The construction industry in Canada has many self-employed and small business contractors working on any given project. This could include plumbers, electricians and carpenters, just to name a few. The Canada Revenue Agency has long been concerned about the risk of tax evasion in the construction sector, especially since many contractor payments are made in cash.
As a result, the CRA subcontractor rules require that all contract payments in the construction industry be reported on a special form – the T5018 or statement of contract payments. If you work in the construction sector, read on to make sure that you are following all the rules to avoid T5018 penalties.
Who needs to file a T5018
If construction makes up more than half of your company’s business, you need to file T5018 slips. You should report all amounts paid to subcontractors. (If the contractor is a non-resident of Canada, you use the T4A-NR form).
You don’t need to report payments to subcontractors if the amount is less than $500.
What defines a contractor for T5018?
As indicated above, all construction trades are included in the T5018 requirements. They could be individuals, partnerships, corporations or even a trust.
You do not need to report payments for services such as bookkeeping, janitorial services or legal fees.
What is a T5018 used for?
Basically, the Canada Revenue Agency wants to track financial payments in the construction sector. If payments are made in cash, it still wants contractors to declare them on their income tax returns and pay the appropriate income tax.
The CRA also uses the information to make sure that contractors are charging and collecting HST. Small businesses that have less than $30,000 in annual revenues do not have to levy HST. However, most construction contractors will exceed this amount – unless they only work part-time. By adding up a contractor’s T5018 slips, the CRA can determine whether an individual has exceeded the $30,000 threshold.
The CRA may assess penalties for contractors and subcontractors who conspire to avoid taxes by paying cash and not filing a T5018 tax return. The fines can be up to 200 percent of the tax they tried to avoid.
What’s the difference between a T4A and T5018
They are similar. A T4A is issued by an organization that is making payments to self-employed business professionals or entities. Therefore, these are independent workers rather than employees.
On the other hand, the T5018 form is just for the construction industry. It is used to record payments to independent contractors in the construction sector.
Employees are treated differently. If you employ people in the trades, such as plumbers and electricians, you should make the appropriate deductions on their paycheques, including income tax, CPP and Employment Insurance. Since they are employees, at the end of the year you will give them T4 slips and file a T4 summary of all of the slips.
Let’s look at an example. Bob’s Construction Ltd. builds houses in Kingston, Ontario. It employs two carpenters on a full-time basis. In addition, it uses contractors for drywalling, electrical work, plumbing and other goods and services.
On a monthly basis, it issues paycheques to its carpenters, deducting the appropriate amounts required by the Canada Revenue Agency. The contractors invoice Bob’s Construction at the end of each month for their services, adding HST to the bill. Bob’s pays each contractor via e-transfer.
At the end of the year, Bob’s issues a T4 statement to its two carpentry employees. It then files a T4 summary. In addition, it sends out a T5018 slip to each of the contractors who have invoiced for more than $500 during the year. It also submits a T5018 summary to the CRA.
How do I complete the T5018 slip?
You need to fill out the slip for any contractors paid a total of $500 or more during the year. This applies to small contractors who have revenue below $30,000 (who are not required to register to collect HST).
On the slip, you enter the contractor’s business registration number. However, if the contractor is a self-employed individual and does not have a business number, you still have to issue a T5018 slip. Instead of the business number, you enter their Social Insurance Number.
Let’s pick up on our Bob’s Construction example. Jaspreet is a retired drywaller who still likes to keep busy and earn extra income by taking on an occasional project. Jaspreet doesn’t earn enough to register for the HST. When he completes a project for Bob’s Construction, he simply sends an invoice. Last year, he did a total of $850 in work for Bob’s. In this case, Bob’s would issue a T5018 slip for Jaspreet for $850, using his SIN on the form. Jaspreet would then report the income on his tax return.
In addition to work conducted in Canada, you need to report payments for services of Canadian residents on construction projects outside of the country.
How do I file a T5018 summary?
The Canada Revenue Agency prefers that all companies file the T5018 electronically since it saves them having to re-enter data. However, if you are a small business that has issued fewer than 50 slips you are permitted to file paper copies.
Larger companies with more than 50 slips are required to file electronically.
When to file a T5018
You can choose to file the T5018 summary at the end of the calendar year or at the end of your company’s fiscal year. In both cases, the T5018 due date is six months after your year end.
Do you need to file T5018 slips and summary?
The T5018 is only for companies in the construction sector. So, if your firm earns more than half its revenue in other areas, you do not need to issue slips and file a T5018 summary.
Construction companies are required to file if a contractor was paid more than $500 total during the year – even if they received cash. It is important to file the documents on time to avoid T5018 penalties.
