Not even. Any corporation can have a payroll account set up with the CRA, so that is the main thing from a CRA perspective. However, employees in different provinces might prefer that for some reason. But to be frank, there's not much.

So you can get by with a local provincial one. And regardless whether it's provincial or federal, you did recommend that they should get business insurance as a corporation, right? That's a good idea. Now, I've heard someone say this. And again, I didn't really have a rebuttal. One of my contractors maybe. No, I'm kidding. I didn't really have a rebuttal for this because I didn't fully understand. But they were saying, oh, you know, when the agency asked me to provide business insurance, I never do that because that means liability gets pushed down to me. And I'm thinking it's because the agency. So Montreal Associates obviously has business insurance, but if the person who's ahead of you in the chain before the client has business insurance, does it automatically stop there? Or if you made the mess, can the buck still come down to you without insurance?

Another podcast with a lawyer on it.

We should have had one, but that's okay. If that's too much on the lawyer side, we can do that in another session.

There might be one walking down Yonge right now.

You can probably run out. All good. We can move on from that one. I'll keep that one in the bank. What are the steps to setting up an incorporation? Can I do this myself? Do I need an accountant?

You could use an accountant for professional advice and help you go through the process. But in terms of setting it up, it's pretty simple. Depending on the structure. If you do it thoroughly, you’re choosing a name, you're registering it. If you register as a provincial corporation, your name is not protected in other provinces. So someone can take your name. If, for example, I open Ali's Cafe in Ontario, tomorrow, I want to open it up in Manitoba, somebody else could have already opened up Ali's Cafe. And I don't have the rights to it. So choosing the name, in terms of setting up a corporation, you choose your name, establish your articles, select and appoint your directors, and then you file those articles. Once you file those articles, you set up bylaws, you make sure you convene a meeting and follow the bylaws. Those are the simple steps in a nutshell. It's not that difficult. And in between, you get your business number.

The HST number.

Depending on where you’re operating, we'll call it your tax number and your business number. It takes about 5 to 6 days. Then you convene your meeting. Setting up an incorporation, getting the right tax advisors and legal advisers is essential. From there on, it's pretty simple. Steps are very simple. Canada and Ontario made it very simple to create businesses, to operate businesses. But you just need to understand and get the right advisors and experts in the room to make sure you're doing it correctly and within the correct scope of work.

I believe there would be a provincial government website where you would go and do that or have an accountant do it for you. And there's a Canadian federal website where you either do it yourself, like you actually click incorporate, or have an accountant help you walk you through the process.

Just to add on, where a CPA or a lawyer could help with this process is there's a lot of legal jargon through those forms. That's where a lot of IT contractors come to us. It's quicker, it doesn't cost too much. We're able to do that holistic analysis for them to help them set up the corporation with potentially family members, potentially other people to help reduce that tax bill once they start making that money.

I can't wait to get to that part. Should I, let's say I open up incorporation, got a contract ready, I'm working, billing, and my corporation is making revenue. How should I pay myself? Should I payroll myself? Should I issue dividends? Is there another way to pay myself, some kind of combination? Let's say this person is making well over 100,000, or their revenue is well over 150,000 per year. What's the best strategy?

There's no one size fits all like you just said. You could pay yourself a combination. You can pay yourself only salary, only dividend, or a combination. Having a payroll has its complexities but has a lot of benefits too. A payroll makes you liable for CPP, but you also get the benefit when the time comes. When you pay into CPP and EI, you're contributing and your long-term strategy makes sense. What the dividend allows you to do is that you don't need to withdraw the entire income. Dividend can sometimes be tax advantageous.

I have one client outside of the IT industry. There was a grant available for that specific industry, but the grant was only available if someone was on a payroll. But these two brothers, they have a nice business, but they were only paying themselves dividends. They can't access the grant, which is a couple hundred thousand dollars accessible to that industry. All their colleagues are doing it, but they can't because they didn't realize how big they were going to become. They went from 100,000 to $2 million revenue in six years. Now they're resetting up correctly. Getting the right industry expertise and advice is crucial because not one size fits all. They should have had both payroll and dividend setup.

For a lot of newcomers to Canada, the first question we get is how to save taxes. But the question we go back to them with is, what are your financial goals? Do you want to qualify for your first house or get a car? If that's the case, having that regular T4 and contributing to banks like that makes sense.

