Thank you, Mr. Chairman.
My name is Richard Fahey and I am the Senior Vice-President of Strategic Development at the CFIB. My organization represents 105,000 SMEs across Canada, of which 24,000 are in Quebec. Out of this number, we have approximately 11,000 self-employed members in Canada of whom 3,000 are in Quebec, making this the largest national association of self-employed workers.
Today's presentation will focus on the definition of the term "personal services business", subsection 125(7) of the Income Tax Act, and its impact on the tax deductions that a self-employed worker, particularly in the informatics sector, can claim.
When this provision was created, in the 1990s, we had two prominent cases, two reasons or fundamental objectives in mind. The Metro grocery store chain had made changes that affected delivery drivers, the people who distributed the groceries. These employees had been laid off, then rehired immediately after as independent workers in the transportation sector. There was also another problem, and that was that some professional athletes were incorporating themselves in order to be able to deduct expenses when in fact their only employer was the sports team with which they had a contract. These two cases led to subsection 125(7) of the Income Tax Act.
Let us now examine the issue from the self-employed workers' viewpoint. I will provide you with data taken from surveys commissioned by the CFIB. First of all, in early 2000, we commissioned two surveys to better understand what motivates people to become self-employed. It turned out that their top reason was to be their own boss, to have some flexibility, to create their own job and to improve, to some extent, their financial situation.
The same questions were asked in 2007 as part of a joint Hewlett-Packard and Ipsos Reid survey. We can see that a very large percentage of people want to be their own boss. Indeed, when we asked these self-employed workers whether they consider themselves to be self-employed workers, workers or entrepreneurs, 82% of them responded very clearly that they view themselves as entrepreneurs. Essentially, they view their business as one that would eventually expand over the years. This decision to go into business is an important one.
In Quebec, we have discussed how we should view dependent self-employed workers, namely, those who have a small number of clients. It should be pointed out that "dependent" does not mean "exclusive". However, 86% of these dependent self-employed workers also view themselves as entrepreneurs. In early 2000, Quebec tried to treat dependent self-employed workers as salaried employees, but the self-employed workers refused to agree to this status, as shown by the survey results at the bottom of page 3.
More recently, in 2005, the government proposed to include self-employed workers in part III of the Canada Labour Code. We surveyed our members at that time, and 52% replied that they were not interested.
If you look at a breakdown of the undecided—you know how surveys work—you realize that 62% of entrepreneurs do not support the proposal whereas 38% of entrepreneurs would accept self-employment being included in part III of the Canada Labour Code. Thus, CFIB concluded in 2005 that there were no compelling reasons to change the status of self-employed individuals in Canada.
Let's now briefly discuss—and this will be the final point of my presentation— the evolution of self-employment in Canada. It is a myth to believe that the self-employed are forced into starting their own businesses. They do by choice, independently of economic cycles.
According to the latest labour force survey from Statistics Canada, there were close to 2.8 million self-employed Canadians, which represents about 16% of the current workforce. Despite a dynamic job market since the 90s, the self-employed sector grew by 4% per year on average.
An interesting fact that you will see on the graph at the bottom of page 4 is that the ranks of the self-employed are growing. There was an 8.5% increase in employees, whereas there was an 18% increase in the incorporated self-employed during the same period.
If we look at the numbers of the self-employed, we realize that today, there are more women in the labour force and hence a greater proportion of female self-employed workers, but there are also more older self-employed workers who decide to build a bridge to their retirement.
Currently, according to the 2006 Census data, about two thirds of independent workers are men and one third are women. The greatest growth has been noticed in the case of self-employed individuals in the 45-to-64 age group, as you see in the graph on page 5. This is therefore a bridging mechanism towards their retirement.
With the aging of the Canadian population, these highly-skilled workers decide to continue working from home and remain a part of the labour force which is essential for Canada. Treating self-employed individuals as salaried employees is showing them a lack of respect, and could discourage these people from launching new businesses becoming self-employed or setting up a small business, an SME. This would only aggravate Canada's severe labour shortage.
We need to facilitate self-employment and contribute to the overall competitiveness of the Canadian economy. On that note, you will see that Canada's macroeconomic reality applies quite relevantly to the status of independent workers in the computer industry.
And now, I will hand over to Jean-Pierre Mathieu.
Thank you, Mr. Chairman.
Ladies and gentlemen, members of the committee, good morning.
