If you have clients whose primary business is construction, and they pay subcontractors for construction activities, the Canada Revenue Agency requires them to report such payments using the Contract Payment Reporting System. The CRPS was designed to reduce underground business activity, help honest businesses compete on a level playing field, and promote the integrity of the tax system. In 1998, the system became mandatory, and the CRA began a process for continually modifying the CPRS to reflect feedback from businesses. During this process, the CRA has established the rules on who, what, when, and how to report qualifying payments to construction-industry subcontractors.
Who Must Report
Under the CPRS program, your clients that derive more than 50% of their revenue from construction activity whether they’re set up to do business as sole proprietors, partnerships, or corporations. This reporting requirement doesn’t apply to some businesses that perform large amounts of construction when such work isn’t their primary business activity. An oil company, for example, may build refineries and lay pipelines, but they don’t need to report under the CPRS because they’re primary business is selling and delivering oil, not performing construction activity. For the purposes of the CPRS, construction activities include erection, excavation, installation, alteration, modification, repair, improvement, demolition, destruction, dismantling, or removal of any part of a building, structure, surface or sub-surface construction. Your clients don’t need to report work related to planes, satellites, and ships, as those aren’t considered structures for the purposes of the CPRS. They do need to report payments for work related to buildings, gas and oil pipelines, roads and bridges, power and telecommunication transmission lines, and waterworks and sewage systems.
Which Payments to Report
Just because a payment seems related to construction doesn’t mean it has to be reported. Say your client rents a backhoe along with an operator to do some construction activity; that’s reportable. It’s not reportable if they simply rent the equipment and their own employee operates it. If your client buys a standard refrigerator and pays a company to deliver it to their breakroom, that’s not reportable. If they buy a large refrigeration system and pays a subcontractor to integrate it with their meat-packing operation, performing on-site modifications in the process, it’s reportable. Your clients should report qualifying payments to subcontractors for construction services, whether such payments are made by cash, cheque, or offsetting credits. This applies even if the payments fall below the $30,000 limit that applies to the goods and services tax or harmonized sales tax with regard to tax registration. They should also report the dollar value of barter transactions, but they don’t have to report goods-only payments. It’s not necessary to report payments involving a mix of services and goods unless the service portion totals more than $500 during a tax year.
Information to Report
The CRA requires your clients to report subcontractor names as they appear on the cheques they make out to them, or the names subcontractors include on invoices they submit to your clients. They don’t have to report subcontractor addresses, but the CRA encourages them to. Your clients should also include either subcontractor Business Numbers or social insurance numbers. Identifiers of subcontractors that have BNs should include an ‘RZ’ under CRA rules that went into effect in 2010. Your clients should report the total amounts paid, credited, or bartered to all subcontractors they paid more than $500 in a single tax year. When calculating the amounts to report or determining if total payments to a subcontractor exceeded the $500 threshold during a tax year, they should include goods and service, harmonized sales, and provincial sales taxes. They can report these payments on a fiscal-year or calendar-year basis. Fiscal-year payments don’t have to be allotted to the calendar years in which they’re paid.
When and How to Report
The CRA requires your clients to file information returns within six months after their reporting period ends. So, if they operate on a calendar year, the deadline is June 30. If they operate on a fiscal year ending, say, February 28, the deadline is August 31. Your clients need to report using a T5018 Information Return. This return includes a T5018 Information Slip: Statement of Contract Payments, and a T5018 Summary: Summary of Contract Payments. Since the CPRS’s inception, the CRA has modified it in order to respond to feedback from the business community and minimize administrative costs. This activity is ongoing, so consider staying abreast of changes to the CPRS to help your clients stay in compliance with the tax code, at the lowest possible cost. You might have some clients who aren’t sure whether or not to report some payments to certain entities, or who are finding it difficult to determine whether or not certain activities fall under the CPRS. If so, consider reminding them that the CRA accepts information under the CPRA even when it’s not required. Sometimes it’s easier and cheaper to report it all, and better safe than sorry.