If you got the house, the car, and your life is set up, you may want to lean more towards dividends.

Can we talk about the tax rates actually? You have to pay or charge HST on your services, pay HST, pay corporate tax, and eventually income tax if you payroll yourself. Can you walk me through those percentages for each of those situations?

Sure. In Ontario, when you invoice, it's going to be 13%. For IT contractors, there aren't as many HST deductions available as there are for goods and services businesses with more inventory. So, a lot of times every quarter, our clients do have to pay most of that HST back to the government. But that's kind of an in and out. So it's not really a real tax for most of our contractors. The two main taxes that we should talk about are the corporate income tax, which is the profit that the corporation makes, the roughly 12.5% tax that the corporation has to incur, no matter how much revenue they make or up to a certain amount.

For corporate taxes, it's pretty much a flat rate for the most part. So if I my revenue is 2 million. So under okay. Yeah. I'm talking more for IT contractors which would be. Surprised my friend. True. Yeah. Um but let's see. So I think he's trying to recruit us. Huh. Is it up to 500 grand? No. Given that almost all of your clients would still qualify as a CCPC, a Canadian controlled private corporation, assuming they are Canadian residents, that corporate tax rate would be around that 12.5% for Ontario corporations.

That rate doesn't differ too much by province. You know, the provincial portion isn't too different. So even if you're in Quebec, Alberta, that corporate tax rate in Canada is pretty low and pretty consistent across provinces. Where it hurts most is on the personal side. And whether you get a dividend or a salary, you do have to pay personal taxes. As you're probably aware, the more you make, the higher the rate goes.

Probably for most of your clients, they are getting to that 45% tax bracket, which does hurt. And that is where initially we mentioned for the most part dividends. The net math on that does help. It's just a lower tax bracket. So if you're in a higher tax bracket, the income tax that you have to pay on a dividend wouldn't most likely be lower than what you have to pay on a straight salary.

Okay. So if we look at the straight up payroll, if someone payrolls themselves effectively, they get taxed just like they do as a permanent employee because that's how they're running it. You're a permanent employee of your own corporation. You are going to pay taxes like any permanent employee would up to you say 40. It feels like 50. But they're going to pay tax within the respective bandings with dividends.

Can we just get a bit more detailed on what that tax actually looks like and perhaps percentages for sure. For the T4. One thing to also keep in mind is the corporation. Your corporation has to pay the employer portion of CPP and EI, right? So if you're an employee at a normal corporation, you're only incurring that one side of it. At a corporation, you got to pay both sides of it. There is that additional hit that which is deductible, though, from payroll.

What you what you. So that's the advantage, right? Is that the corporation gets a deduction. What I mean. Exactly. Now the reason again most people do take the dividend though is because of what I was talking about before where corporate tax rates are pretty low. In Canada, personal tax rates are much higher. So you do whatever you can to save on that personal portion of taxes.

Understood. And that's where there is something in Canada called the eligible tax dividend credit. And that's what kind of gives you like a roughly a 15% break on the taxes that you pay if you get a dividend versus if you just got straight salary. By comparison, if we look at someone who one business where they pay the contractor, the business person basically pays themselves x amount of dividends and then another business identical, the person pays themselves the exact same amount of money as payroll.

The taxes paid by the person. The employee of the corporation should be about 15% lower on the dividend side. All else equal. Yes or no. Because you still have to take into consideration the fact that the corporation isn't saving taxes when they're paying out dividends. So a dividend is not a deduction to the corporation, right? Yeah. So you don't get that portion of tax savings. Sure, sure.

If we just talk straight personal, personal straight, if we look at the amount of tax that someone would incur. Basically taking complete payroll with the same amount of money as someone else doing the dividends. Is that a good way to look at it? If we forget about for the corporate for a minute. So you still can't give a definite answer because unfortunately in Canada the math is never it's never easy. It because they do that on purpose.

I'm certain they do helps us a little bit, but yeah. You know, the because you have that laddering system of the rates, right? And the fact that everything in Canada is based on family income depends how much your spouse is making. Depends if you've got children or not and how old those children are. It's not a straight black or white answer. But for vast majority of clients, when we do the math and we do that for our clients, right, you can show them flat out where exactly we can do scenarios for them, right?