I am Jean-Pierre Mathieu. I am an engineer by training and I have a masters in project management. I have been working for approximately 25 years. I became self-employed in the year 2000. In 2006, my company received assessments from the Quebec Ministry of Revenue for the years 2002 to 2004. The following year, the Canada Revenue Agency also sent me assessments.
Today, I will show you how the economic organization of the information technology industry, which we refer to as IT, does not align with the criteria used to decide the status of personal services businesses, or PSBs as we refer to them. In order to do so, I will begin by describing the organization of the IT market.
In our industry, the demand for computer services comes mainly from the major employers. There are definitely private sector businesses, but also the public sector, the federal government, provinces and municipalities, along with their departments, government organizations, and commercial crown corporations like Canada Post and Hydro Quebec.
In terms of supply, businesses compete with each other in order to satisfy demand. First of all, there are a few major consulting companies and IT businesses such as CGI and LGS-IBM which are in fact the two biggest in Canada. Second, there are several average-size consulting companies as well as employment agencies specializing in IT. Finally, there is a high percentage of small businesses, including the self-employed entrepreneurs.
To give you an idea, in 2008, 86% of information technology businesses employed fewer than 10 people.
It is typical of our industry that companies become incorporated, as a preferred way of functioning. Eighty per cent of self-employed IT workers are incorporated, contrary to other sectors where only 20% are. The status of registered entrepreneur is rather unusual.
Subcontracting is also typical of the industry. The major work providers, particularly the public sector, are not hiring much. They prefer to beef up the staff on their projects through subcontracting rather than hiring more employees.
Another common characteristic is that the major work providers generally do business with the major IT companies for big projects. The result of this situation is that it is very difficult, if not impossible, for self-employed entrepreneurs to offer their services directly to the final client. They are obliged to go through big consulting firms or employment agencies who only act as intermediaries. The business relationship is therefore generally threefold: the self-employed entrepreneur, the intermediary, and the final client.
Sometimes, the relationship is multipartite, which is to say that there are several intermediaries between the work provider and the entrepreneur. A two-party relationship or bipartite relationship, that is to say with a direct link to the client, is also rather rare.
Speaking of this bilateral kind of relationship, I want to point to the case of the Treasury Board of Canada which deals with employer-employee relationships in its policy on government contracts on its website. In 2006, the year that I received my assessments, Treasury Board had set a deadline of 20 weeks for the signing of a service contract with a self-employed person in order to prevent there being any employer-employee relationship.
However, nowhere is there a time limit mentioned in the official documents of the Canada Revenue Agency beyond which the business relationship may be considered as being an employer-employee relationship.
Now that I have given you an overview of the organization of the IT market, I will present an overview of how work is organized within the parameters of a computer project.
Computer systems development is carried out in project mode. A team is tailor-made to produce a computer system. Projects are by definition unique and temporary. There is a beginning, a more or less lengthy middle, and an end. Project duration varies. A small project can last less than a year and require only a few people. On the other hand, a major project can last several years, be divided into several stages, require hundreds of people and cost tens if not hundreds of millions of dollars.
Computer systems development is complex and involves a multitude of activities. I will list a few for you: analysis of the client's needs, the design and programming of software, the setting up of hardware, field trials, and implementation.
An self-employed entrepreneur may be involved in one or several activities according to their expertise. For example, a business analyst would only be involved at the outset of a project in order to analyze the needs of the client. A programmer would be involved from the start of programming until the implementation stage. Finally, a project manager would head up the project from the beginning to the end. One can see that the period of time the services are offered can be shorter or longer.
Moreover, IT professionals provide service according to accepted standards and practices. In our business, best practices are to be found grouped in specialized texts such as the PMBOK Guide, or Project Management Body of Knowledge for project management, and the ISO 9001 standard for quality, which you are certainly aware of.
These are international standards which don't belong to the clients, nor to the consulting firms, but everyone applies them.
As you know, unless a person is in the business of fixing computers, people who work in IT usually have to make many small interventions, and they normally work in the client's office. In fact, they are usually on site all the time during regular business hours, because they have to meet and interact with the people who are working on projects. The service is delivered using the client's information systems.
How does Revenue Canada interpret this? How does it assess the fact that we work on site, full-time and during regular business hours, and that we participate in meetings? It sees these things as monitoring indicators because it says that we participate in the organization of the client's work.
