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.
