Any self-employed person's tax status can make a huge difference to the viability of their professional work. This is because some tax statutes provide significant benefits, such as reduced tax rates.
Unfortunately for independent ICT advisors operating as incorporated small businesses, government authorities are currently challenging the legitimacy of their small business status as eligible for the SBD (Small Business Deduction) and the ability to deduct certain expenses. This happens when the government believes that the consultant is not in fact a company, but rather an incorporated employee.
Here is the situation as it stands.
Tax authorities challenge the small business status of independent ICT advisors
The IT consulting profession is relatively new. In fact, this profession has taken shape alongside the development of ICT. Over time, many independent consultants chose to incorporate in order to benefit from a small business status. This allowed them to benefit from more favourable tax rates through the SBD.
However, the status of small ICT companies is currently being challenged by the Agence de Revenu du Québec (ARQ) and the Canada Revenue Agency (CRA). In fact, since 2006, both levels of government have been trying to equate independent ICT consultants with personal service businesses (PSB) that unfortunately are not eligible for the same tax benefits.
They have even launched an offensive by claiming tens of thousands of dollars in retroactive tax assessments following a reclassification of their services. Basically, all the amounts saved through the SBD are claimed from them.
AQIII is involved in the fight for the rights of independent IT consultants
Founded in 1993, the Association québécoise des informaticiennes et informaticiens indépendants (AQIII) supports microentrepreneurs in the IT sector in a variety of ways. This non-profit organization quickly became actively involved in this conflict in order to assert the rights of its members and enable them to continue to benefit from the small business status.
In particular, the AQIII paid a large portion of the lawyer's fees related to an independent IT expert's case in a tax dispute concerning his status as a self-employed worker. A decision in favour of self-employed ICT workers was rendered in this case, changing the ARQ's tax interpretation guidelines.
Since then, AQIII has set up a comprehensive plan to represent clients vis-à-vis the various tax authorities in order to make them aware of the realities of an independent ICT consultant's work. It has also published the Business Startup Guide for Information and Communication Technology (ICT) Freelancers to help its members adopt practices that support entrepreneurial status.
The responsibility of CPAs hired by independent ICT consultants
Many independent ICT consultants use a CPA to assist them with their accounting and business taxation. The CPA hired by an independent IT consultant should be able to provide personalized advice to minimize the risk of having his or her status changed to that of a personal services business (PSB).
It is therefore essential that their tax accountant is familiar with the AQIII's procedures and gains in case law regarding self-employed status. Some CPAs are well informed about this and even have the status of recognized partner of the AQIII.
T2inc's tax accountants are here for independent ICT consultants
In conclusion, the fight to maintain the tax status of independent ICT consultants is far from over, but the hope that the tax authorities will reverse their decision is not lost. In the meantime, independent ICT advisors should adopt the best possible accounting and tax practices in order to maximize their chances of being considered a small business.
Moreover, if you have any doubts about the future of your current status as a small business, take the steps to maintain it by seeking the advice of a tax expert and contacting the team at T2inc.