REPORTING REQUIREMENTS FOR PAYMENTS TO SUBCONTRACTORS IN THE CONSTRUCTION INDUSTRY
Canada Revenue Agency (CRA) established the Contract Payment Reporting System in 1996. The system was first set up on a voluntary basis but became mandatory with the 1998 Federal Budget and effective January 1, 1999.
All construction businesses are required to report any payment of $500 or more to subcontractors providing construction services. The requirement also applies to Canadian resident subcontractors performing construction services outside of Canada. Construction businesses include individuals, trusts, partnerships, and corporations whose income earning activities are primarily, that is at least 50%, in construction. Businesses that spend less than 50% of their time in construction activities are not required to report payments to subcontractors. Businesses that are outside of the construction industry are not required to report subcontractor payments either, even if they have construction work done for them. Note that such businesses may have to file T4A slips for payments for services in excess of $500.
CRA’s definition of construction encompasses buildings, roads, and bridges and includes such activities as:
- installation
- erection
- alteration
- modification
- repair
- improvement
- demolition
- dismantling
- removal
Subcontractors are defined as individuals, partnerships, or corporations that offer construction services, including those under the GST limit of $30,000. Contractors who provide non-construction services such as janitorial work or bookkeeping are not reportable.
Contract payment information should be reported on a T5018 Information Slip for each subcontractor and summarized on a T5018 Summary. The slip must report the subcontractor’s name, as it appears either on invoices or as a payee on the payer’s cheque. Sometimes a cheque is made out to more than one subcontractor to ensure both subs are paid and to avoid liens against the job. In such cases, the contractor should report on the subcontractor he/she dealt with directly.
Other information required on the T5018 slip includes the subcontractor’s CRA identification number, that is his/her Business Number, GST registration number, or social insurance number. The subcontractor’s address should be reported wherever possible but this is not mandatory information. CRA also requires the total amount paid to the subcontractor, including GST and PST. It is recommended, but not required, that the subcontractor receive a copy of the T5018.
Businesses may substitute a listing of payments to subcontractors for the T5018 slips and summary. CRA requires the listing in columnar layout and on a line by line basis, including the same information required on the T5018 slip. The listing must contain all the information reported on the T5018 summary, that is total dollar value of subcontractor payments, total number of subcontractors, and an authorized signatory of the business.
All amounts paid or credited to a subcontractor for construction services must be reported, including:
- payments by cheque
- cash payments
- barter payments (report the fair market value of the bartered goods or services)
- payments offset against amounts owing
Payments for mixed goods and services must also be reported if the service component is at least $500.
Contract payments may be reported either on the basis of the calendar year, or on the basis of the reporting business’s fiscal year. The report is due within 6 months of the end of the reporting period. Once the reporting period is established, it cannot be changed without CRA authorization.
CRA’s penalties for late filing are $25 per day per slip, with a minimum penalty of $100 and a maximum of $2500 per slip. As a result, the penalty quickly becomes a very large amount for a large construction company having many subcontractors. For example, if a construction company had 300 subcontractors and was 100 days late filing, its penalty could amount to $750,000. Even a moderate-sized company with 20 subcontractors could face bankruptcy with a penalty of up to $50,000.
CRA’s Voluntary Disclosure Program offers relief from penalties and interest for late filing under some circumstances. To qualify for the Voluntary Disclosure Program, the slips must be more than 1 year late.
Talk to your tax accountant about your requirement to comply with CRA’s Contract Payment Reporting System. The costs in failing to comply are very high.