Introduction - What is a T5018?
A T5018 is a CRA taxpayer information return known as the statement of contract payments. It applies to all individuals, partnerships, trusts, and corporations involved in construction activities and where their primary source of business income are those construction activities. Basically, a T5018 is like the version of the T4 for the construction industry.
The primary purpose of the T5018 is to allow the CRA to track income earned by subcontractors in the construction industry. As the construction industry often involves many subcontractors who are small business owners and self-employed, as well as transactions frequently being made in cash, the construction industry has long been a concern to the CRA for tax evasion. Cash payments, in particular, are a risk factor when it comes to unreported or underreported income due to the relative lack of a paper trail. Furthermore, self-employed workers do not have income taxes withheld automatically when they are paid, increasing the chances of there being unpaid taxes and tax evasion. The T5018 attempts to help document and track the payments by putting an additional onus on the construction business hiring the contractors.
Additionally, HST is another major CRA tax evasion concern when it comes to smaller subcontractors. Where the subcontractor has revenues below $30,000 in four consecutive quarters, they are not required to collect or remit HST. However, once they pass that threshold, they are required to register an HST number and begin collecting and remitting HST. Since any individual job may pay less than $30,000, but several jobs in aggregate may exceed that number, the T5018 requirements allow the CRA to better identify individuals who are required to register and remit HST. Call our experienced Toronto tax law firm to learn more about information returns and HST registration requirements
When is a T5018 Required?
Where construction is a business' primary source of income, a T5018 slip must be completed by the business for any amounts paid or credited to subcontractors who are Canadian resident taxpayers for construction services. For non-resident subcontractors, a business would instead need to submit a T4A-NR return.
That said, if the amounts paid to a subcontractor are less than $500, the T5018 is not required, though it may still be voluntarily completed. Further, payments to subcontractors for goods do not need to be reported, though mixed payments for goods and services will need to be reported on the T5018 as long as the service portion of the payment accounts for at least $500 of that payment. Notably, businesses/contractors only need to file the T5018 for the subcontractors that they are directly dealing with - if one of the direct subcontractors has further sub-trades, the subcontractor will be responsible for filing the respective T5018s for those sub-trades.
Construction as Primary Source of Income
For construction to be considered the primary source of business income, more than 50% of the business' income earning activities must be construction related. Note that businesses may have significant construction activities but do not primarily earn their business income from those activities and in those cases would not need to complete the T5018 (for example, an oil company may construct pipelines but primarily earn its income from oil related business). The T5018 can be reported either 6 months after a business's fiscal year end or 6 months after the calendar year end.
Potential T5018 Penalties
The penalty for failing to file a T5018 when required is $25 per day per failure, with a minimum penalty of $100 up to a maximum penalty of $2,500 per failure. Furthermore, if any contractor plans with subcontractors in order to avoid tax by concealing underground activity the subcontractor could face criminal tax fraud prosecution with fines and penalty of up to 200% of the tax they attempted to avoid.
Pro Tax Tips and Common Tax Pitfalls
Given that a construction contractor may have numerous subcontractors on multiple jobs, the failure to file penalties can easily stack up and in total amount to huge penalties. Of course, the best thing to do is to keep on top of your filing requirements and avoid the penalties altogether. However, if you are in the situation where you have not filed as required, the voluntary disclosures program is an opportunity to rectify the problems. If an application to the voluntary disclosures program is accepted, some or all of the penalties may be waived and you will also be exempt from criminal tax prosecution. For subcontractors, be aware that even if your contractor does not file a T5018, that does not mean the CRA does not know or is unable to find out about funds you are paid. The voluntary disclosures program can also be used to disclose unreported income and comes with the benefit of waivers of penalties and interest. Speak to one of our top Toronto tax lawyers and ask what we can do to help.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.