Oilfield workers in BC and Alberta are often given the option of being an employee or contractor. This choice may not impact fieldwork, but it can make a big difference from a tax & responsibility perspective.
Contractors usually enjoy higher day rates and may get increased living out / mileage allowances to compensate for their extra costs; however, contractors need to register/charge/remit GST and deal with a lot of administrative tasks. Setting up a business as a contractor opens a whole new world of options, but also brings additional responsibilities (headaches).
Most oilfield contractors are required to set up a corporation, so the rest of this blog assumes that a corporation is involved, and all tax rates used are from 2021. Learn more about setting up a Canadian corporation before you make this choice.
So, what’s better? Working as an oilfield employee or contractor? Let’s go over some of the pros and cons.
One of the big advantages of incorporating as an oilfield contractor is that if you’re making a lot of money and don’t need all of it then you can defer up to 37% in taxes (Alberta) or 42.50% (BC). This is because small corporations within Alberta and BC (making under $500,000 taxable income) pay a low tax rate of 11%, whereas personal tax rates range up to 48% in Alberta or 53.50% in BC.
The amount of tax deferred depends on two important details:
Canada uses a progressive marginal tax rate system. This means that the more you make, the more taxes you pay on that extra money. If you’re in Alberta and make less than $13,808 then you’ll pay no taxes. You’ll pay 36% on any income over $98,041. So, if you make more than $98,041 then you could defer up to 25% in taxes (36% personal tax bracket – 11% corporate taxes). You can control your personal tax bracket when you have a corporation.
There’s a free download at the end of this blog for Alberta & BC tax rate charts showing exactly how much you could defer based on how much you make. You should check it out.
A corporation is a separate legal entity that pays its own taxes. As such, you need to track every cent related to corporate activities (a good accountant or bookkeeper will do this for you). You’re taxed, personally (via salary or dividends), on any money that you use personally. So, if you don’t keep any money in your company then you won’t defer any taxes. But if you only take out what you need, and keep the extra cash in your company, then you can defer a significant amount of taxes over your lifetime.
Keep in mind that tax deferred is not tax saved. It just means that you’ll pay the tax later when you ultimately pull money out of your corporation. However, you are able to save tax by spreading income over several years at lower tax brackets.
What do you do with all that extra cash from lower taxes paid? You can reinvest in your business (buy a new truck or equipment) or use your corporation to build up a nest egg for retirement. Simplify has a relationship with a licensed insurance/investment brokerage and can work alongside them or your advisor to ensure you have a solid plan in place.
As a contractor, you can deduct a lot more expenses than you can as an employee. What exactly is a “tax deduction” or “expense”? It’s anything that lowers your income (resulting in less taxes paid). What can you expense? If you need it to earn income, you can likely expense it. For example, if you’re using a truck solely for business, then you can deduct all of your truck expenses. All of your legal and accounting fees are tax deductible. Certain meals can be tax deductible. Business cellphone, business related home office expenses, supplies and insurance are also tax deductions.
Once you’ve set up a corporation, you’ll likely need to register for GST (if you expect to earn less than $30,000 annually then you don’t need to register, but you shouldn’t set up a corporation if this is the case). The downside of this is that you then need to charge GST for your services, file GST returns and remit GST to the government.
The upside of being a GST registrant is that you can get a refund for any GST paid on business expenses. Expensive engine replacement? You can get the GST back! How does this work? Well, when you charge and get paid GST, this money doesn’t actually belong to you. You’re holding the GST collected, in trust, for the government and will need to remit (give it back) to the CRA; however, you don’t need to remit the full amount of GST you’ve collected. You can reduce this by any GST paid on business expenses. You would add up all of the GST you’ve charged minus GST paid, and this is what you remit to the government. If you have a good bookkeeper or accountant then they will help you with this.
A lot of oilfield contractors are doing most of their work for one company, and some of these contractors may actually be considered employees by the CRA. If you are operating from a corporation as an employee then your corporation would be considered a personal service business (PSB). There can be some pretty nasty tax consequences if you’re corporation is considered a PSB.