If you pay yourself this much and then you give yourself this amount of dividends, this is kind of what you're going to net as a person. This is what it looks like for your business and vice versa. However you want to move the scale. Part of it is also how they want to plan their long term financials. Right.

So I understand the question is how much as an employee would you be paying. But that employee also owns that corporation. And what is his vision for that corporation? Does he want to amass a certain amount of dollars that can eventually lend to another corporation to buy something else or invest in a different business? Those are things that open up to a lot of possibilities, right? A lot to do with the business, a lot of possibilities, making money. Especially those contractors that are making half a million or getting up there, they're not spending half a million. Well, at least not a lot of people I know. But you're trying to buy a house in Mississauga. Yeah. That's your down payment. And that's different. So what is holistically your savings? So a bit of a hybrid model sometimes works for different individuals versus straight payroll or straight dividend. And as Nasser alluded earlier, also the benefits of having a payroll, whether it's grants or showing up at the bank and getting a loan, a lot of those things contemplate where you are in your financial journey and how you want to be set up.

Just to quickly add, let's say you get a $200,000 eight-month contract. And after that eight months, you might go away for a couple of months or you don't see anything in the pipeline right now. Well, if we know that, then we can say, okay, you know what? Let's not take too much of that profit right now in this year. Next year might be more dry. Let's defer some of that or a lot of it to the next year and save a lot of taxes. You can still have a salary while you're technically not even working if you wanted to do it. Keep withdrawing that money. When you're not making money, you'll get to that lower tax bracket, and that's where it can help as well. The financial planning, I imagine, with proper accountants is invaluable for situations like this where sometimes that's how they want to structure it. They want to do three to six months on, couple months off, back and forth. That's the beauty about being a contractor who can work remotely.

And on that, when we're talking about cross-border, if I am an IT contractor with my own corporation, how can I work with US-based clients as a Canadian corporation or provincial incorporation? It's becoming very common these days. Those US contracts can be pretty juicy, and we're seeing a lot of that come through. The quick answer is, get those contracts, sign them, bill in USD, and just register yourself in the state that you're going to be billing in if you're going to meet that state's threshold of sales tax. To put that in simple words, if your client's in California and California says, if you're going to be making over $200,000 a year in our state, you've got to pay us sales tax. So whatever the threshold is, just go and register there, and you're set up, you're good to go. But yeah, for the most part, it's not too difficult. We're seeing a lot of invoicing to US clients, and it's a booming business right now for Canadian contractors.

So you're saying that if I'm registered in Canada already, I want to consider also registering as some kind of S Corp or LLC in the United States as well, or no, stay with your incorporation in Canada and just invoice? What's the best situation? This is what I've seen, and perhaps these contractors are doing it wrong, right? But we can talk about this, that's the whole point of having the chats, right? Probably, who knows what kind of advice they're getting. So we get a contractor where, obviously, if we're the one who has the contract with the client, it's an American client, right? We can't invoice that client Canadian tax because they're not paying Canadian tax. It's a flat rate. They're going to say, we're going to pay you X amount an hour, find us a contractor. When we go to the contractor if we're directly working with them. Yeah, right. If we're registered in Canada from what I understand, we can have them charge their HST on top of their standard rate. Yeah, right? We pay that HST in as a Canadian business. We claim it back at the end of the year, and the American company still pays the flat rate that they mentioned because you're the middleman. But if it was direct, yeah, so it's different if it's direct. So we have a bunch of clients that do it, and they just they don't put tax on it. Yeah, because they still don't pay that HST at the end of the year. They're going to rusty. They don't have an agency like that. No, exactly. They're going to direct. So if they're like, but that's also a good example because we have contractors who do both. They'll do it through an agency like us, right? Where it's a little bit easier because technically their contract is with a Canadian company. Yeah, exactly. And then if you look at one that's working with an American directly. So Canadian business to American company, what a lot of them tell me they do is they have to factor what that HST is going to be on top of their base rate because they're not charging HST, but they're expecting to have to pay it. Some of them, though, have told me the opposite, where it's like, oh, but if it's an American client and I'm billing directly to an American client, I shouldn't have to pay HST. I'm not an accountant, I don't know what to say, but at the end of the day, they've got to do their taxes, right? I don't think they have to do HST either, because the good or service is not being provided in Ontario or Canada.

