Canada’s taxation system is self reporting. This means it relies upon the accuracy and integrity of individuals and companies reporting information to Canada Revenue Agency (CRA).
With this in mind and in the era of every government wanting to collect taxes due, over the past several years CRA has enacted a wide range of initiatives to encourage more reliable reporting.
These have included simple pushes like proper marital status reporting, to complex pushes like full income disclosure.
On the income disclosure front, CRA has begun to monitor the reporting of contractor income differently, with “contractor” defined as a freelance business or construction service.
Contractors have always self-reported income earned just as other self employed proprietors or corporations have. However CRA’s new initiative involves a different source of information to monitor the reporting of contractor income.
CRA is requiring, although apparently not enforcing yet, any company paying contractors to report the year’s payments made to the contractors using one of three CRA slips, but which one?
The T4a tax slip is likely familiar to most people. However what may not be known is that in 2010 CRA added Box 48 on the T4a slip for companies to record payments for services and other amounts paid to contractors. Although the addition of Box 48 was nearly 10 years ago, it’s only recently that there has been an upsurge in its use for this purpose.
This slip is issued by a company that paid a freelance contractor who provided services such as a bookkeeper, janitor, trainer, etc, $500 or more in the year. If payments to the contractor included GST, the amount on the T4a will not include the GST paid to the contractor.
The T5018 is the second slip. It too has been around for years.
This slip is issued by a company that paid a freelance construction contractor such as a plumber, painter, roofer, etc, $500 or more in the year. Amounts paid to the contractor for goods supplied are not included. If payments to the contractor included GST, then the amount reported on the T5018 will include that GST paid to the contractor.
The T1204, the third slip, is issued by any government that hires a contractor, and since governments are GST exempt, the amount reported on this slip will have no GST included.
How does a contractor report this information on their tax return?
A T4a is reported just as any other T4a. For a proprietor, it’s reported in the T1 tax return’s T4a input form which flows through as self-employed revenue onto the 2125 business schedule. For an incorporated contractor, it’s reported directly onto schedule 125 of the T2 tax return.
A T5018 or T1204 is reported as revenue directly onto the T1’s 2125 business schedule or the T2 schedule 125, remembering that any GST included in the amount has to first be deducted and accounted for separately from the revenue.
And of course, the company issuing these slips uses the amounts reported as contractor expense.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.