Thursday, July 17, 2008

Canadian Tax Laws Disadvantage the Self-Employed

In Canada, when a person works for a company as a regular employee, benefits are not taxable. The company pays premiums for health and dental benefits, CPP and so on at no cost to the employee.

But if the same person works for the same company on a contract basis and the company pays for the same benefits, the worker has to pay income tax on every dollar the company spends for their benefits.

There are a couple of ways to partially get around this, at least for the health and dental component. A self-employed worker can set up a Private Health Services Plan (PHSP) with a private insurance company. The worker then has to pay the insurance company 8-10% of all their health and dental costs, and that makes the health costs tax deductible - up to a limit of $1,500 a year. Noone over the age of 40 is going to get health and dental coverage for $1,500 a year. But in the personal tax laws there is some tax relief provided for health expenditures that are over 3% of income (to a maximum income of $63,000, which is $1,890) - expenditures aren't completely deductible, but there's some provision.

The PHSP is a messy way to handle the unfairness to contract workers. For one thing, the self-employed worker is out of pocket to the insurance company. For another, there is a restriction that you can only claim the PHSP expenditures on your taxes if your self-employment income is more than half of your total income for the year. Consequently, if you have health-related costs in January, lose your contract in February and get a regular job in March, you cannot claim the PHSP expenditures on your taxes - you're out the 8-10% you paid the insurance company.

It also seems crazy to hand this huge freebie to the insurance industry - they get to scoop up 8-10% with no effort and no risk.

It seems a principle of tax law fairness that people should not be disadvantaged by the way their job contract is created. Increasingly, companies like to hire people on a contract basis. It's true that there are tax breaks afforded to self-employed workers that regular employees don't get, but they don't turn out to be very much, at least if you're honest. For example, there's a deduction for working at home, but you're only allowed to deduct a small portion of your home expenses. First, you take the square footage of your home office and divide it into the total area of your house; say that's 10%. Then you work out how many days a week you work at home, say 5/7. In that example you can deduct about 7% of your home expenses. Similarly, you can deduct a portion of your car costs based on the percentage of your driving that is work-related.

Revenue Canada should reform the tax laws for self-employed workers to create parity with regular employees on the tax implications of benefits. Health and CPP premiums should be tax-deductible, at the very least.



Anonymous said...

Business people are always changing and twisting facts to suit their own "needs". Funny how that reminds of our politicians.
7% of your housing cost is more than any "scab" worker deserves, that's for sure.
You can't get health and dental for 1,500 dollars a year?
Are you sure about that?
I paid 64.00 dollars bimonthly for health, dental and including long and short term disability and that money was deducted from my paycheck even though I told my employer I didn't want or need the coverage.
I could have bought my own insurance with much better coverage than the garbage coverage my employer was forcing me to have for a lower price.
Employee's do pay into CPP and those few that do have any Benefits usually pay a part of the cost which isn't taxed and neither is the employers portion.
The problem is really that you are an illegal worker and not an employee or self employed legally.
You need a an Accountant that doesn't pay GST to get the kind of deductions your talking about.
Not tax "fairness", LoL.

Yappa said...

What an amazing comment from anonymous at 1:08... I didn't think anyone would comment, but if they did, I was hoping for some discussion of issues faced by the self-employed.

Increasingly, companies like to hire people on a contract basis. It's frequently not the choice of the worker to be on contract.

To think that contract worker = scab is just bizarre. I am in no way an illegal worker. (Also I don't work on contract for the same company I worked for as a regular employee; I just phrased it that way to show why there should be parity in the tax law between contract and regular employees.) Whether companies explicitly pay for benefits or bump up the remuneration to cover them is moot.

Plus, I was referring to the employer contribution to CPP... the rest is paid by the worker regardless.

7% of home costs might be significant if you have a big mortgage or you pay rent, but when neither is the case it is a really small amount of money.

In any event, my point is just that the tax law should try to ensure parity in the taxation of regular and contract employees. There are all sorts of other inequities faced by workers but that's a separate topic.

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In the U.S., for example, there are these Indianapolis tax accountants who are hire by some self-employed individuals. They report the income or loss using the IRS Form 1040 and the calculation of the self-employed tax. Computed taxes are paid quarterly using form 1040-ES. Being self-employed is quite different from being a business owner, though. So I think the policies vary.

PHSP said...

Job on contract basis is somewhat risky in terms of getting tax free benefit. One cannot enjoy benefits provided by an employer as tax free. It is good to see a solution for those workers. With setting up own PHSP plan with a insurance private company, they can enjoy tax free benefit for their health and dental expense. By paying 8-10% of total health expense, a worker can be benefited of the health costs tax deductible.

But the issue is really worrisome for the worker in case of loosing contract. Further he cannot claim for PHSP expenditure and will be out of 8-10% payment made to the insurance companies. The issue should be considered and a parity should be created between contract based workers and regular employees on the tax implications of benefits.

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