Contractors can be victors and not victims every tax season, says expert

As we gather our receipts and get ready to prepare our taxes, many of us start to feel a ‘cash crunch’ to pay HST and make instalment payments towards income taxes owing.

Look out because tax fraud promoters and tax preparers are on the hunt too and while you’re looking for deductions, they may be looking to entice you into a fraudulent tax scheme.

Tax Schemes

Every tax filing season, we see the same tax schemes used over and over. One of the most popular tax schemes works by preying on your sense of moral obligation.  Here’s how it works: promoters posing as financial advisors or expert tax preparers, recommend investing in new and interesting medical research, promising matching investment funds, jobs for Canadians, tax credits, and most importantly big tax refunds.

Over time, the research ‘investments’ prove to be smoke and mirrors and victims are out of pocket the initial investment, having to repay the Canada Revenue Agency (CRA) any refund wrongly received, the required payment likely having doubled due to accrued interest and penalties.

It’s an awful trick. People’s life savings get taken from right underneath their noses, and some even lose their homes or are forced into bankruptcy.

How do you avoid falling victim to one of these tax schemes? As a general contractor, be on the lookout if you fall into one of the below categories:

1. Unions

Overwhelmingly, general contractors are skilled in their trades or members of a union or work on unionized job sites earning an honest living but they aren’t tax-savvy which makes them susceptible to these tax schemes. Word spreads quickly through unions and job sites, which may attract several victims at once.

2.  General Contractors (GCs), tradesmen earning $50,000 + per year

Most self-employed GCs or tradesmen do not typically pay tax until April 30 but may be looking for a better way to lower their taxes. At the end of a good year, GCs may have to pay their fair share of union dues, WSIB, income tax and HST, a fact not lost on the tax fraud promoters. Promoters try to eliminate as much of the tax obligation as possible, typically charging a handsome fee to do so.

3. GCs working construction for 10, 20 or more years

GCs and tradesmen who consider their jobs to be stable typically feel they are financially able to take on a little more risk or try something different from their typical RRSP contributions. That, together with the fact that they also tend to be a little less up-to-date or "insulated" from financial products makes them an attractive target.

4. Consistent RRSP contributors

Every year most GCs and tradesmen make regular contributions to their RRSPs either independently or through their respective unions with the expectation of receiving a tax refund. This has two consequences.

First, the fact that legitimate financial tools such as RRSPs or RRIFs generate tax refunds makes it easier to believe that new, seemingly legitimate financial instruments or business arrangements will do the same.

Second, over time, GCs and tradesmen become desensitized to receiving tax refunds believing it is to be expected.

5. GCs and their families that self-identify as "middle class"

The middle class generally feel as though the "top one per cent" of Canadians have access to a network of professionals and advisors (such as bankers, financial planners, tax lawyers and accountants etc.) that have insider information and know something they don’t.

So, when a promoter presents the tax scheme as commonplace for high net worth individuals and sophisticated investors, this supports the inside information paradox.

Specific tax tips for GCs and Tradesmen

GCs that are not unionized work in a cash business environment and that is a fact not lost on the CRA.  This adds a layer of complexity to the GCs tax affairs and the subtrades they engage and every effort should be made to properly report income, and collect and remit HST.

Keep in mind, when a GC is under audit, what was not reported is sometimes more important than what was, based on lifestyle and bank statement investigations.

Combine that with GCs that do renovations and do not report the profit from housing sales relying on the principal residence exemption, and you can appreciate why having good business books and records is so important.

There is a lot of misinformation between GCs who are engaged in different employment arrangements. Though your colleagues may have the best of intentions, they could be inadvertently giving you advice that is not applicable to you and could end up costing you hefty penalties.

Keeping tax records can be very challenging when you don’t have a desk or when you use your vehicle as an office. Invest in a good portable file and make sure that all receipts make it in there, labelled, in the proper place.

Many times, GCs will often mix personal and business purchases on the same receipt — this just leads to more confusion and more work come tax time. Avoid doing so.  Keep purchases separate, and separate your receipts.

If you have any doubt about your tax situation meet with a licensed accountant or tax lawyer familiar with construction and the trades. It could save you thousands of dollars and empower you to be victor, not a victim come tax season.

Eldad Gerb is a  tax lawyer with Devry Smith Frank LLP.