The ‘benefits’ when you’re a Contractor
There are a ton of benefits to being an independent contractor – you get to set your schedule, can choose who you work with, and generally get to ‘be the boss’. In short, you’re living the dream, right? Well, if it were nothing but upside, everyone would be doing it – so let’s talk about the upsides as well as the downsides to being a contractor.
Item #1 – Employee Benefits
It’s hard to get group employee benefits when you’re not an employee, right? While a very few companies will offer benefits to their contractors (if you are contracting almost exclusively with them), this is generally frowned upon as the CRA takes a dim view of companies calling a group contractors for payroll purposes, but then giving them benefits similar to their employees – it is less complicated to simply let contractors take their earnings and decide to
replace this coverage on their own. Generally, an employer sponsored benefits plan will offer life insurance, disability insurance, health, dental, and travel benefits.
Life insurance will protect your family in the event of your death, with a group benefits plan covering either a lump sum (typically $25,000 - $50,000) or a multiple of salary (1-2x annual earnings). As an individual you can do a full review considering your assets, liabilities, earning potential of yourself and your spouse and other insurance in force to determine what amount and type is right for you.
Disability insurance protects your income in the event you are unable to work due to illness or injury (whether physical or mental), replacing approximately two-thirds of your income on a tax-free basis. Even if the company you are working for offers benefits to contractors, they will not offer disability because contractors do not have T4 earnings with the company.
Health, dental, and travel benefits are those most are familiar with – your prescription drugs, massage and chiropractor, dental cleanings, and coverage when you go to unwind on vacation. Lots of people who are without employer coverage plan to ‘self-insure’ these benefits and pay for treatment out of pocket as it comes up, but some items covered by these can be difficult to pay for as they occur – for example, expensive prescription drugs (with Biologics becoming more common, treatment costs of $50,000 - $70,000 are not uncommon for some illnesses), air ambulance, accidental dental, or emergency coverage while travelling. These types of events can come with a large price tag that can jeopardize your business.
How do you protect yourself against unforeseen events?
As a contractor, you have flexibility in how you want to proceed, but there are four main options, depending on the level of protection you want.
1. You can self-insure. This method essentially means you save the premium you would spend on insurance, and hope that when you pay out of pocket it winds up being less costly than the premiums would have been.
2. You can put a Healthcare Spending Account in force for your company. While you still wind up funding your claims, you pay for them with pre-tax corporate dollars rather than personal after-tax dollars. Please note that if you are a sole proprietor this option is not available.
3. You put in a Healthcare Spending Account with some Catastrophic coverage. For everyday claims, it would function as above, however there will be some Emergency Travel coverage and protection if drug claims exceed a certain level (typically $25,000). Again, for a Health Care Spending Account you must be incorporated.
4. You can fully insure yourself. This means taking out an insurance policy with set premiums and a set list of covered items that you can claim. In some years you may pay more than you claim, but in others you may claim more than you pay. This removes variance from your expenditures.
Which option is right for you?
This is a difficult question to answer – it truly depends on what level of risk you are comfortable keeping to yourself versus transferring to another party. A good way to determine if a risk should be held or maintained is to ask yourself, what is the occurrence of the risk, and what is the impact?
Item #2 – Employee Retirement Accounts
Another item of coverage that is lost as a contractor is a Group Retirement Plan. Generally these plans require employees to contribute a percentage of their T4 salary earnings to an RRSP plan (or an RPP plan if the company still has a full pension plan), and they will match all or a portion of the contributions.
There are several reasons why having contractors on these accounts is problematic – contributions are withheld via payroll deductions, and you are not a payroll employee. You have no T4 salary with the company and depending on how you are paying yourself you may not even be accruing RRSP contribution space. From the company’s perspective – they are paying you a higher hourly rate as a contractor precisely so they don’t have to deal with payroll tax, CPP contributions, health and dental benefits, and Group RRSP contributions so why would they want to add you to these plans even if they can – much like health and dental benefits, it’s better to give you your higher rate and let you decide how to handle your affairs.
Item #3 – Your Compensation
I’ve mentioned the things you are missing out on – but let’s talk about some of the fun things. If you are incorporated, you can fully control how and when you are being paid, whether it’s salary income, or dividends. This is great because you can look at things like whether you want to accrue your RRSP contribution room (an argument to pay salary) or keep earnings in the company and only take what you need as needed (an argument for dividends). While from a tax perspective you will largely be indifferent (but always talk to a tax professional about this) your friends in a salaried position will have no ability to control the way they are taking their income, or the timing of it, so this is definitely a win for you.
If you decide to keep money in your corporation, you can also decide if you want to leave it as cash available for operations, or do you want to open an investment account in your corporation? While there are some passive income rules and capital gains inclusion rules to be aware of, this can be a great way make use of funds that you still want to keep within the corporation.
Item #4 – Your Expenses
Like how / when you are paying yourself, you will also have some flexibility as to having some items related to your business being either a personal or business expense. Now, don’t go crazy with this as the CRA will definitely not agree that your all-inclusive trip to Jamaica to unwind from working so hard is a “business expense”, but things like the phone you use to conduct business, your vehicle if you use it to operate your business, or the portion of your home for your home office can be considered to be expenses. If you are looking at what are valid expenses to count against your income, I cannot recommend speaking with a tax professional highly enough. Your accountant, tax lawyer, and financial planner will all be more than happy to work with you to make sure you are structuring your income and expenses in the most tax efficient way possible, but once the decisions have been made and tax time comes around, there is little room to make changes. You especially will want to get their advice to make sure you are staying on the right side of tax minimization and staying on the CRA’s good side!
Overall, there are a lot of things to consider when you are an independent contractor, but you gain a ton of flexibility and choice. While this opens a lot of possibilities, it makes your planning more complex than a salaried employee. I encourage you to review your full plan with your Financial Professional to ensure that you have the best set up for you and your family. Not sure how to proceed? I can help - reach me here.
Elyce Harris is a CFA Charterholder working with Cornerstone Investment Counsel, a registered ICPM in Alberta, Canada. She is also a licensed insurance broker in Alberta. While every effort is made to ensure the accuracy of statements, errors may occur. If a specific stat or carrier policy is cited, a source will be provided, however this is not done for generalizations.