There are 2.6 million self-employed people in Canada. Even though the Canadian and provincial governments generally have formally stated positive attitudes toward self-employed people, key aspects of tax administration are biased against people being self-employed. This blocks entrepreneurship. To understand how the bias works, a brief overview of the Canadian tax administration process is needed.
A quick overview of the administration of tax raising in Canada
The Canada Revenue Agency (CRA) provides revenue-raising administration services for the Canadian federal and provincial governments. When Canadians pay taxes, the notices they receive from CRA itemises the:
- Federal tax payment;
- Provincial tax payment for the province in which they live.
They also includes deductions and payments for:
- The compulsory Canada Pension Plan;
- Employment Insurance premiums.
Canada Pension Plan
Under the Canada Pension Plan it is compulsory for contributions to be made to the Plan in equal amounts by an employer and employee. Employers must make both the employer’s and employee’s payments to the Canada Revenue Agency. Self-employed people must also contribute, paying both portions. Canadians receive payments from the fund when they retire, based on the amount of credits they have built up in the fund over their working lives. The fund is entirely financed by contributions and investments.
Canadian Employment Insurance
Under Employment Insurance (EI) (see here and here) it is compulsory for employees to make contributions (via their employer) to EI, with employers making additional contributions for employees. The employer must make the payments to the Canada Revenue Agency. Self-employed people do not make contributions to EI. Anyone who is out of work can receive unemployment benefits, but only if they have contributed to the scheme. In other words, self-employed individuals cannot receive unemployment benefits from EI.
[Note: Self-employed people can choose to join EI, pay premiums and receive payments for ‘special benefits’ covering maternity, parental, sickness and compassionate care.]
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