Quick question on that. If someone, let's say, for example, was registered in Canada with their Canadian business and was actually traveling for perhaps an extended period of time, let's say a month, to their client in, I don't know, Mexico or the United States. It doesn't matter, right? They're traveling abroad to be there locally with the client every day. Can they effectively write off that entire trip as an expense, or are there things on that trip that they cannot? Like if they have to eat during the day and they're only there because of business, is that tax deductible for the corporation?

If they're there primarily for business, yeah, that's a full write-off. The entire thing, the full expense, like there's no limitations. Do they need some kind of corporate contract or corporate policy that says per diem for traveling people? As long as the contract doesn't specify that so and so contractor has to be on-site. Because if it's saying that, then, again, you're effectively getting to that point. Well, are they kind of an employee, basically a foreign employee of that corporation, right? So, you know, as long as there's nothing there that pops up, you can just, yes, you can't be stipulated to go to the office, but it's like, I am going to service my client because for this month, I believe I need to be there, we're doing a go-live or deployment, for example. Yeah, right. Yeah, exactly. So that's something that projects, major milestones are coming up. I need to be there in person for XYZ reason. Hence, why to make that billing, I had to be in person. So, you know, I'm charging it off.

Okay, yeah, is it worth it to charge in USD if I still live in Canada and all of my expenses are in Canadian dollars?

We are seeing that a lot. I think the major reason is the US and clients prefer that, you know, a lot of times on their end, it's a bit easier. Again, especially for startups in the US, they don't really have that backend really set up. So a lot of times it's just a pain in the butt to pay in Canadian dollars or foreign currency. So they prefer getting US invoices and getting the clients. Absolutely, yeah, for individuals it's, you know, it's very easy here. Our banking system is very, uh, very easy for US clients. Every single major bank provides us corporate accounts here. So it's a very easy process. You just go to your bank, request a US checking account. It takes them about two minutes to set up and that keeps it very easy.

So yeah, there's really would you agree though that if, um, if I'm in Canada, right, and I'm billing in USD, but all of my life and expenses as of right now are in Canadian, and I don't have much because of, say, my life goals, I don't have much bandwidth to keep that USD in USD in my corporation, would it be in my best interest to just get an equivalent Canadian contract in that case? Because I'm always converting the money because I have to use it, right? Is that would you agree with that or no, it's still better to take the USD, take the better currency, diversify your income. But, uh, if it's the only source of your income and you're expending the entire amount, then maybe there is an anomaly here. But, you know, you would assume as an incorporated contractor you may have multiple sources of income, ideally. And then you might want to hedge, uh, and you might want to get some advice from a financial planner, uh, you know, even from a foreign exchange perspective, right?

Okay, so I think that makes sense. To summarize, if it's perhaps your first contract, this is what I'm more getting at. Yeah. And you're making USD, like you're pretty much just going to be eating conversion cost. Unless, unless for example, this first one is in USD, I got another one coming in Canadian where I could bank most of that USD and keep it in my corporation without, say, converting it now. Yeah. And then using the Canadian dollars for precisely the. Okay. Yeah, I understand. Okay, so I've been giving good advice there. That's what I've been saying to my contractors.

What are some ways to legally reduce the amount of taxes you pay as a corporation and as an individual?

Yeah, for sure.

I'll start off and I'm sure there's a million things you can add in there, but when it comes to an incorporation again, I've touched on it a few times. With contractors, we do advise, you know, if you can somehow use your life partner or your spouse to put them on payroll as an administrative assistant and maybe involve them in the business to help out with administrative tasks, getting new clients, and being your salesperson. A lot of that stuff saves money to the bottom line and also does a little bit of legal income splitting there, right? If it's legitimate.

The other thing, again, we advise our IT clients is if you're using your home office, get your floor plan, figure out what percentage of that house is being used as a home office. If it's a corporation, then we can write up contracts to say XYZ Corporation is renting out this space to be used as a place of business. If you're a sole proprietor, then it's just a straight deduction as you know, this percentage of my house and my expenses are being incurred to make that income.

