Should I set up a service business?

It is the right of every Canadian to provide their services under contract and to do so through a corporation to limit their liability when doing so.

Before you choose to provide your services though a corporation it is recommended that you consult with a lawyer and an accountant to get the benefit of their professional advice.

A question to ask yourself is why you might want to provide your services as a contractor through a corporation as opposed to doing so as an employee.

My view is that there are two primary motivations:

1. Money
   • As a contractor providing services which are in demand you can charge a premium rate
   • If the demand for your services offers continuity of work, you can realize significant income well above what you might have earned as a employee.
2. Security
   • Many people have worked for years as employees, believing this loyalty would create job security, only to see their jobs disappear as the result of common business strategies such as: mergers, Acquisitions, Outsourcing, Off shoring, etc.
   • Unless you work for  some level of civil services the idea of a job for life is a myth and even then, it can be at risk.
   • As a contractor you can provide specialized services and through experience and training can position your expertise so that it appeals to the client community and ensures work continuity.
   • Your skills and experience are what ensure your security.

All the other suggestions of security are a myth which stems from reliance on some other party.

As noted in earlier posts, common benefits  realized from providing your services through a business or corporation include the ability to

1. Charge HST on provide services and retain a portion of the HST revenue.
2. Deduct expenses incurred by the business (subject to CRA rules).
3. Employ other people (spouses) and pay them for provided services .

When providing your  services through your own corporation there are added considerations

• Tax Rates
  • Your corporation is a small business which benefits from small business tax rate.
  • However, this only applies to net income inside the corporation.
  • When you want to take funds out of the corporation you will be subject to personal tax just like every other employee.

• Taking Income out of the corporation
  • There are two ways to take money out of the corporation which are:
    • As income, which will be subject to income tax and
    • As dividends which will be subject to dividend tax
  • The tax paid, by yourself (the person receiving the funds) will be subject to tax at the same or similar tax rate that you would be if you were an employee.
  • The suggestion that you only get taxed at a small business tax rate is distortion of fact.
  • The Theory of Integrations explains this in detail, check it out.

• Sheltering Revenue
  • The increased tax rate only applies when money is taken out of the corporation.
  • A common practice when  excess revenue is realized by your  corporation is to leave funds in your corporation a “Retained Earning.”
  • These funds are sheltered and kept available to fund future issues such as the absence of work due to something like the Covid disruption.
    • Employees continue to be employed.
    • The government provides funds for the unemployed .
    • Contractors are on their own with no support.
    • They risk a loss.

• Pension
  • One of the possible uses of Retained Earnings is investments
  • As an Independent Contractor you are responsible for your own post-employment income (i.e., pension)
  • Since you have not taken funds out of the corporation
    • you have avoided personal tax rates.
    • and therefore, you have more funds to invest.

• Professional Development / Training
  • Your knowledge and experience are fundamental to your work continuity and therefore your financial wellbeing.
  • As a FTE your responsibility and training are determined by the needs of the employer
  • As a Contractor your training as well as the contract engagements that you accept  will be determined by yourself , being reflective of where you see potential demand for your services.
  • Continuous self-improvement is fundamental to your financial wellbeing and your work continuity. It is under your control and not someone else’s.

One concept that is important to note is that as the owner of a corporations the buck stops with you, and while you may be a subject matter expertise in your specific area of expertise it is highly recommended that you engage professional expertise for legal and accounting services.

It is very much a situation where an ounce of prevention versus a pound of cure.