When a self-employed person loses a client, there is no EI support. When they take a week off, no employer pays for their vacation. When they spend a day finding their next contract, they are working, but those hours aren’t billable.
These are ordinary conditions of working for yourself. Yet Canada’s tax and social protection systems do not adequately account for the combination of business risk and personal financial insecurity that comes with self-employment.
A self-employed person is treated as an employee and an employer; they face the obligations of both and receive the benefits of neither. They employ themselves, but small business policymakers overlook them because they don’t see them as job creators. Their income is taxed as if they are 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 simplest 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 standing 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 taxes the 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 share of Canada Pension Plan (CPP) contributions. A self-employed person covered by CPP pays both shares, subject to the applicable limits. Tax deductions recognize part of that cost, but the person must still find the money to pay it.
Employees in insurable employment may qualify for regular Employment Insurance (EI) benefits when they lose their jobs. Sole proprietors generally cannot claim regular EI simply because their contracts dry up. Eligible self-employed people can opt into EI special benefits, including sickness and parental benefits, but that is a different form of protection.
Paid vacation, employer-funded health coverage and workplace pension contributions can also form part of an employee’s compensation. Many employees lack some of these benefits, and their protections need to be strengthened. For someone working alone, however, there is no employer to share those costs.
The same business income must cover daily living expenses, retirement savings, periods of illness, gaps between contracts and the next investment in the business. A good month may have to pay for several difficult ones.
Why incorporation is not enough
Canada already recognizes that businesses need room to retain earnings. Eligible Canadian-controlled private corporations can claim the federal small business deduction, which reduces the federal corporate income tax rate to nine per cent on qualifying active business income, generally up to a $500,000 business limit. Provincial or territorial corporate taxes also apply, and eligibility rules can reduce the amount available.
That does not mean an incorporated owner pays only nine per cent on money used to buy groceries. Salary or dividends paid to the owner can attract personal income tax. Comparing a corporate tax rate directly with a sole proprietor’s personal tax rate leaves out this crucial step.
Nevertheless, incorporation can offer a valuable tax deferral when profits remain in the company. Money that would otherwise go to personal tax can stay available for business use until it is distributed.
That advantage is much less useful to someone who needs substantially all their earnings to live on. Incorporation also brings administrative obligations and costs. Telling a self-employed person to incorporate does little to address the underlying problem of having too little left over.
A reliable livelihood is worth supporting
Business policy needs to make room for people whose immediate goal is a reliable livelihood. A business that supports one person is already doing economically useful work. Its value should not depend on whether it eventually hires employees.
This matters for women trying to build paid work around caregiving responsibilities, disability or barriers in conventional workplaces. Flexibility can make self-employment possible. It does not pay for time away from work or create a financial cushion when income falls.
A sole proprietor deduction
The federal government should 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 leave self-employed people with more of what they earn so they can build reserves, replace equipment, invest in their skills or withstand a slow period without taking on more debt. Greater stability is a worthwhile policy outcome in its own right.
Relief that reaches those who need it
The design matters. Relief should reach people with modest and unstable earnings. A measure that delivers its largest gains to high-income professionals while offering little to someone barely covering rent would miss that objective.
Government should assess the rate, income ceiling and distribution of benefits before settling the formula. Because a deduction offers limited help to people who owe little or no income tax, that assessment should also consider a refundable credit or complementary support for low-income earners.
Clear eligibility rules would be essential. Employers must not gain a new incentive to relabel employees as independent contractors and offload their obligations.
Tax relief would also need to sit alongside better access to income protection, parental benefits and affordable care. It cannot replace the public services and collective protections that make decent work possible.
A well-designed Sole Proprietor Deduction would acknowledge something our economic policies too often overlook: the person running the business is also a worker whose livelihood deserves protection.
Canada’s support for small business should reach the woman working at her kitchen table, serving clients and trying to put enough aside for next month. She should not have to promise to become a larger company before her financial security counts.
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