Can Canada Increase Entrepreneurship?: How tax administration may be biased against self-employment

Commentary, Taxation, Frontier Centre

Winnipeg: The Frontier Centre for Public Policy today released Can Canada Increase Entrepreneurship?

Examining the administrative practices of the Canada Revenue Agency (CRA), this backgrounder finds the government agency to exhibit a bias against self-employed entrepreneurship.

Australian author and self-employed entrepreneur Ken Phillips provides an analysis of CRA administrative practices based on a series of actual cases in which the state agency has investigated contractual relationship between businesses and self-employed individuals. Typically, Phillips points out, the CRA conducts investigations into the nature of an association between legal corporations and individuals, or among registered corporations interacting, and concludes that there is an employee-employer relationship between them. The move then forces enterprises to pay significant and often massive backlogs in payroll taxes, pension and unemployment benefits.
“The only issue should be from whom is the revenue collected, from the employer or the self-employed individual?” Phillips says, suggesting that it should not be up to the revenue agency to decide whether an individual who wants to be treated as an entrepreneur should be treated as one.
Moreover, the CRA administers legal common law tests to make its determinations as to whether one is an employee or a contractor. Given that the agency also has the power to punish by imposing fines and penalties to those it investigates, Phillips says, it “sets itself up as investigator, prosecutor, judge and jury,” as well as law enforcer. In our legal tradition, the author argues, only courts have the institutional competency and neutrality to administer such tests. 
These types of investigations do not ever find that an employee should be treated as a self-employed entrepreneur. In all known cases, it is the opposite. The agency uses its resources and coercive powers to convert entrepreneurs into employees, clearly displaying a bias against self-employment and entrepreneurship, Phillips says.  The question is not about avoiding taxation but the manner in which it is done. “The issue we raise,” Phillips writes, “is not the obligations themselves, but how the collection of payments under those obligations is administered.”
Many who wish to set up businesses as self-employed entrepreneurs, knowing of the financial penalties and potential legal costs that may be incurred in running afoul of CRA’s practices, simply choose not to do it. CRA’s practices therefore act as high transactional costs to potential entrepreneurs, and amount to deterrence against individual entrepreneurship. From experience, it is known that entrepreneurs contribute to greater innovation and economic development in a community. A decrease in their numbers may leave us with less innovation and less development.
The study challenges CRA to re-examine its practices and calls for a review of its institutional biases.
Download a copy of Can Canada Increase Entrepreneurship? HERE.

For more information and to arrange an interview with the study’s author, media (only) should contact:

Ken Phillips

Tel: 011 61 412 393 692
Marco Navarro-Genie
Director of Research
Tel: 403.995.9916

Ken Phillips is co-founder and Executive Director of Independent Contractors of Australia. Ken is an independent contractor operatingas his own business, as a researcher, commentator, advocate,lobbyist, and consultant on workplace management issues. Amonghis many activities, Ken is a published authority on independentcontractor issues and directs research on related commercial andcompetition issues. His strongest interest is management issuesand the development of internal and external relationship buildingfor organizations. Within this framework he promotes the conceptof ‘markets in the firm’. Ken was ICA’s representative at the 2003and 2006 International Labour Organisation debate on the ‘Scopeof Employment Relationship.’ The ILO outcomes formed the conceptualbasis for Australia’s Independent Contractors Act. Ken’s book, Independence and the Death of Employment, is published by Connor Court.