Amy asked:

I am a director of a private limited corporation incorporated in British Columbia. I do not receive a salary nor any director's fee. Can I be paid by the company for freelance work (which is less than $10,000 per annum). Is it correct to declare this on Line 130 under "other income." Do I need to pay GST?

Lloyd Lindsay answered:

Director’s Fees
The Income Tax Act specifically states that a director’s fee is income from an office or employment. Because of this, the appropriate income tax withholdings and payroll taxes would normally apply. However, some directors may be professionals (such as an accountant or lawyer) who are members of a firm that is entitled to their fees. In these circumstances, the fees are business income and the firm would charge GST/HST, but the withholdings and payroll taxes would not apply.

Freelance Work
The company can pay you for freelance work, as long as the amounts are reasonable for the work you performed. The amount is not an issue; whether the work is income from employment or self-employment (a business) is. Some of the criteria used to determine whether you are self-employed include the following:

• Do you actively hold yourself out as self-employed?
• Do you advertise to the public as a self-employed business?
• Do you participate in the company’s medical and pension plans?
• Do you have more than one customer/client?
• Can you use someone other than yourself to perform the freelance work?

If you are in fact an employee, then the appropriate income tax withholdings and payroll taxes would normally apply and the corporation would issue you a T4 at the end of the year. If you are self-employed and earning business income, you had better consult with a lawyer because you are also a director and would not be dealing with the corporation at arm’s length. Probably, the Board of Directors would have to approve the contract between the corporation and your business and you should refrain from voting as a director on this matter. Once again, you should seek legal advice if you are an independent contractor.

Reporting Your Income
Employee:
If you are an employee, you will receive a T4 and report you income as employment income on your T1 Individual Income Tax Return.

Self-Employed:
If you are self-employed and unincorporated, you would not report your income as “other income” on Line 130 of your T1. Instead, you would report it in the “self-employment” section on one of the lines that immediately follows Line 130. And if your own business is incorporated, then you would report the income on a T2 Corporation Income Tax Return, not on a T1.

GST/HST
The GST/HST rules would apply if your income is considered business income and not from employment. The rules require you to register and charge the tax when your sales that normally would be taxable exceed $30,000 over the past 12 months. Because your freelance work is less than $10,000 per year, you may choose to register or not register. If you do register, you must charge the GST/HST on your freelance work, but you can recover the GST/HST you pay on your business purchases. If you don’t register, you do not charge the tax, but you can’t recover the tax you pay on your business purchases.

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