Self-employed workers deserve a tax system that recognizes their risks

If a self-employed person loses a client, there is no EI support. If they take a week off, no employer pays for their vacation. If they spend a day finding their next contract, they work, but those hours are not billable.

These are normal conditions for working for yourself. But Canada’s tax and social security systems do not adequately account for the combination of business risk and personal financial uncertainty that comes with self-employment.

A self-employed person is treated as an employee and as an employer; they face the obligations of both and receive the benefits of neither. They employ themselves, but small business politicians neglect them because they do not see them as job creators. Their income is taxed as if they were employees, but they receive no employee protections or benefits.

A Sole Proprietor Deduction could help.

The risks of working for yourself

A sole proprietorship is the easiest way to run a business. The owner earns revenue, pays expenses and reports the resulting net business income on their personal tax return. There is no separate legal entity between the person and the business. Business income flows directly to the owner. But business debts can put personal assets at risk.

After allowable expenses and applicable deductions, the personal income tax system treats business income just as it does employment income. But the circumstances in which it is earned can be very different.

An employee’s employer pays a portion of Canada Pension Plan (CPP) contributions. A self-employed person covered by the CPP pays both shares, subject to the applicable limits. Tax deductions recognize part of those costs, but the person still has to find the money to pay them.

Employees in insurable employment may qualify for regular Employment Insurance (EI) benefits if they lose their job. Sole proprietors generally cannot claim regular EI simply because their contracts dry up. Eligible self-employed people can opt for EI special benefits, including sickness and parental leave, but this is another form of protection.

Paid vacation, employer-sponsored health coverage and workplace pension contributions may also be part of an employee’s compensation. Many employees lack some of these benefits, and their protections need to be strengthened. For someone who works alone, however, there is no employer to share these costs.

The same business income must cover daily living expenses, pension savings, periods of illness, gaps between contracts and the next investment in the business. A good month may have to pay for some difficult ones.

Why incorporation is not enough

Canada already recognizes that businesses need space to hold revenue. Eligible Canadian-controlled private companies can claim the federal small business deduction, which reduces federal corporate income tax to nine percent on qualifying active business income, generally up to a $500,000 business limit. Provincial or territorial corporate taxes also apply, and eligibility rules may reduce the amount available.

That does not mean that an incorporated owner pays only nine percent of money used to buy groceries. Salary or dividends paid to the owner may attract personal income tax. Comparing a corporate tax rate directly to a sole proprietor’s personal tax rate leaves out this crucial step.

Nevertheless, incorporation can provide valuable tax protection if profits remain in the company. Money that would otherwise go to personal tax can remain available for business use until distributed.

This advantage is much less useful to someone who essentially needs all of his earnings to live on. Incorporation also entails administrative obligations and costs. Telling a self-employed person to integrate does little to address the underlying problem that too little is left.

A reliable life expectancy is worth supporting

Business policy must make room for people whose immediate goal is a reliable livelihood. A business that supports a person is already doing economically useful work. Its value should not depend on whether it eventually hires employees.

This is important for women trying to build paid work around care responsibilities, disability or barriers to conventional workplaces. Flexibility can make self-employment possible. It does not pay for time away from work or create a financial cushion if income drops.

A sole proprietor deduction

The federal government is to introduce a Sole Proprietor Deduction: targeted tax relief on eligible net self-employment income, available through the personal tax return.

Its purpose would be to let the self-employed have more of what they earn so they can build up reserves, replace equipment, invest in their skills or weather a slow period without taking on more debt. Greater stability is a valuable political outcome in itself.

Relief that reaches those who need it

The design is important. Relief should reach people with modest and unstable incomes. A measure that would deliver its biggest benefit to high-income professionals while providing little to someone barely covering rent would miss that goal.

The government should assess the rate, the income ceiling and the distribution of benefits before the formula is determined. Because a deduction provides limited help to people who owe little or no income tax, this assessment should also consider a refundable credit or complementary support for low earners.

Clear eligibility rules would be essential. Employers must not be given a new incentive to reclassify employees as independent contractors and shirk their obligations.

Tax relief should also sit alongside better access to income protection, parenting and affordable care. It cannot replace the public services and collective protections that make decent work possible.

A well-designed Sole Proprietor Deduction would recognize something that our economic policies too often overlook: the person who runs the business is also a worker whose livelihood deserves protection.

Canada’s small business support should reach the woman who works at her kitchen table, serving customers and trying to put enough aside for the next month. She should not commit to becoming a bigger company before her financial security counts.

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