Winning a Federal Contract in Ottawa: The Tax Setup You Need Before You Bid

There is no other city in Canada where the largest customer in town is a government. In Ottawa it is, and a sizeable share of the local consulting, IT, translation, engineering and facilities work in the region is billed through a federal contract of some kind.

The procurement side of that is well documented. Public Services and Procurement Canada publishes a getting started guide and CanadaBuys explains how to register your business. What nobody hands you is the tax and accounting setup that has to be in place before the first invoice goes out, and a few of those decisions are hard to reverse once you are mid-contract.

The registration stack

Four different registrations get confused with each other constantly, because they all involve a number and three of them are issued by different bodies.

The PBN is not a CRA number and it does not replace one. It is derived from your CRA business number for procurement purposes, which is why the CRA registration has to come first. The mechanics of the BN and the program accounts hanging off it are in the CRA business number and its four accounts.

You do charge GST/HST to the federal government

This is the single most common misunderstanding among first-time bidders, and it usually surfaces after an invoice has already gone out without tax on it.

The CRA is unambiguous. Under its guidance on supplies made to governments, a supplier must charge the GST/HST on taxable supplies of property and services it makes to the federal government. The department is not an exempt purchaser. It pays the tax and recovers it internally, which is invisible to you.

Ontario is in the same position for provincial work: it is a participating province, and a supplier charges HST on taxable supplies made to the Ontario government as well.

Two practical consequences follow:

Registering voluntarily usually makes sense. If your customer is a department with no objection to paying HST, and your startup costs carry recoverable tax, waiting for the $30,000 small supplier threshold to force you costs you input tax credits in the meantime. The threshold logic is set out in GST/HST registration for a small business.

Quote tax-exclusive and say so. A bid priced “all in” that turns out to have been tax-inclusive is a 13% haircut on a contract you cannot reprice.

The personal services business trap

This is the one that costs Ottawa consultants real money, and it is specific to how federal work is often structured.

A common path looks like this: you incorporate, you are placed through a staffing agency onto a departmental contract, you sit at a government desk, you work the hours a manager sets, and you have effectively one client. The CRA’s test for a personal services business asks whether, but for the corporation, you would reasonably be regarded as an employee of the entity you are serving.

If a corporation is found to be a PSB, three things happen at once. It loses the small business deduction. It faces an additional tax rate on that income. And its deductible expenses are cut back to essentially salary paid to the incorporated employee and a short list of other items, which means the ordinary business expenses you have been claiming disappear.

Do you work through your own corporation on a federal contract?
│
├── No  → PSB rules do not apply to you.
│
└── Yes
    ├── More than five full-time employees, or the client
    │   is an associated corporation?
    │        → Excluded from the PSB definition.
    │
    └── Otherwise, weigh the real relationship:
        ├── Who controls how and when the work is done?
        ├── Whose tools and equipment are used?
        ├── Can you subcontract or send a substitute?
        ├── Do you carry any risk of loss or chance of profit?
        └── Do you have, or can you get, other clients?
               → The more this reads like employment,
                 the greater the exposure. Document the
                 answers now, not during an audit.

The full analysis, including what a defensible contractor relationship looks like on paper, is in avoiding the personal services business rules.

Getting paid, and the cash flow gap

Federal payment terms are predictable but not fast, and a contract won in January can mean payroll funded out of your own pocket for a quarter. Three things to plan for:

Instalments arrive before the cash does. A newly profitable corporation starts owing corporate instalments, and they are calculated on prior results rather than current bank balance. The schedule is in corporate tax deadlines and instalments.

You remit GST/HST you have not been paid. Net tax is calculated on the GST/HST collected or that became collectible in the reporting period, per the CRA’s guidance on calculating your net tax. Invoice a department in March on 60-day terms and the tax is in your March return whether or not the money has landed. On a large first contract that is real cash out the door before any cash comes in, and it is the most common reason a newly registered contractor misses a remittance.

Tax you have collected is not working capital. Move it to a separate account on receipt rather than deciding later which part of the balance was yours.

Subcontractors create reporting obligations. In construction, payments to subcontractors are reported on T5018 slips, which I have covered for local firms in T5018 reporting for Ottawa construction. Outside construction, fees for services paid to a contractor may belong on a T4A.

Records, because the audit clause is real

Federal contracts routinely give the buyer audit rights over the work, and that sits on top of the CRA’s own requirements. The CRA expects business records to be kept for six years from the end of the last tax year they relate to, per its guidance on keeping records.

For contract work specifically, keep the timesheets and the deliverable acceptance evidence with the same care as the invoices. A time-and-materials claim is only as good as the record of hours behind it. The retention rules in detail are in record retention in Canada.

If you are bidding on federal work for the first time, or you have been placed through an agency and have never tested whether your corporation is exposed to the PSB rules, send me the contract, the agency agreement if there is one, and your last corporate return. I will tell you what the structure looks like from the CRA’s side and what to change before the next renewal. Get in touch.