Recently Canada’s Revenue Agency (CRA) has been targeting independent contractors with a view to classifying them as Personal Services Businesses. The rules applied are 30 year old rules that have not changed … which begs the question “why now?” … but the bigger issue is that the world today is VERY different than that of 30 years ago. Suddenly interpreting these rules in a way that will damage the independent contractor eco-system is going to be helpful to nobody.
CRA will suggest that they will pay more taxes, but the reality is that our tax system will receive minimal benefit and the economy will suffer significantly … resulting in companies (that pay taxes) being less effective (read less profitable, resulting in less tax paid and people hired).
I contend that the independent contractor is an integral part of Canada’s economy and we cannot afford for that to change.
What is an Independent Contractor?
Typically he/she is a skilled person with a marketable skill who chooses to be self-employed.
What Risks/Costs Does an Independent Contractor Assume?
Job security. They need to find their own work, typically on a project by project basis. Their contract can be terminated with no notice due and for any reason … typically not within the control of the independent contractor.
Obsolescence. They are responsible for their own training, and if they fall behind in skills then they become less employable. This is particularly relevant in fast moving industries like High Tech.
Financial. They are a business and can lose money if their client chooses not to pay them. This will happen if the client is not happy with their work. The contractor may also bear the cost of financing if their client is slow in paying them. The contractor may incur expenses for travel and living in particular, which are usually reimbursed at a later date … but cause cash flow and interest payment considerations.
Tools. While in the high tech industry most clients will not allow a contractor to bring their own computer (typically for security concerns), the contractor still needs to have state of the art tools. A computer powerful enough to do training, in addition to marketing efforts, invoicing and other “housekeeping duties” associated with any business. They may need to have specialized software to support their role, when working from home. They will typically have a PDA and the ability to stay connected 24/7 in order to be available when opportunities knock. They may have their own website and marketing materials, perhaps maintain a blog and twitter accounts to keep their name “out there”.
Incorporation. The professional contractor operates like any business, with legal and accounting advice and an incorporated entity. This will allow them to grow their business, to reduce some risks and to hopefully take advantage of some tax benefits … but the setup and ongoing costs are a real business expense.
Why Do People Become Independent Contractors?
There are many reasons … here are some.
Independence of not having a boss.
To avoid the politics of being an employee.
To have an opportunity to choose the work they accept.
To have the opportunity to start a business, with a view to growing it into something bigger. (Note that many of the BIG consulting companies and some software companies started with a couple of independents getting together).
Because they want to focus on their technical skills … not management.
To earn more.
To be an EXPERT in their field.
For variety … working for various clients, various industries even in various geographies.
To allow them more control over their own time.
Why Are Independent Contractors Important To Canada’s Economy?
Again there are many reasons … and here are just a few reasons that they help Canadian companies to be more effective.
Companies can bring in expertise that “hits the ground running” enabling them to implement projects more efficiently.
Companies can bring these highly skilled, and more expensive resources in on a project basis … only paying for them when while they are actually needed.
Companies can staff up to the minimal levels
needed, and bring in contract help to help meet peak demands … allowing them to remain lean and competitive.
Companies can use these experts to bring their own staff’s skill levels up, through knowledge transfer whilst implementing projects.
Scarce skills in the market can be shared across multiple companies over time … allowing more companies to be successful than if those resources worked for one company.
Using external help allows companies to get access to different perspectives, while still retaining their core staff.
Companies can use contract staff to try out pilot projects with less risk … if it doesn’t work then the contractors leave.
Companies can use contract help for short term needs such as covering for employees on extended leave … they come with good skills and leave when it suits the company.
The Canadian business model that includes independent contractors occasionally comes under attack, particularly when they are viewed as “employees” or “quasi employees”. At an individual level there can be cases where the line is grey, but at a global level these companies bring tremendous value to Canada’s economy and it would be short sighted if our various levels of government targeted this group and made it unattractive to be a contractor … or too expensive for clients to be able to engage them.