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Equal Recognition - Self-Employment DiscrepanciesBy Debbie Patterson, owner of Odessey Business Services It is the year 2001, a time of new discoveries, new technologies and new age thinking. It is also time for the government and the financial institutions to start looking at self- employed business owners in a different light. Now that we self-employed proprietors have used every possible deduction to get our taxes down, I’d like to talk about the negative side of being self employed. The hours are good - choose your own - but most of us work more than regularly employed 9-5’ers. No one to report to except ourselves but no one else to blame either. And the ‘institutions’ of our country, specifically Revenue Canada and the financial conglomerates still don’t look at self employed entrepreneurs close enough. I don’t want to use the word prejudice but the word fits in some of the situations I’d like to present. The government loves to talk about supporting small business, even encourages it with grants and loans, and the banks all have small business divisions now, but even these attempts are not enough to really support those of us who choose to be our own bosses. One of the major losses we face is the Employment Insurance - EI benefit. As soon as we are self-employed, we no longer qualify for employment benefits. For example, there is Jane Doe, a 25 year old that works 8 months a year at a seasonal job. She gets enough hours to qualify for E.I. benefits and decides she’ll take off to Mexico every winter. She has a friend sign her E.I. cards and manages to elude the government for years. Eventually she will get caught, but for now that $5000 in E.I. benefits gets added to her $27,000 wage, giving her a yearly income of over $30,000. Then there is Barb Doe, a 36 year old self-employed entrepreneur for the past two years. Her largest client claims bankruptcy and Barb is now in financial trouble and forced to close her doors. E.I. is not available to her because she is self-employed. She billed out $48,000 last year, worked 6 days a week - nights and weekends and now she has no alternative for income. This policy of E.I. is outdated and the self-employed should be offered the opportunity to contribute to E.I. the same way as they MUST pay C.P.P. on self- employed earnings. To continue with this scenario, Jane Doe’s dad finds this cute little house and they decide Jane should settle down and buy it. Her last three tax returns show her income of an average $30,000 per year (including the E.I. benefits she’s received), but she has no money down as it gets spent as fast as it’s made. The bank sees her younger age and suggests a co-signer, which isn’t a problem - and dad foots the bill for the down payment. So she is 25 years old and has joined the real estate market, able to buy and sell now that she has her foot in the door... Meanwhile, Barb Doe sees a great little house and decides she’d love to buy it. She billed out $48,000 last year but her income tax assessment shows net income of $14,000. The year before that she worked half the year on her own, starting up her company and half the year at a receptionist job. Her tax assessment showed $21,000. The year before that, to complete the 3 years needed by the bank, she made $34,000 at her receptionist job. She’s been in the work force for 20 years and has never missed a payment or ended up with bad credit. She has been contributing to RRSP’s monthly for years and has $6,000 for a down payment. The bank looks at her tax assessment and politely asks, “Can’t your dad co-sign for you?” ...Her father is retired. Barb Doe works all the numbers out on paper. With the rent she pays now and her car being paid off in two months, she could easily make the mortgage payment and have money left over. But the bank closes the file and tells her that without a co-signer she would need 25% down or to assume a mortgage because there is nothing they can do for her. The bottom line is, this process of qualifying a self-employed business owner for credit has to be re-evaluated and a new process brought in that takes into consideration the special circumstances surrounding a small business owner. Here is another example is of a small business owner scenario: A 29 year old man entered into the trades young and made good money. He has owned 2 homes and sold his second home to put the money into the company during a big growth period. Last year he billed out three-quarters of a million dollars, owns 8 company vehicles, employs 8 people including a full time office clerk. He paid $60,000 in source deductions and $25,000 in GST to Revenue Canada, but he can’t qualify for a mortgage over $60,000 because his bottom line incomes for the past 3 years have been too low of an average to comply with the current qualifying procedures. According to Statistics Canada’s 1996 census, 1,209,625 people were self employed, almost half of those women, and in 1997, 1 in 6 workers were self employed, accounting for nearly 2.5 million Canadians. This number has certainly gone up in the past 3 years and this is a substantial percentage of the Canadian work force, almost 10%. This percentage also reflects the self-employed in Alberta compared to all classes of employed workers. With Alberta’s booming economy, it is clearly a strong environment for home businesses. This class of workers contributes to the economy by employing people, collecting and remitting GST and paying personal tax, as well as contributing their own specialized services. It is hard to believe that the ‘institutions’ have not come up with a more detailed procedure for granting credit to this large section of the work force. Each companies circumstance is unique and with more and more people looking to contribute their own special talents to the economy, it is time the self-employed entrepreneur is recognized as contributing citizens and not pushed aside because of the older methods our institutions put into place years ago. In addition to the two mentioned benefits unavailable to the self-employed worker, other benefits are also not readily available, such as disability coverage, medical coverage and parental benefits. As self-employed business owners, we do have the option of coverage through private companies, but a new struggling business may find these expenses are not viable in the beginning. The financial burdens and sole employee time schedule can also negatively affect training, education and upgrading which can be so important for expanding and offering a higher level of service to your clients. As in the trades, E.I. benefits are available to people going back to school for apprenticeship training. This benefit alone would be a great help for small business owners who want to stay competitive in the industry they have chosen to offer their services. Another industry that is affected by these same circumstances is the hospitality industry. These workers get the lowest wage available in the work force and live on the tips they receive for their service. The industry average for claiming these tips as income is 10%, if any (as my manager at a restaurant where I once worked told me). A professional server can make $300 to $400 a night in tips, grossing over $40,000 a year, but their income for taxes only shows $10-14,000. It is up to the employees in this industry to claim these tips as income, especially when they are planning to get credit of any kind, because the banks will only look at bottom line numbers as we know. Revenue Canada HAS to know this industry norm as this has been going on for years. They are not prepared to audit every server in Canada and it is too difficult to monitor this industry because of its size but this is another area that should be looked at more closely for it’s special circumstances. Many will ‘own up’ to the amount made in tips that they received in return for their good services in order to help themselves to qualify for any kind of credit, if this option was available. Many people in the industry would agree to pay tax on a potion of gratuities earned providing the entire amount could be claimed and shown as income. A gratuity is NOT guaranteed income and is in return for outstanding service, a voluntary tip from the consumer. Many servers must also pay to work in an establishment, and thought this practice certainly is not legal, it is accepted. These employees cannot write off this expense as a deduction to the income earned from tips, as much as the employer is certainly not claiming this payment as income. These are just a few things to consider if you are self- employed or considering setting up a home business and have not yet established a mortgage or will need credit in the future. It is up to us to change the stipulations needed by the institutions by letting Revenue Canada and the banking industry know that we are a large, contributing sector of the economy that should be recognized for our contributions. Debbie Patterson is the owner operator of Odessey Business Services, specializing in income tax. Visit her website: www.odesseybusiness.com for more tax tips or contact her directly at 403.816.5098 |