How I started in the Contract life

6 minute read

My journey, my tips, and my lessons learned when moving from stable life to the contracting world.

Pros and Cons about Independent Contracting

Major areas that affects me the most as a Contractor in the province of Ontario, Canada. Can’t really say how it’s like outside of Ontario.

Pros

Higher hourly rate (generally speaking) for similar salaried position
Personal income deferral/sheltering
- Flexible “income” payments
More capital to invest with up front (Taxes are not fully front loaded)
Valid expense claims to operate business
Choose your own working hours

Cons

Will need to hire an accountant (possibly manage your own day to day transactions)
Job Security
Lack of Benefits/Vacation Pay/Statuary Holiday Pay
Liability
Overhead work (admin/marketing/strategizing)
Education/Certification

My Personal Experience

At the time of writing, my current experience more or less encompasses a singular full time contract role and a couple small short-term part time contracts. I will also add that my “main client” has been very generous and flexible with my work schedule. Undoubtedly, your experience will not be the same but I will try and highlight common differences between being on Salary and being on Contract.

I definitely am “Team Contract” but because of my life situation, it allows me to maximize more on the benefits of contracting. Benefits from wife’s employment, and don’t need the entirety of my income.

Starting my own Corporation

There are a couple ways to register for your own corporation (see below for ways to setup your corporation). I had done it myself but had not setup the share structure properly. This was about a $500 (ish) cost to have a lawyer and my accountant fix this so that I would be able to corporate shares to “income sprinkle” to other people in a tax efficient manner. However, as of Jan 1, 2018, this method of using corporation to “income sprinkle”, has been shutdown by the CRA.

My step by step process

Checked and Ordered Corporate Name on Nuans Canada Website
1. This process had some back and forth as I was trying to register federally and my company name apparently seemed “too close” to another company in Alberta. (TekRx is too similar to Tequrx???)
2. The process itself took about 1-2 weeks as it takes at least 24 hours for someone to check and validate your Company name and then for you to “do due diligence” that your company name isn’t the same as someone else’s.
Registered on Corporation Canada Website
1. I honestly had did the best that I could through this process and it was relatively straight forward. In retrospect, if the tax laws didn’t change for “income sprinkling” in 2018, I could’ve saved myself $500.
Get confirmation that my corporation was created (yay!)
Opened a TD Business account. But closed it shortly afterwards due to $20 a month fee for services I really didn’t need.
Opened a BMO e-Business account.
Opened a Business Trading account (used Questrade QPass Key: 316323986417738)
As recommended by my Accountant, I opened QuickBooks to manage my finances.

Self Employment Types

There are generally three main forms of businesses:

Sole Proprietorship
- Business = Individual
- Can operate under personal name without having to register for a business.
- Income for business is same income for personal income.
Partnership
- Similar to Sole Proprietorship but the taxable income is shared among partners.
Corporations
- Business is a separate legal entity from the business owner.
- Offers legal protection.

Independent Contracting

Overview

Typically when you’re salaried, you apply, go through interviews, go through HR, company on boarding etc. But as a contractor, your business owns the contract with the client. There are many “less hoops” to jump through. You’d still need to apply, go through interviews, but there wouldn’t be a long on-boarding process. All this sounds great! Hired quick, do works, get paid, profit!! However, the flip side to this is that should there be any organizational changes, typically contractors are the first to go.

Recruiters

One common way that people get hired is through recruiters. Most larger companies (e.g. banks), would most likely not hire a direct Independent Contractor (now known as IC from here on out), but rather, they’d hire a hiring company whom in turn hire the IC. The contract that your corporation would hold, would be with the hiring company and not directly to the client you’re working for.

Obviously there’s a cut that the hiring company takes for their own gains, which then lowers your hourly rate as well. Some recruiters can be very crafty when it comes to compensation and hourly rate. Don’t let them dictate what you should and shouldn’t make. 100% do your research and see what other recruiters are asking for similar roles. General rule of thumb for contract rate is approximately 20-39% more than a salaried hourly rate.

Example

Assumptions:
- Working 52 weeks of the year
- Working 37.5 hours a week
- No Bonus
- No Vacation/Sick Days
- No RRSP Matching/Benefits/other salary benefits

Formula: _Salary_ / _Number of working weeks_ / _Hours worked per week_

Salary = $100,000

Calculations:
$100k / 52 wks / 37.5 hrs = $51.28 per hr

Now to account for days off, reduce number of working weeks.

Assume:
- 3 weeks of vacation
- 5 paid sick days
- 9 statutory holidays

Calculations:
$100k / 47.71 wks / 37.5 hrs = $55.89 per hr

Factoring in RRSP matching, benefits, other salary benefits,
20% higher ($61.54/hr) doesn't seem to crazy does it?

Self sought clients

Advertising, word of mouth, networking. All the ways for a budding business person to get out there and find their own clients.

Corporate Bank Accounts vs Personal Bank Accounts

From an Incorporated Business perspective (number 3 in the types of self employment), it’s important to know that money that’s earned for your business MUST go into a business or corporate account.

At the time of writing BMO e-business account worked the best for me as it has 2 free e-transfers (which I use to “pay” myself) and no monthly fees. Note: Any cheques or deposits (ATM or e-deposits) are billed around 20c per transaction.

If you would like to take money out of the corporate to use at your leisure, you will need to pay yourself a “salary” and your corp remit your personal income taxes, CPP, etc. as if you were to be earning a normal salary.

Summary:

Get a good accountant.
Need to have business banking account
Money for business is not money you can spend however you wish. Your accountant will be able to tell you how you can use that money properly.

Random tidbits of information

Always, always, always GET A GOOD ACCOUNTANT.
1. Finding a good accountant will really help with tax planning as well as how to manage your expenses and understand what can be claimed and what can’t be claimed for tax benefits.
2. Make sure your accountant will maximize the benefits of having your own corporation but not abuse system potentially triggering a CRA audit. That’s an annoyance you never want to deal with.
There are two ways to setup your corporation:
1. DIY on Corporation Canada Website. Typically costs around $200-250 + Corporation Name fee (if you want a custom name and not a numbered corporation)
2. Accountant will be able to help you. Typically Costs around $1,000
Ways to pay yourself
1. Salary
  1. This should be the safest way to pay yourself on a regular basis. You do have to pay personal income taxes but it is generally more reasonable in the CRA’s view.
2. Dividend
  1. This is the most tax advantageous way to pay yourself. This is also riskier in terms of being audited by the CRA.
  2. At the time of writing, you can pay yourself a dividend of around $50,000 “tax free” assuming no other sources of personal income. Financial Post had written an article on this a while back. (Again, please consult your accountant for further details)
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Jonathan Tsui