Traditionally, 85 percent of Canada’s workforce has consisted of the employed. But that’s about to change: 45 percent of Canada’s workforce will be “on demand” or “freelancing” by 2020 *. This is a continuation of an upward trend that started with the financial crisis of 2008. This also means an increasing number of Canadians need to revisit what kind of tax and financial planning they should be doing.
Self-employment is estimated to increase by half a million more each year, every year that unemployment rates are high. A trend that applies especially to certain demographics. Unemployment has been particularly high for 15-24 year-olds; double the national average rate from 2000 to 2017. 25 to 44 year-olds have suffered, too. Yet interesting, those between the ages of 45 and 64 are twice as likely to be self-employed as the 25 to 44 year-olds. Why? Often that’s because of down-sizing.
The choice to become self-employed isn’t always to solve an employment crisis, however. The number one reason why people like the gig economy is the feeling of autonomy they have when working for themselves, according to a BMO Wealth Management Survey conducted in July 2018. Older workers often have the knowledge and skills to make more money, and have more time flexibility when working on their own.
Other reasons for self-employment: the potential to make extra money on the side, and to balance career and family. For 27 percent, though, it’s been the only way to earn money.
In light of tax increases for high earners and private corporations, together with increased CPP rates that begin in 2019, it is expected that more employers will turn to the “on demand” or “contingent” workforce in the foreseeable future.
In fact, Statistics Canada shows it’s already becoming the norm. It now counts 2.18 million people as self-employed. The self-employed fall into three groups: those self-employed in the agriculture industry, that make up the highest number; those in accounting, computer systems and management consulting services, making up the next highest segment. Then there’s the “other” category that consists of the trades: electrical, machine repairs, construction, etc. that falls third in line.
Even Finance Canada is concerned, especially by the number of self-employed people who are incorporating. There are compelling stats from the July 2017 proposals on tax reforms:
Our economy is undergoing significant economic structural changes, from a goods-producing environment to a service environment.
The number of Canadian-controlled private corporations (CCPCs) has increased from 1.2 million in 2001 to 1.8 million in 2014.
An increasing proportion of self-employed individuals—many of whom traditionally have been unincorporated—are choosing to incorporate. In some industries, the proportion of incorporated self-employed individuals almost doubled between 2000 and 2016. Corporations in professional services have tripled over the last 15 years.
The tax advantages have encouraged many individuals to incorporate their businesses, but recent changes have curtailed some of the advantages.
So what kind of financial help are these new “agile” workforces needing? This too falls into three main categories:
1. Tax reporting and planning.
This relates especially in making the decision whether or not to incorporate. The self-employed must also make their own remittance for CPP (Canada Pension Plan), income taxes (generally quarterly instalments for proprietors), and bear all the burden of proof for income and expense reporting. Missing on these responsibilities comes with very expensive penalties.
2. The management of risk to human capital.
That is, insurance to cover income-producing capacity in case of illness or death. There is often also a need for liability insurance, especially for those working in the professions.
3. The need to plan for their own future.
The self-employed have to determine how to cover health care costs and retirement income, in the absence of group benefit and employer-sponsored retirement plans. Which investments should be made first to cover these costs, after mandatory contributions to the CPP? Is it the TFSA or the RRSP? Something else?
There is no sick pay for freelancers. Planning carefully for the very near future when companies opt for a more “contingent” workforce is a critical part of the financial well-being of Canadians.
As financial literacy is a life skill that does not tend to be taught in schools, tax and financial advisors who specialize in helping the self-employed are well positioned to thrive themselves.
According to a Statistics Canada report *
Evelyn Jacks is Canada’s most trusted educator in the tax and financial services. Founder and President of Knowledge Bureau, she developed the Real Wealth Management discipline and is the author of 53 books.
Additional educational resources: Ready to help small business clients protect their financial future in this ever-evolving economy? Take a free trial, risk-free and see what’s involved in getting your MFA – Business Tax Services Specialist designation. This year’s CE Summit events, especially the November tour focusing on year-end planning for investors and small businesses will help you ensure you’re up to speed on the latest changes.
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