Double flat tax on the self-employed

Michael
Michael Johansen
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Low-paid, self-employed workers (of whom, according to the 2005 national census, there were 807,030 in Canada with an annual net income of less than $25,000) might be forgiven for assuming that their tax bill will reflect the great possibility that they are poor.

As they sit this time of year, filling out all the tax forms and calculating all their revenues and expenses, they might be imagining that since Canadian citizens are supposed to enjoy the benefits of a graduated tax rate (one that decreases the less one earns), the amount they'll owe to Ottawa won't cause them any financial hardship.


Low-paid, self-employed workers (of whom, according to the 2005 national census, there were 807,030 in Canada with an annual net income of less than $25,000) might be forgiven for assuming that their tax bill will reflect the great possibility that they are poor.

As they sit this time of year, filling out all the tax forms and calculating all their revenues and expenses, they might be imagining that since Canadian citizens are supposed to enjoy the benefits of a graduated tax rate (one that decreases the less one earns), the amount they'll owe to Ottawa won't cause them any financial hardship.

They could very well be wrong.

The census data - available on the Statistics Canada website - reveals a disturbing trend.

While the total number of self-employed people decreased by 22,910 to 1,218,565 from 2000 to 2005, the number in the lower-income ranks actually swelled. In fact, 73,480 more self-employed workers - a category that includes such people as independent contractors, actors, craft makers, artists and writers, who do piece-work or are paid by the job (and who rarely ever hear the word "benefits" uttered anywhere nearby) - are making less than $25,000 per year.

Of that subtotal, more than half earn less than $10,000.

There are plenty of reasons that can explain this drop in the income of self-employed people.

First of all, most of them have been in a recession for more than a decade - the rest of the world only caught up last year.

Even as government assistance to the various industries important to the self-employed have evaporated, clients have become fewer. Companies merge, cut back on their purchases, or go out of business. Theatres close. Production companies and publishers shut down. Newspapers and magazines fold. On top of all that, the individual payments for work done were either frozen in the early 1990s or they've gone down.

While revenues have dropped, expenses have risen.

Things like motor vehicles, office supplies, interest charges, accommodations, insurance, taxes, professional fees, materials and tools - all of which are necessary to conducting a business or profession - have gone up in price.

That's why, since the Canadian tax system is supposed to charge a lower rate the less you make, a self-employed individual who earned a taxable income of around $10,000 in 2008 would not be out of line to think he or she has to pay $100 or less to the tax collector.

He or she would be wrong.

In addition to the amount demanded by the graduated tax rate, every self-employed person who earns more than $3,500 is required to pay a flat tax of 9.9 per cent of his or her income to the federal government.

The government, however, doesn't want it called a tax.

Ottawa calls it a Canada Pension Plan contribution.

Nobody is permitted to opt out of it, even if the government has told them they can only expect payments of less than $12 a month after they retire - hardly a fair return on investment.

Bureaucrats who argue for the system say it is fair because everyone - employed or self-employed - has to pay. That might be true if everyone paid the same, but the self-employed pay twice.

Revenue Canada considers that since such a person works for his or herself, then he or she is actually two people.

As a result, he and she must not only pay the employee's contribution, but the employer's as well. That's why someone who can ill afford it, someone who only clears around $10,000 per year, has to pay almost $1,000 of that to the federal government.

Fortunately, there is a way out.

When this over-priced, yet mandatory, pension contribution comes on top of a pile of unpaid bank bills, electricity bills, insurance bills, tax bills and medical bills (among others) the beleaguered self-employed citizen can truthfully declare that it would cause him or her severe financial hardship and that he or she has no way of paying it.

Even Revenue Canada sometimes agrees and forgives - sometimes.

Michael Johansen is a writer living in Labrador

Organizations: Statistics Canada, Revenue Canada

Geographic location: Canada, Ottawa, Labrador

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