Further, how does Revenue Canada assess the fact that we work on clients' information systems? It is another control indicator because the client provides us with the tools and the equipment, whereas we don't bring in our own.
I have a third example. How does Revenue Canada assess the fact that we fill in time sheets, which is a good project management practice, in order to follow the progress of the entire project?
My name is Paul-André Robitaille. In 1998, I started a company and I went into business. Since then I have started several other businesses. In 10 minutes, it is very difficult to describe the extent of the despair that my family and myself have experienced since the spring of 2006, when we received our notice of assessment from the revenue department.
I did a lot of research before deciding to go into business and when I did that, I consulted with professionals, mainly accountants. I was never told about this PSB concept, not in 1998, nor in 2003 when I started my other business. Perhaps that is normal, given that these are anti-avoidance measures, therefore punitive measures that usually target a restricted group of individuals. It had nothing to do with our business. None of the accountants raised it. If I had known what the intentions of the tax authorities were, I would have never left the well- paid job I had with Hydro-Quebec in order to go into business. As Mr. Fahey said earlier, going into business was my choice.
At the end of the 1990s, we learned that the taxation department had warned the larger consulting firms about the risks they were running when they used registered self-employed workers. Almost all the subcontractors had to set up a company. That was when the trap was set, in a scenario worthy of the Vincent Lacroix, Bernie Madoffs and company.
In my case, I install SAP software packages for clients, in this case large businesses. I believe these are the highest-selling software packages in the world. I therefore work in the context of projects representing several tens of millions of dollars and unfolding over several months and in several stages. I therefore have nothing to do with the day-to-day workings of these businesses.
In the case of the Gaz Métro project, the technical team included 14 consultants, of which 13 were self-employed individuals, and one was an employee of the intermediate company, CGI. That gives you an idea of how our industry works. Was I, from a legal point of view, in some way the subordinate of CGI? No one from CGI nor from the client ever came to tell me what to do or to monitor my work. On the contrary, I was the one with the expertise. The only time I set foot in CGI's building was to sign a service agreement with that business.
In the course of his work, the self-employed IT worker incurs various expenses. This happens in all businesses. Those expenditures included computers, specialized software, printers, fax machines, Internet access, telephone lines, cell phones, paper, business cards, accounting and legal costs, professional association dues paid to the FCEI and the AQIII, that is, the Association québécoise des informaticiennes et informaticiens indépendants, symposia, travel, accommodation, and, very importantly, training.
Training is fundamental for all computer specialists. It is an issue of survival for us as self-employed individuals, because our area is constantly and quickly evolving. Training costs are huge, varying between $500 and $700 a day. One course can easily take two weeks. During their training, self-employed workers have no income. It is therefore very difficult and demanding, in terms of time and money, for a self-employed worker to remain in demand. That is one of the biggest risks we face. However, officials tell us that we face no risks, whether they be financial or other.
How do the tax authorities react to training costs? In order to ensure the quality and relevance of my own services within a specific mandate, I left the project for one week to do some training in Toronto. I received no payment during that week but I spent $5,000 on courses and accommodation. This is what the tax authorities told me: “Mr. Robitaille, we regret to tell you that given that you are considered by us to be an employee, you cannot deduct this expense. Furthermore, we have disallowed all of your expenses, including your accounting costs. An employee who uses an accountant to do his income tax statement is not eligible for that deduction”. And yet, a consulting firm or a client who decides to send an employee for the same training can deduct all costs related to that training. In fact, I would not be surprised if they could even deduct the employee's salary. Is that not an illustration of a “double standard”?
Clients use us at specific times because for the most part we are super specialists, at the very leading edge of information technology. That is in fact the niche of self-employed individuals. The fact that the technical team for the Gaz Métro project was made up of 14 consultants, including 13 self-employed individuals, is an illustration of this. I can tell you that the Gaz Métro people had very good things to say about our service. You can see those comments on CGI's website, actually.
In short, it is easy to become a self-employed IT worker, but it is much harder to remain so. We have to deal with the ups and downs of the market and the risk of our knowledge becoming obsolete.
The reason I am before you today is because the name of my business was on a list of CGI subcontractors, which Revenue Canada used as a basis to lay charges against a whole bunch of people, without prior verification of the facts and because it has limitless power and full impunity. The original accusation was solely based on the Carreau decision, a first instance decision, it goes without saying—and the CGI standard contract.
