PROS of the RRSP:

• HI Contribution amount up to $21,000
• Provides tax deferral (Reduces taxable income when deposited increases taxable income when withdrawn)
• You can hold USD stocks
• Growth is  not taxed until funds  are withdrawn

CONS of the RRSP:

• You can’t take money out except for buying a home or for education for you or your spouse
• If you are in the lowest tax bracket tax savings are low and  you may pay higher tax rate in retirement if you have a pension

PROS of the TFSA:

• Grows completely tax free.
• Everyone can contribute $5000 starting from the age of 18.
• It is easy to get your money out

CONS of the TFSA:

• little contribution room available  ($5000 a year )
• does not reduce taxable income

 Determining which is best depends on the individuals circumstances.   Typically the tax strategy for independent consultants is to leave as much money inside the corporation and to pay the least amount of salary possible.  Due to this strategy RRSP contributions are not nearly as beneficial for contractors as they are for employees. While the tax savings may not be as lucrative, they still have a role to play.  My advice for clients is that contributing to an rrsp is beneficial up to the point where the tax savings brings you taxable income to below the lowest tax bracket (roughly 40,000).  If you are below this tax bracket and you have funds available it is better to contribute to you TFSA.  The most ideal tax planning strategy would be to declare a salary of $50,500, contribute $10,000 to your rrsps and contribute $5000 to your TFSA.  This would mean that your taxable income would be in the lowest tax bracket, your rrsp benefit would be received in the middle tax bracket, you would max out the CPP contribution and you would mac out your TFSA contribution. 

I typically recommend to max out the TFSA contribution because I believe clients should be able to generate high investment returns of over 10 % (see bobs video on financial coaching)  and because I believe it is important for IT consultants to have a cash reserve that can be used for emergencies.  While I believe contributing to RRSP`s is also beneficial the long term savings for IT contractors are limited and the strategy is mostly for tax deferral.  If you have the funds available to do both TFSA and RRSP great. If you had to choose one I would recommend a TFSA.

The reason that ca4iT does this differently is three fold.

First, it consultants have a different structure than most corporations, in that typically the only employees are the directors themselves.

Secondly, by paying the source deduction only once a year you will reduce the administration and accounting cost plus you will have access to the time value of the Money.

Thirdly and most importantly, this ensure that we will have all available information on hand when we make a decision on the tax planning for your corporation.

For example it is not that un-common for Consultants to move back and forth from fulltime to contract. This will very rarely happen at the exact end of your fiscal period. This can have a significant impact on the tax planning. For Example if you were to pay sourced deduction on a monthly basis then take a full time position half way through the year. This would mean that the tax planning done at the beginning of the year is no longer valid. In fact you would probably want to declare no salary from the corporation. Back peddling from this unforeseen situation can be difficult and costly.

While most junior auditors may tell you that you are not allowed to pay source deductions on an annual basis they are wrong. We have been using this strategy foralmost 2 decades and have successfully defended this strategy on more than one occasion. If you do receive a letter or call from CRA you should either direct them to us or simply state that you have no eligble employees with any eligible remittances during the period and that you do not expect any further remittances until January. Do not attempt to explain this further as there is some very specific language used for sourced deductions and saying the wrong thing cause you some unnecessary headaches with CRA.

As a corporation, you have to remit the CPP contributions, the EI premiums, and income tax deducted from your employees’ income, along with your share of CPP contributions and EI premiums.

These deductions, along with the remittance form, must be received by CRA on or before your remittance due dates. Due dates vary depending on the type of remitter you are.
If your remittance due date is a Saturday, Sunday or public holiday, your remittance is due on the next business day.

If your business goes bankrupt or stops operating, you must remit your deductions to your tax centre within 7 days following the closure/bankruptcy of your business.

New or regular remitter
your deductions are due on or before the 15th day of the month after the month you made them.

Quarterly remitter
If you are eligible for quarterly remitting, CRA has to receive your deductions on or before the 15th day of the month immediately following the end of each quarter. The quarters are:
• January to March;
• April to June;
• July to September; and
• October to December.
The due dates are April 15, July 15, October 15, and January 15.

Accelerated remitter
Threshold 1
This group consists of employers, who had a total average monthly withholding amount of $15,000 to $49,999.99 two calendar years ago.
CRA has to receive your deductions by the following dates:
• for remuneration paid before the 16th day of the month, by the 25th day of the same month;
• for remuneration paid after the 15th day of the month but before the first day of the following month, by the 10th day of the following month.

Threshold 2
This group consists of employers, including those with associated corporations and multiple payroll account, who had a total Average monthly withholding amount (AMWA) of $50,000 or more two calendar years ago.
As a threshold 2 remitter, you have to remit your deductions through a Canadian financial institution. We have to receive your deductions from your Canadian financial institution by the third working day after the end of the following periods:
• from the 1st through the 7th day of the month;
• from the 8th through the 14th day of the month;
• from the 15th through the 21st day of the month;
• from the 22nd through the last day of the month.

What is Personal Services Corporation (PSC) risk?

This video answers the question “What is personal service corporation risk?”
If you are a independent consultant or IT contractor and earn more than $40,000 per year or you are going through a CRA Audit, This is a must watch video.

Please view the following pages for more information on “Personal Service Business Risk” or sometimes called “Personal Service Corporation Risk“.

What is the Personal Services Business Risk?

Are you concerned about a CRA Audit?

This video answers the question “What is personal service business risk?”
If you are a independent consultant or IT contractor and earn more than $40,000 per year or you are going through a CRA Audit, This is a must watch video.

Please view the following pages for more information on “Personal Service Business Risk” or sometimes called “Personal Service Corporation Risk“.

Dave Hayward from the NACCB talks about Personal Service Corporation risk. He reviews a case study from the AQIII and how it may impact IT Contractors across Canada.

Please view the following pages for more information on “Personal Service Business Risk” or sometimes called “Personal Service Corporation Risk“.

Personal Services Corporation & Personal Business Services

Please view the following pages for more information on “Personal Service Business Risk” or sometimes called “Personal Service Corporation Risk“.

Personal Service Business Risk- How to Protect Yourself

Please view the following pages for more information on “Personal Service Business Risk” or sometimes called “Personal Service Corporation Risk“.

Jeff Nugent from Contingent Workforce Solutions provides an overview of the Personal Services Risk and what you can do to protect yourself.

Please view the following pages for more information on “Personal Service Business Risk” or sometimes called “Personal Service Corporation Risk“.

Terry Power, President of the NACCB discusses possible ICT shortages in the future and how independent contractors can fill the gap.

Please view the following pages for more information on “Personal Service Business Risk” or sometimes called “Personal Service Corporation Risk“.