It’s important to make sure you can argue that you’re actually a contractor and not an employee.
There’s no black and white guide for an employee-employer relationship, but the following four criteria is used by the courts (and CRA) for these decisions:
Control is the ability, right, or authority of the payer (i.e. the company you work for) to exercise control over the payee (you). You may be considered an employee if you have no control over your hours, pay, or how you do your work. Contractors usually have more control over their schedule, pay and how they do their job.
Employees usually don’t have much risk. They’re guaranteed a set $$ amount and have little downside. Contractors have more risk in a business relationship than employees. They have the opportunity to make more money, but can also lose money from loss of materials, equipment damage etc.
If you only work for one company, then you’re integrated with that company and it’s more likely that you’d be considered an employee. If you’re working for multiple companies and don’t rely on one company for all your work then you’re more likely to be considered a contractor.
Employees are usually provided with everything they need to do the job. In some cases, trades are required to bring their own tools or provide their own vehicle, but this alone doesn’t make them a contractor (all 4 crtieria need to be looked at together). Contractors are more likely to own the tools and equipment used in their work and are responsible for repairs and maintenance.
So, are you a contractor or an employee? If you can set your own hours, have control over how much you make, work for other companies and provide all your own equipment, then you can probably argue that you’re a contractor. Take a look at your work contract (if you have one) and check it against these four criteria. You can also check out this CRA publication if you’d like to learn more .
If you are considered an employee, then your corporation will likely be a personal service business and you will have a whole new set of tax complexities to deal with. You’d be looking at the following issues:
Instead of paying 11%, your corporation will pay 34% (Alberta) or 38% (BC).
Within a PSB, you are treated as an incorporated employee – from a tax standpoint, you are no longer self-employed, and can’t write off any expenses that aren’t available to employees. This means that your deductions are limited to salaries and a few other expenses. It helps if you include your truck, cellphone, living out allowance and other items on your invoices because you may be able to argue a deduction for these items if you’re invoicing for them.
If you’ve been operating as a normal corporation for several years and are deemed to be a PSB, then the CRA could go back and reassess previous tax returns. This would result in significant back taxes, penalties and interest.
If you’re concerned about this risk then it’s best to talk to a Chartered Professional Accountant that deals with a lot of oilfield contractors (i.e. Simplify). They can give you guidance about your unique situation. The easiest way to reduce this risk is to pay yourself a salary from most of the income your company generates.
Sounds complicated? It definitely is. Being an oilfield contractor isn’t a straightforward decision. And tax legislation is constantly changing. It’s important to understand your obligations when you set up a company. Too many oilfield contractors ignore their taxes and end up paying significantly more in interest/penalties than accounting fees. Worse – if taxes are ignored, you can put yourself in a terrible financial position really fast and the CRA has really broad collection powers (i.e. they can garnish wages, freeze bank accounts and seize assets).
Choosing whether or not to incorporate as an oilfield contractor isn’t simply about checking the boxes. Your options are limited as an employee but you have more headaches as a contractor. And there’s no guarantee that you’ll make more money as a contractor. You can do really well with the right tax planning, solid connections and some basic organization skills. The decision will ultimately depend on your unique circumstances.
Good luck and don’t hesitate to contact me. I’m happy to talk about your situation and point you in the right direction; and, if you decide to move forward as a contractor… then you should reach out! Simplify helps reduce accounting headaches for a lot of oilfield contractors by taking care of all the nitty gritty details and optimizing their taxes. You won’t pay excessive hourly rates, but instead pay a monthly fixed price. You pay for results, not time. Plus, we use the latest technology, so you have access to your records and can even take pictures of your receipts with an app.
If you don’t like bookkeeping or don’t have the time or knowledge to do it well, a bookkeeper could be a valuable resource and a great investment for your business.
The Living out Allowance (LOA), also referred to as subsistence, is common among oilfield contractors in Northern Alberta, but it’s often misunderstood. This article explains what it is and how it can reduce your taxes.