Employment Advice 2

[Berserk]

Hello,

Just opened my pay check and looking at the tax deducted, it's already at $8,000CAD. (This is about 4 months of pay having started at this company on May 5 2003)

I am a Part Designer using Unigraphics NX and working at Windsor Ontario.

I have a friend who works as a installer of dry wall.
He's like on a contract, but works regular hours and do lots of extra hours (works every Saturday and Sunday). His employer does not deduct taxes and other stuff (cpp, ui). He pays them himself. He told me that he only paid like $2,000 CAD last year and he made more money than I do.

I know of another person where he is working as a toolmaker (10 to 12 hours days)and he has the same arrangement as my friend. He and his wife made more than $100,000.00CAD 2 years ago and paid only a little over $2,000.00 (He pays an accountant to do his taxes)

Both of them told me that they could use a lot of things that are tax deductible, and they also "employ?" their kids.

So, do they have their own business?
How do you do something like that here in Canada?
I would like to talk to my Boss, if we could make some arrangement like that.

Please advise.

TNX

 

[IRstuff]

South of the border, such attempts at tax evasion will get the IRS interested very quickly.

In general, for the IRS, they apply the duck test, e.g., if you look, smell, walk like an employee, then you are one, regardless of the paper trail.

A true consultant or contractor has certain autonomies and usually more than 1 client.

TTFN

 

[RDK]

IRStuff is correct. To be an independent consultant you have to be fully at arms length from your client or you run the risk of having CCRA (Canadian Customs and Revenue Agency, our version of the IRS) treat you as an employee.

There are two ways around this. The first is to incorporate and be an employee of your own firm. This simply places you personally in the same tax situation as you are in now, an employee of a limited company and therefore subject to the same taxes etc.

You can also operate as a sole proprietor. In this case you will also be responsible for all the taxes, including those normally paid by the employer, as well as having your personal assets at risk. If you are acting as a sole proprietor, you better have other clients, be supplying other than pure labour (equipment and tools for example) and have freedom to pick your own hours and turn down assignments. You also better not be using the client’s business cards etc.

If you are a true consultant, one with multiple clients, freedom to pick assignments and are supplying services other than pure labour then there are some tax advantages to being an independent. They include the ability to right off part of your residential expenses if you have a home office, the ability to claim mileage as soon as you leave home (and home office) etc.

These advantages are not sufficient reason in themselves to become a consultant. They really are minor and do not compensate for all the other risks, expenses and variability in income associated with being an independent. Become an independent consultant for the right reasons, not simply to avoid taxes.

If your friends are avoiding income by hiring family members and these family members are not providing a service and the rate of pay is not equivalent to what you would pay an arm’s length employee then they are breaking Canadian tax laws. Anyone earning $CDN100, 000 and only paying $2,000 in taxes (even if they are a couple and are properly splitting income) are also most likely violating tax laws. If you have knowledge of this and do not take action then you too are violating the law and your code of ethics.

You may want to check that the employer is deducting the correct amounts. You can request the tax tables directly from the CCRA or you can get a tax deduction program from their web site.




Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[ietech]

One rule of thumb I have learned --- If you're not paying taxes youe not making much money, There might be exceptions for the BIG BOYS ---- but as a regular guy if you're not paying taxes you are either not earning or you are cheating and will eventually pay the price.

Give a good days work for a days pay --- pay your share in taxes fairly and quit looking for a way to slide under the table. Your friends are probably not telling you the whole headache involved or they just haven't been caught YET.

 

[arunmrao]

Do not grudge paying your taxes ever, It is always safer to be on the right side of rules rather than be an independent consultant and carry all the risks. Though it appears very attractive to bend the rules and beat the system you may not be aware of the mental stress your friends may be undergoing.It certainly not its worth.

 

[TheTick]

Find a good certified tax accountant and talk to him about your situation. He can probably help you make the best of your situation.

In the U.S., if you are single and do not own a business and are not doing anything but just working, you get the longest end of the tax shaft.

My brother is a self-employed painting contractor. It takes him a lot less gross pay for the same take-home pay. He is able to deduct things like tools and equipment and mileage driving to work sited and even most of his lunches.

All this machinery making modern music can still be open-hearted.

 

[RDK]

Don’t forget that in order to get a tax deduction you have to have a deductible expense.

Yes tools are deductible but you have to buy them. If you pay $10 for a tool you can get a reduction in taxes of somewhere between 25 and 50% depending on your tax situation.

It doesn’t take a mathematical engineer to see that you are still out of pocket. The best you can hope for is to be able to charge enough to cover these costs.

For my own one-man practice depreciation, licenses, insurance, phone, fax office supplies, small tools etc averages $CDN 20,000 per year. ($5k insurance which is mandatory before I even offer services to the public.) I have to earn that much before I even start to look at breaking even. After that I have to earn enough to be able to expand the business by buying necessary equipment and computers etc. Then and only then can I look at taking home any money for myself. After that I have to earn enough money to continue to operate over any dry spells. A dry spell is more expensive than working because I am constantly on the phone and traveling on my own cost looking for more work.

I would love to be paying $100,000 in taxes every year. If I was then I would be earning a lot more than that and be much better off financially.

If you want to be an independent consultant do it for the right reasons. You must have a high tolerance for risk and uncertainty. You must have a thick skin in offering services only to be turned down. You must be willing to work long hours writing proposals and be prepared to be rejected. You must be prepared to be the first to go in any slowdown and the last rehired.

You must be prepared to uproot your life on short notice. I was once contacted on a Thursday and working 500 kms away on the following Monday. That assignment lasted 6 months. Another time I was leaving a site 600 kms away from home and did not know if I would be turning left or right when I got to the highway. I finally got through to my client and turned left and drove another 700 kms and did not get home for 3 weeks.