The November 10, 2009, issue of Le Devoir revealed that the crown jewel of Canada's IT consulting sector was abolishing 500 jobs and would hire 500 new people in its offices in India, claiming that it could not do otherwise because it was acting at the request of its clients. Honestly, it is unbelievable that Canadian companies are asking to work with people in India. All joking aside, is there an economist who can tell me what impact the outflow abroad of capital will have on the Canadian economy? What is being done in the meantime to replenish the state's tax coffers? Self-employed workers are being attacked, yet we spend our money in Canada.
I will now talk about the advantages of working for oneself. Self-employed workers reflect the dynamism of individuals who no longer count on governments and corporate welfare bums to secure their future. We only count on ourselves. We invest in ourselves. We represent the new tertiary economy and we operate within virtual networks of contacts. We are the new creators of jobs. I dare you to name one large corporation that has created new jobs without receiving any kind of subsidy in the last ten years. Because of our specialized skills, we are helping Canadian companies to be more competitive on a global scale. Therefore, we help to create jobs. We are healthy competition for the large consulting companies that are increasingly outsourcing their jobs abroad.
Before concluding, I would like to raise a couple of other issues. Who will benefit from our disappearance? Make no mistake, if we are found guilty, it will mark the end of self-employed IT workers. What can one say about a law that attacks only the little guy, the most vulnerable guy, the guy who takes all the risks and who does all the work? What is the point to this anti-avoidance law? What is the underlying spirit of this law? Since the Income Tax Act is based on the principle of voluntary declaration, how am I to know whether my next job will be as a contractor and not as an employee? How can one predict such a thing? Are we not perverting the spirit of the law?
Originally, this law was probably aimed at professional athletes who, by way of complex financial manoeuvres, hid their money abroad to avoid paying taxes. But now, all of us are being tarred with the same brush and labelled guilty as charged, and Revenue Canada is hoping for a tax bonanza.
In conclusion, I would say that this issue is not a legal one, but rather a political one, and especially an economic one. Bureaucrats are forcing us to defend ourselves in court, which will result in an economy based on court rulings paid for by our savings. Rather, this vision should come from our lawmakers and not from our judges, who must apply laws that are not commensurate with the new economy and globalization.
To verify the application of this punitive law, the judge who will hear my case will ask himself the following question: Was Mr. Robitaille working as an employee or as a contractor? If the answer is that I am considered an employee, then my family and I will end up on the street. If the answer is that I am a contractor, then I will owe Revenue Canada nothing. We will only have lost tens of thousands of dollars in legal fees, and the last four years of our lives will have been marked by stress and anxiety, not to mention grey hair and hair loss!
It is high time that we have a public debate on this issue and that people speak more openly about this situation.
Good morning, Mr. Chairman and committee members. Thank you for taking the time to hear my remarks.
My name is Olivier Guerrero; I am a Canadian citizen, and president and shareholder in my own IT consulting company called Conseils GO & See Inc., which was created in March 2000.
I am here today to tell you about the unfair legal action being taken against me by the MRQ and the CRA, namely, because the MRQ decided to consider me a PSB. I created my federally chartered corporation myself, using all of the information I could obtain from the government and by consulting documents and Internet sites. At the time, and today, it was not indicated anywhere that I could set up as a PSB. To obtain more details on the status of PSBs, I had to do specific research using highly technical terms on government websites in order to know what a PSB was.
For 10 years, I did as all businessmen do and prepared my annual federal and provincial tax returns, paying my GST and QST instalments. My corporate tax returns, both federal and provincial, never contained any irregularities.
One fine day in February 2008, I received a call from an MRQ auditor who told me that according to his analysis of my file, my company was a PSB. His argument was that I had been with the same firm for several years and that, consequently, I was considered an employee. He also announced that a new assessment for previous years would be produced, because as such, the only eligible expenses for a PSB are salaries paid and the taxation rate must be adjusted upwards since I am not the owner of a real business. After several months of contact with the auditor, I finally received a notice of assessment for several tens of thousands of dollars, for which the cumulative interest represented almost 20%. Five weeks later, I received a notice of assessment from the CRA, which was based on the MRQ decision. The bill doubled. I immediately paid the notice and the two from the government, because I am an honest citizen and I do not want something like that hanging over my head. However, I had to borrow money from the bank to do so. I challenged both levels of government. The MRQ rejected my appeal, and at present, I am taking steps to file a complaint in court so that I can continue to follow up on my file. That is a brief overview of my situation and how I got there. I would now like to explain just how absurd the notion of PSB, as it stands, is.
