Canada’s taxation system relies on the integrity and accuracy of individuals and businesses reporting information to Canada Revenue Agency (CRA).
With this in mind, over the past several years CRA has enacted a wide range of initiatives to encourage more reliable reporting, a key one being the reporting of income by contractors.
“Contractor” is defined as a freelance business service or freelance construction service.
A contractor self-reports income earned to CRA, just as other businesses do. However CRA several years ago began an initiative that more closely accounts the reporting of contractor income in that revenue paid to contractors is no longer reliant solely on the contractor’s self-reporting.
Under specific rules, CRA is now requiring a company that pays a contractor to report the year’s payments made to the contractor on one of three CRA tax slips.
Although the T5018 slip has been around for years, until recently it was used very little. Referred to as the “statement of contract payments” slip, CRA now requires a company that derives at least 50% of its income from within the construction industry to submit to CRA a T5018 slip for payments made to any contractor such as a plumber, painter, roofer, etc, who is paid $500 or more in its fiscal year. A copy of the T5018 may also be given to the contractor but does not have to be.
If payments to the contractor include GST, the amount reported on the T5018 will include that GST paid to the contractor. Amounts paid to the contractor for clearly identifiable goods supplied are not included.
The T4a slip, although well known, quietly had Box 48 added to it in 2010. This box, although used very little until recently, was established for inputting payments made to contractors who provide services such as engineering, accounting, training, cleaning, etc, of $500 or more in the year. If payments to the contractor include GST, the amount on the T4a does not include the GST paid to the contractor. Likewise amounts paid for clearly identifiable goods supplied are not included. A copy goes to CRA and to the contractor.
The T1204 slip, is issued by a government when any contractor is paid $500 or more in a year. Because the government is GST exempt, the amount reported on this slip will have no GST included. Amounts paid to the contractor for clearly identifiable goods supplied are included. CRA gets a copy of this slip but there is no requirement to issue a copy to the contractor.
How does a contractor report the revenue reported on any of these slips on their tax return?
The T5018 detail is reported as revenue directly onto the personal tax T1 schedule 2125 or the corporate tax T2 schedule 125, remembering that any GST included in the amount has to first be deducted and accounted for separately from the revenue.
The T4a detail 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.
The T1204 detail is reported as revenue directly onto the T1’s 2125 business schedule or the T2 schedule 125.
Given the newness of these slips in the bookkeeping process, it is very important for a contractor receiving these slips to not input the revenue twice – once as regular revenue and once via the T slip provided to them. The classic situation occurs when a contractor paid early in the year reports that revenue in the company’s books at that time, then receives a T slip at the end of the year and enters that same revenue a second time in the company’s books.
Conversely, not reporting income that needs to be reported could prove problematic to a contractor since CRA has copies of these slips yielding the ability for CRA to track and review revenues paid to contractors more easily.
Ron Clarke has his MBA and is owner of JBS Business Services in Trail, providing accounting and tax services.