Remember how stressful it was looking for a job? Imagine looking for one every month or at most every six months or so. If your involvement in any one project is small you could be looking for work all the time.

If you only want to be an independent because it offers some slight tax advantages, they you are destined for failure as a consultant. If you want to be a master of your own destiny and have the opportunity to get involved in a lot of different and interesting projects and can handle the downside then go for it.

If you are only looking for ways to become a tax cheat do not look here. That is illegal and unethical behavior. A local businessman was put in jail for that. Talk to an accountant about ways to arrange your affairs to be able to avoid or defer taxes legitimately. You may find that as a salaried employee the only option available to you is a RRSP (Canadian version of IRA’s) and that you may not be able to recoup the costs of the consult.




Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[Berserk]

IRstuff
I agree with you. Thats what I thought too. Except for the south of the border comment. (Windsor is south of Detroit).

RDK
Thanks for the informative reply. Having more than 1 client would be a problem because most of the prospective customer I know would be coming from my employer and I do not want to do that. (He is a very good boss and its not ethical).

I used to be self employed, making bushing and decorative brass knobs using a turreth lathe. Problem is customers always want you to lower the price and they take a couple of months to pay while I have to pay cash for my materials.

Thanks for all the replies.

 

[IRstuff]

no worries.. I just didn't know the name of the CCRA

I think that there's always a temptation present when you see others doing something that would seem to be less than ethical and being rewarded, but my experience is that certain people just don't get caught, while others will get caught the first time.

TTFN

 

[MRM]

I can't say whether your buddies are paying the taxes they legally owe-they may or not be. They have to live with the consequences of their own actions, but I will say this; many people do not take advantage of all the tax benefits they are entitled to legally. That is, there are more deductions (legal ones) that a lot of people are not aware of, in my opinion. Work with a tax preparer who is knowledgeable on the current laws and one you can trust.

I've heard before that if you pay your kids a salary rather than an allowance, there is actually a tax benefit (I don't know this first hand though because I don't have kids yet.) It makes sense to me-you're giving your kid money for doing chores around the house or whatever you have them doing to earn that money, right? See if things like that are legit with someone who knows for sure.

 

[melone]

Does that mean you can fire your children?

 

[buzzp]

MRM,
There are many legal tax deductions/credits that are totally unknown to the majority. The best thing (cheapest) you could do for taxes in the states is to start a home based business. You must show at least $400 in revenue for the year. I suggest you make an honest attempt at this. I am totally amazed at the lack of knowledge in the states on taxes. I for one, generally get almost all the taxes I paid in (kids and wife help with this in deductions/credits) back. I have finally got it ironed out to where I do not owe at the end of the year and do not get any back.
I believe the posters example likely has some illegal activities going on but I would not automatically assume that those that do not pay no or hardly any taxes are operating illegally.

 

[RDK]

Canadian tax law is clear on hiring family members. You can only pay them what you would have paid a non-family member for the same tasks and the tasks have to be in support of the business.

Therefore you cannot hire your children for chores around the house unless these household chores are related to the business.

At a practical level you could easily substantiate paying a 16 year old a couple of thousand a year, paying a 6-year-old $20k might be a stretch.

I would imagine that similar rules apply in the US but do not know for sure.

I cannot imagine how on earth anyone could earn $100k and only pay $2k in taxes. They are grossing not netting the $100k and have some serious expenses, they are using some imaginative tax-sheltering scheme (which may be disallowed by CCRA) or they are cheating the taxman.

The tax laws also allow the CCRA to look past the form of the transaction into the substance of the transaction in applying tax laws retroactively. They can review your returns for 7 years for simple errors and go even further back than that if they suspect fraud.


Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[IRstuff]

I think the IRS has similar guidelines.

In some respects, they may be more stringent. They've done their homework and come up with financial models for a variety of businesses so that their agents can more effectively determine if your costs are out of bed relative to your income.



TTFN

 

[buzzp]

I only no what the tax laws are in the states.
Kids can be hired to clean, for example, if you operate out of your house. You can only deduct the cleaning required for the square footage that is used for your business. There are many tax deductions/credits in the states that people do not know about because they usually do not prepare their taxes. They generally hire an accountant who only does a mediocre job.
To suggest that someone making 100k a year in the states and only pays 2k in taxes is doing something illegal is hogwash (although they may be). The more money you make, the more you have in deductions. There are many tax strategies that will reduce your taxes in the states significantly. The problem is, the rich are the ones that can hire the personal accountants who can track deductions throughout the year (big job) so the average joe is not aware of these 'strategies'.
There is one company that comes to mind that specializes in such strategies but they do not reveal them to you without some cost. They are NADN (national audit defense network). I have no recommendations for them as I have not used them, only heard about them. I just had some experiences with their high pressure salesman.

 

[RDK]

With computers, industry averages can be tracked and if you fall outside the industry you can be automatically picked for audit.

This will be more common in industries where there is a lot of cash work. For example a residential carpenter. If he has expenses much more than the average, CCRA will assume that he is doing some work for cash and charging these expenses against income that he is claiming and conduct an audit. They may wait a couple of years to see if the trend continues.

The CCRA can also do a lifestyle audit. This consists of examining the lifestyle of an individual and determining if the claimed income is sufficient to support this lifestyle.

Engineering work is usually done by companies for other companies. Work is seldom paid in cash and therefore there is not the opportunity for hiding income.

The same logic as buzzp presented for hiring the kids to clean applies in Canada. You can pay your kids but only as it applies to the business and the amount must be reasonable for the work done. At a practical level $2k to a teenager will not be looked at, $30k to an infant would raise some questions.



Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com