Very simply put, PSB status can be determined in two different ways, based on criteria that are completely subjective and discriminatory, in my view. The first is punitive. You are told that you must go back three years and pay interest because you did not do things properly. The second is on a voluntary basis. To my mind, this leads to a highly unusual paradox. I am being criticized for having offered my services to a consulting firm for several years.
The first year, I have no reason to think I might have PSB status, as I am working as a consultant with the company. The client is satisfied with my services, and offers to renew my contract for another project. I declare my income the following year the same way. Did I have any reason to question my status? I don't think so. However, I'm really unlucky, because the client feels that my services are very good and decides to offer me another contract. In the end, I should tell myself that since I have been with the firm for three years I should consider myself a PSB. How do I do that? Is there a form to declare that I am a PSB? How do I indicate that to the government? If I do so voluntarily, will I face a punitive process? They will tell me that I have been doing that for three years and that I will have to pay interest. I don't know how to position myself.
According to arguments put forth by the government, a company must take risks. In reality, isn't the aim to create a loyal clientele, as the fewer the risks, the better the company will fare? Why, in my case, would that become a means of discrimination?
Must we punish the good people who offer good service? Or should I be bad and change contracts every three months? How can I plan how to carry out self-assessment? What are the criteria, beyond all reasonable doubt, that I can take into consideration?
I will continue describing the paradox looking at another aspect, that is the situation I find myself in and because of which I have had to borrow money. I was labelled as a PSB because they wish to see me as the employee of a company I do not own. As a company, what benefits do I have compared to a permanent employee of the company to which I offer my services? Overall, I do indeed earn a bigger salary, but compared to the list of advantages that a permanent employee has, my advantages are quite slim. Moreover, as is the case for my friend Mr. Robitaille, I have to pay the management costs of the business, whether they be fees to register with the government, accounting fees, professional association dues, the cost of equipment, software, and training.
As far as employment insurance is concerned, I do not have the right to contribute and even less to benefit from it. An employee working 35 hours per week, for example a permanent employee, simply goes home once his day is done. I however must provide approximately five hours of work per week throughout the year in order to ensure the survival of my business and do the administrative work. This is unpaid time.
The employee enjoys training programs. When I am in training, however, I cannot bill for the cost of it nor am I paid. It is therefore a loss. On the other hand, my freedom as an entrepreneur is something I consider an advantage, for which a price must be paid. I made this choice to have that freedom. I want to be able to make my own decisions, but the government is denying me that.
Finally, the ultimate irony in this story is that I am being accused of acting as an employee. By declaring me a PSB, I am obliged to remain a business, but I am not granted the right to be one. I do not have the right to deduct my expenses. As a PSB, my tax rate is approximately 50 percent, whereas with the deduction granted to a small business, the rate is 19 percent. It is 38 percent for large businesses.
Do you believe that such tax rates allow me to remain competitive with my competition? Am I being discriminated against in the end? Do we want to snuff out independent entrepreneurs to the benefit of companies that, by the way, take advantage of subsidies? These same companies are also quick to decamp and invest in foreign markets such as in China or in India. I lose all around. I ask you the following question: is a PSB an employee or a business?
I hope that my presentation has convinced you that the law must be changed and objective criteria defined to limit these kinds of excesses. Canadian micro-businesses will not be able to remain competitive and develop if they have to bear this kind of a burden. We want to create wealth in Canada and not in other countries.
I am sent you a document entitled EPSP = employee or enterprise? which in contains some of the arguments that I have just made before you. In conclusion, I would like once again to thank you, ladies and gentlemen members of Parliament, for having listened to me.
Good afternoon, Mr. Chairman. Good afternoon, members of the committee.
My name is Fernand Garceau. I have been an independent IT worker since 1994, and I have worked in this business since 1980. The name of my company is Techno-Dba inc, and it is federally registered. I take care of my own future by choosing my own life and disability insurances. I manage my own training and I also manage my pension fund which I must build up for myself. Moreover, I am constantly keeping up my network of contacts in order to be able to find new contracts when necessary. Before beginning, I would like to point out to you, as an independent worker, that there is no work done on the black market by my company.