And then, yeah, as we touched on before, if you're going to client sites to hit project milestones, a lot of that stuff can be written off. So just keep those receipts. Always use a separate bank card or credit card for all of this corporate stuff so that there's no confusion. The CRA likes it, keeps it clean, it's the right way to do it. And you know, hopefully as you add a lot of those expenses up there definitely can be some nice tax savings.

And I would also think, figuring out what's relevant to your incorporation in terms of sometimes there's industry conferences. Are you, is that going to add value in terms of what you're delivering to your customer? And it could be in California, it could be in Florida, it could be in different places and where you could network and where you can have a clear justification for your business. And those are some of those things where you can establish that relation and you leverage the legal allowable utilization of your revenue in terms of how you're functioning.

If you have multiple, let's say, even if your spouse is a legitimate person that's helping you in the business and where you are able to establish income splitting, do we have, however you're incorporated, you can have an annual general body meeting. You can do a lot of things where, legally, it's allowed. And you have to make sure that there's a clear justification and relationship created for your business in order for that to be justified as an expense.

And the last part, you know what he just said? Make sure you're using the right card, not your personal card, and mixing personal and business. Keeping a separate line definitely helps and avoids any focus on your transaction.

So how far can this go? Because let's say, for example, I have a few thousand bucks worth of technical equipment at my place, which is very common for IT contractors. They got expensive stuff and I got a really big dog. And this dog is a breed of dog that could be considered a guard dog. Could I perhaps write off all of the costs for this dog, who effectively is my security for my, for my gear that's worth, say, five, six, seven, eight, nine grand?

Has anyone ever asked you that question?

Actually, yeah. I'm serious.

Yeah, yeah. Like what I'm trying to get at is like, could something like that actually make sense? Like security cameras, obviously. That's something where if you're working from home, I would imagine, right? You could write off, say something like this. But could you go as far as that?

So I think to answer your question, you know, it's always a logical test, right? Does it logically make sense to an average human being for the most part, where we get a lot of crazy questions, you know, in it, networking is key. So if you go down to the club on the weekend, you get bottle service and everything. You know. Where exactly is the line drawn on? You know, am I just getting clients or, uh, you know, just having fun?

Um, you know. So the narrative has to make sense. Establishing a clear relationship, how you add value to your business. Got you understood? Yeah, understood. There's a million theory court cases on a lot of this, too. So, I mean, when we get a lot of those questions, we do. It's gone through the courts. You'd be surprised how much crazy stuff has gone through the courts. So a lot of this stuff could be answered. Gotcha. But I think that's a good rule of thumb, what you just mentioned, where like, does it, does this legitimately add value to your business? If it really does make sense where that's, you know, you live in a place where perhaps a bit dangerous, I don't know. Yeah. And it does protect, then, you know, then it is what it is. But yeah, I get, I get how things can definitely be perhaps too far-stretched, as you mentioned. Um, but that's where accounting, proper accounting advice can come in to see, okay, what actually does make sense for how you're operating, how you're set up.

And I would also advise any of your IT contractors to be careful in terms of how and what they're retaining from accounting advice. There's a lot of accounting advice out on the streets, and you need to make sure that it's proper, you know, it's coming through sources which have the license and training. Because we have attained a lot of clients where they've been audited and their accountant has disappeared. Literally. That's how one of our, you know, I would call it a pipeline of customers or clienteles we have is because then that person also knows other people that were being serviced by the same accountant, and they're running into the same issues. And it's really important because, you know, people tell you all the great stories and the wins and how they saved all this, but very few will tell you creative accounting, right? Yeah. Where if you will tell you a creative accounting only goes so far. One plus one still equals two. Yeah, yeah, yeah. That's really good advice because you're right. There's a lot of stuff that goes around, right. That maybe they slid under the radar for a bit too long. But at the end of the day when push comes to shove, you can be in a lot of trouble. Right. Exactly.

If I, if I want to keep money in my corporation. So let's say, IT contractor I got a few contracts. I make some money now, right? I don't have to pay myself everything that I'm billing to cover my costs and live the lifestyle that myself and my family need to live. What are my options to invest? And can we talk a little bit about capital gains and perhaps the new law that was, I believe, passed? What can I do? How can I invest the money that's remaining in my corporation?

