Acting as subcontractor for your own company in Canada
In Canada, you generally cannot act as a subcontractor to your own corporation and issue yourself a T4A. Here’s why and what you need to consider:
1. Corporation vs. Individual Relationship
- If you are a director and possibly a shareholder or officer, you are considered to be closely tied to the corporation.
- Canada Revenue Agency (CRA) typically sees payments from the corporation to you as either:
- Employment income (T4), or
- Dividends (T5), or
- Director’s fees (also on T4).
2. T4A Use Case
- A T4A is used to report self-employed income or other income paid to an independent contractor.
- You can’t simply reclassify your compensation as subcontracting to reduce taxes or CPP/EI obligations, especially when you control the corporation.
3. Risk of Personal Services Business (PSB) Rules
- If you try to set up a separate entity (or act as a sole proprietor) to bill your own corporation, CRA might apply Personal Services Business rules, which:
- Deny many small business deductions.
- Impose a higher tax rate.
- Require income to be treated essentially like a salary.
4. What You Can Do Instead
- Pay yourself through payroll (T4) with appropriate source deductions.
- Pay yourself dividends (T5), if appropriate.
- Pay a director’s fee (reported on T4 or T4A depending on how it’s structured, but still subject to scrutiny if it’s just you).
Recommendation
Speak with a tax advisor or accountant before issuing any T4A to yourself. CRA scrutinizes closely-held corporations, and mischaracterizing your income could lead to penalties and reassessments.
