Be A Consultant Or Contractor Not An Employee

If you are currently employed, but have a great deal of freedom in how you perform your duties, when you perform these duties, and how you are remunerated, then the possibility exists to sever your employment and re-engage yourself as an independent contractor. 

There are definite advantages in becoming a self-employed individual. The biggest advantage is the ability to deduct expenses from your income when you prepare your tax return each year.

You shouldn't be blinded by the tax advantages, however. There are other factors you need to consider. These include:

1. No Employment Insurance (EI) protection. As a self-employed individual, you don't have to pay EI premiums. This is a significant cost to you annually outlined HERE. However, if you don't pay EI premiums you won't be able to collect EI benefits if you're out of work. This is particularly a consideration for anyone planning a parental leave and counting on EI benefits during that time.

2. Increased Canada Pension Plan (CPP) costs. As an employee, your employer matches your CPP contributions dollar for dollar. As a self-employed individual, you must pay all CPP contributions yourself, effectively doubling what you would pay as an employee. The amounts are outlined HERE. 

3. Loss of security. If you are no longer employed, you won't have the security that comes with a job. If you take a vacation, you won't get paid. If you lose a contract, you won't be entitled to any severance pay or notice period unless provided for in the contract.

4. Loss of tax-free benefits. Employees are entitled to certain tax-free benefits such as dental and medical plans. Self-employed individuals must pay for their own dental and medical costs out of their own pockets. However, the Income Tax Act does allow self-employed individuals to deduct the costs of private health services plans, under certain circumstances.

5. No company pension. If you're a member of a company pension plan, you don't have to pay tax on employer contributions to the plan. You also get a tax deduction for contributions that you make. As a self-employed individual, you will have to fund your own pension using your RRSP or set up an IPP discussed HERE.

6. Loss of social aspects of a job. Many individuals who become self-employed find that they miss the daily social interaction with their fellow employees if they work out of their house. Of course, they don't have to deal with the office politics either.

7. Difficulty in getting credit. Your income stream may no longer be predictable, which will make it more difficult to obtain credit for either business or personal reasons.

8. Recordkeeping/compliance aspects. You will have to keep records for income tax, GST and other purposes. You will likely have to keep more records than you did as an employee. More record keeping issues are discussed HERE.

Before pursuing this route, also examine the tax risks as outlined HERE in the Tax Traps section and do proper planning with your chartered accountant.

As you can see, there are costs to becoming an Independent Contractor but the benefit of being a contractor is the greater latitude in arranging your income tax affairs. If you choose to go this route, negotiate a higher fee as a contractor than if you were an employee. This higher fee compensates for the additional costs and added risks you are assuming. 

If you want to be certain that CRA will not negate your new status, you can fill out the Form CPT-1 and request a ruling from CRA. However, there is no requirement to do so.

If you are successful in becoming an independent contractor, all of the tax planning devices discussed in this section relating to businesses (and corporations if you incorporate) will apply.

Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice. 

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