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Derrick RancourtMany Canadians think the recently proposed changes to the tax code are a money grab. But it could also be related to the changing face of work.

Just less than a year ago, Finance Minister Bill Morneau began warning Canadians about “job churn.” Also called “precarious work” by Morneau, it’s insecure and unprotected employment that often doesn’t support a household.

More and more companies are forgoing hiring long-term employees in lieu of short-term contracts offered to freelancers. Companies prefer to get employees off their books to eliminate the costs of benefits and pensions. They’re willing to pay more in short-term contracts to eliminate that risk.

In the new ‘gig’ economy, precarious workers often rack up several short-term contracts to pay the bills. As a result, they often set up sole proprietorships or other forms of small business in part to pay for their benefits, long-term savings, etc.

This activity known as consulting was once the domain of white-collar workers (engineers, accountants, doctors, lawyers, psychologists, etc.). However, now many non-professionals are forced to form consultancies. Of course, this change is being enabled by Internet applications and the ‘sharing economy,’ which can be a source of short-term work (think of Uber as an extreme example).

This is also leading to a predicted death (or at least dismemberment) of professions as job churners can pass themselves off as able to do work that only professionals previously did.

Of course, forming a small business based on a series of short-term contracts has its benefits from a tax perspective:

  • Company profits are taxed at a lower rate (10 to 15 percent) instead of up to 50 percent for a regular wage earner.
  • Savvy small business owners use income sprinkling, distributing the company’s profit as earnings to family members, who are taxed at a lower rate.
  • Remaining profits can be invested outside the business. Any revenues generated by these investments are capital gains that are also taxed at a lower rate.

While small business owners argue that this ability to invest profits helps shore up companies through lean years, Morneau calls this and the other schemes above unfair tax dodges.

For years, the Canadian government has been turning a blind eye to the tax loopholes that small businesses have leveraged. This is because many of these tax dodges are practised by physicians and other professionals. Canada has always been at risk of losing these professionals to other jurisdictions, including the United States.

However, with the relatively unfriendly climate in the United States, the Liberal government thinks that now may be the time to tighten up Canada’s small business tax code, without fear of a massive brain drain. While this may be the case, that there may be more to this.

Soon, half the Canadian workforce will be self-employed, compared with 20 percent now. This means Canada is at risk of losing a considerable amount of its tax base. Compare a future 15 percent tax rate for consultants to a 50 percent tax rate for current wage earners.

While the government argues it’s unfair to tax wage earners at a higher rate than small business owners, changing work demographics may have more to do with it. Morneau simply wants to get in front of this parade. Of course, the U.S. climate is helping.

Consultancy was once limited to well-paid professionals but now, because of job churn, it’s being forced on working families.

The government needs to recognize that struggling to assemble short-term contracts, while protecting themselves with self-paid benefit plans and managing pseudo-pensions through investments outside the proprietorship, some distinction needs to be made between highly-paid professionals and working families forced into this new work arrangement.

Derrick Rancourt is a professor in the University of Calgary’s Cumming School of Medicine, where he chairs the Graduate Science Education’s Professional Development Taskforce.

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