|By Kevin Dee,
CEO at Eagle
From time to time governments will decide that they need to crack down on independent contractors. Typically the suggestion is that independent contractors are paying less in taxes than they should, or that they are really employees. During the run up to the recent federal election Justin Trudeau made some references to small business owners avoiding taxes, and hopefully he does some research before he buys into a rhetoric that believes every worker should be an employee of a large entity.
Here are some things you might not have known about independent contractors in the professional space in Canada . It is very important to remember that Canadian laws are different than US laws., because too often I see “experts” weighing in with advice, based on their US experience.
- Taxation … contractors pay the same amount in taxes as everyone else.
An independent contractor in Canada is typically a one person corporation. Her corporation gets paid for the work done and the contractor either (a) takes a dividend from the corporation as opposed to a salary, or (b) pays themselves a salary. The dividend route only provide a small tax advantage (by way of deferring taxes) IF she leaves some of the earnings in the company. If, like 99% of Canadians she spends what she earns then she pays the same amount of tax as everyone else, or possibly more because tax “integration” is not perfect! (Business tax plus dividend tax = equivalent to income tax+)
- Expenses … yes the independent contractor gets to write off SOME business expenses.
These are typically minimal, AND if they worked for “big company” then it would be “big company” writing off the expenses. So, the write offs would have occurred anyway. These are the expenses associated with taking responsibility for a business … marketing, technology, professional services and other necessary business costs. All of these costs go back into our economy supporting other businesses. and creating jobs.
- Risk … independent contractors accept some risks, like any business.
An independent contractor is a business, and as such accepts some risks as it is a lifestyle they choose. They have no guarantees of long term work they are responsible for finding every gig themselves, in strong or weak economies. They can be let go at a moment’s notice, with no severance. If their work is not accepted they don’t get paid. They need to carry business insurance because they can be sued by their client. They accept the risk of their and their family’s health, with no big company benefits. They don’t get paid for time off, vacations, sick days or training time.
- Value to the economy … they are a big boon to Canada’s economy.
Having a flexible workforce is HUGE for all companies to some degree. Special projects, seasonal demands or the ability to pilot new ideas without committing to long term employment contracts are essential for these companies. Having rare expertise available to many companies, rather than just one employer, is a big advantage to Canada’s economy and the average self-employed individual is very motivated to be productive … their continued contract depends on it.
It is worth noting that some percentage of independent contractors have aspirations for a bigger corporate entity. They might be developing a product on the side, or they might band together with a few others to create a company. There are many success stories where one or a few contractors formed a company that became a household name. Some names that come to mind might include CGI, Calian and Cognos but I’m sure there are many. Entrepreneurs will often start small and go on to bigger things.
- The New Way of Work … this is a growing trend in society today
Whether to become self-employed has always been a personal choice. It offers the individual more control over their career, the ability to earn a good income without having to move into management when they are more interested in a specialised career. It allows for freedom to take time off for whatever reason. These people choose to manage their own retirement plans. They have to find their own benefits and accept the responsibility of business ownership.
I guess Ronald Reagan might have been right when he said, “You can’t be for big government, big taxes, and big bureaucracy and still be for the little guy.”
It would be my wish that all elected officials understand the realities of employment today and understand the value of these small business owners. These are valuable contributors to Canada’s economy and messing with that is not going to help anyone! It certainly won’t put more tax dollars into the coffers!
“Every government interference in the economy consists of giving an unearned benefit, extorted by force, to some men at the expense of others. ” Ayn Rand