I'll talk about the first part in terms of how you organize your structure. Sure. Of the corporation, you know, how is how is your professional corp structured under a holding corp or do you have different lines of businesses that one corporation has?

Can we just define holding company really quick? Yeah.

So holding corp essentially, you know how you set yourself up. You know a professional corp can be under a holding corp. And they can have different lines of businesses because each corporation should you know have a defined scope or defined business, whether they're investing or whether, you know, different lines of businesses that they're having. So within the same corp, within the same corporation. Yeah. And even if you don't have it within the same corporation, you can still lend money and charge interest as a deductible to one from one one corp to another corp. But within having, you know, we've seen structures we've created where you have a holding corp, you have a professional corp and you have a bunch of other corporation depending on, um, you know, the vision of that person or vision of that business and you are able to borrow money from one entity to another, uh, just like you would borrow from a bank. And, you know, you're essentially deferring more taxes. Uh, you're creating, uh, interest expense for one business. Um, and you are able to invest your existing dollars without actually withdrawing it and paying full taxes on it.

So there is that element, uh, in terms of the new scope and the changes that have come in, um, the announcement on capital gain taxes. You want to shed some light on that? Yeah. Just with the, uh, the rate increase on the capital tax gain, it will have an effect, especially on some of your clients who are sitting on some of those really big gains, probably especially from property. Um, so definitely that that is something that now with the new rule, it's even more prudent that, you know, going forward, you potentially use a holding corp structure, which is kind of like a paper umbrella corporation where you can have your IT corporation, you can have a real estate investing arm or a stock investing arm all in the same corp, all under that holding corp. And so you would have the holding corp, which is um, it could be owned by like a family trust or you and your wife or you and your family could own that holding corp. So perhaps the holding corp may not be owned by you, correct. Right. Okay. Yep yep yep. Exactly. And then multiple corporations under that that are owned by this holding company.

Exactly. So the IT company would be the one bringing in a lot of money. Um, right. Pumping it into the holding corp. And the holding corp might then be investing that into the real estate corp that's sitting under it, a separate business. A separate business. Right. Um, so because the. The area of business the company is focused on, the taxes are different than if you if you have investments that are outside of your core business. Is that correct?

That is correct.

Okay.

Right.

There's a concept of active and passive income. If one of your corporations is a real estate flipping arm, it gets a different tax treatment than holding one townhouse for ten years without active use. Different rules apply depending on all that.

No, this is very interesting because this is, I think, what a lot of people want to get into when they start to do well. People making 300, 400, 500 plus. So you're saying that if you open up a holding company owned by a family trust, it's to separate your different lines of business.

But also, the reason why you would put it under a trust, perhaps instead of yourself, is for tax reasons and for legal protection if pursued.

Family trusts are used for better taxation around inheritance, and more structure can be placed into that.

If you want to get more creative, if you have younger children and want them to receive shares of the corporation when they're taxed less, that's something to plan for your future goals. So if you start looking at perhaps having a holding company owned by a family trust, you can have one business. Is there a way to register a business under another business or is that a dumb question?

No, exactly. One holding corp can have multiple entities. Is there a way to register it specifically, like on paper or how does that work?

Accountants handle that part.

Right. Like how businesses are set up, how they're structured.

So I'll expand on this. For some high net worth clients, we work with affiliates, financial planners, legal advisors, and lawyers who specialize in high net worth individuals.

This is where good tax advice and planning come into play as you grow beyond your initial expectations. At that point, you need to create a holding corp and ensure your structures have legal contracts between companies. That's effectively what creates connections between the holding company and separate corporations, like your IT contractor or other investments.

If you're thinking of investing money, you can have another company under the same holding company, such as real estate or stocks, as separate lines of business.

If you're considering these moves, start conversations with your accountant and wealth management associates. We can facilitate bringing them together under the same umbrella to discuss tax advice, financial planning, legal perspectives, liability considerations, inheritance planning, and insurance impacts on generational wealth.

To keep that momentum going.

Hey, this was incredibly insightful. Even for me, not an IT contractor, I learned a lot. People watching this can use it as a guide to start having these conversations, not just with family but also with professionals who can guide them toward generating wealth for future generations.

Thank you both for joining me today. Check out Prime Taxes and Accounting if you're interested in moving from a permanent role to a contract role and saving on taxes.

Thanks for having us.