Now, I am going to describe the difficulties. In November 2005, I was contacted by the MRQ (the Quebec Ministry of Revenue) for an audit. My accountant provided all of the documents requested by fax, because there was a snowstorm and the auditor uses a wheelchair to get around. Afterwards, I received a notice of assessment for the period from 2003 to 2005, with retroactive interest of course, supposedly because my business is a PSB. At that time, I had no idea what a PSB was.
Following that, I received two more assessment notices from the MRQ, for a higher amount each time, in order to shut me up. However, no one was ever willing to meet with me to clarify this situation. If you look, I have a document addressed to Mr. Ménard dated March 2009, in which 13 questions are asked, which proves that the government wanted to make us contribute without talking to us, because these questions should have been asked in November 2005, that is before I was accused of being a PSB. Now, it would seem that these steps are being taken in order to prepare a file for the court. If you check, you will see that you all received this document. It is a document addressed to my lawyer, Mr. Ménard.
If you go through all the documents that were sent, you will notice that in one of these, the audit report from Revenue Québec—I don't believe you have it in hand—there is an all-out attack on computer experts. I will quote what is written there:
||Furthermore, the current file is part of a special project for the same kind of business. Given that we are talking about a network of people, the majority of these files will possibly be challenged. The accountant confirmed to us that they will be challenged.
This is something we received from the government.
Now, I will talk to you about the CSST (Quebec Workmen's Compensation Commission) and employment insurance. Given that my business was considered to be a PSB, I told myself I would look around to see the lay of the land. I therefore checked with the CSST in order to see if I was an employee. If you look, you will see that there is document from the CSST. I don't know if that document was sent to you. In this document, it states: “We are informing you that as the head of your company, you are not covered by the CSST.” I am therefore considered to be a company by the CSST.
Then, I checked with employment insurance, and that was much more difficult. I had to wait six months to get an answer from the Canada Revenue Agency. I sent my first request on January 28, 2009. I received an answer on July 29, 2009, without mentioning the reminders I had to send. If you look at the Canada Revenue Agency documents, you can read the following:
||Following our analysis, we have decided that during the above-mentioned period, Fernand Garceau was an employee. However, this is not insurable employment pursuant to paragraph 5.2(b) of the Employment Insurance Act given that he controlled more than 40% of the votable shares of Techno-Dba.
If I understand correctly, in the eyes of employment insurance, I am an employee of Techno-Dba, because I pay myself a salary. However, I am not insurable because I hold more than 40% of the voting shares.
I would like to know how I can be considered to be a company by the CSST, an uninsurable employee by employment insurance, and a PSB by the MRQ and CRA! As you can see, the worst-case scenario is always imposed on the independent worker.
Not only do we have no protection, but the notion of PSB doubles our tax rate by disallowing all our expenses. If you look at the documents that were handed out to you, you will see a comparative table. I am sure you have seen it, because it was on the table. This table compares a small business to a large business, a PSB with salaries and a PSB with dividends.
In this table, you can see that a small business with an income of $140,000 has a cash flow of $31,200. You can see this on the last line of the table. In the far right-hand column of the table, you can see that a PSB with dividends and the same income ends up with a deficit of $23,000.
I will now discuss the criteria used by the revenue agencies to distinguish a salaried worker from a self-employed worker.
Revenu Québec has established six criteria: subordination in the performance of work; financial involvement; ownership of tools; independence with respect to clients; employment for specific work; and the attitude of each party.
As concerns Form RC4110-98f of the Canada Revenue Agency, the criteria are: control, the provision of tools and equipment, the opportunity for profit or risk of loss, and integration. I will not go into the part concerning special criteria.
Now if you look at the document sent by Revenu Québec, you can see that the agency blithely proceeds to use criteria to define us as a PSB, but without ever consenting to meet with us. What you must realize is that these criteria are very old and have never been reviewed. In addition, this law seems to have been put in place for amateur and professional sport. An interpretation bulletin exists on this subject, and I think that it has been handed out.
I would now like to discuss the criteria. Can someone explain to me why the legislation unfairly favours large businesses? Why does a business with five employees no longer have to fulfil the same criteria as self-employed workers, who are often alone and must look after all aspects of their businesses, including accounting, training and so forth?
Let's take the example of a permanent consultant for a large firm, CGI or IBM, who works on site for a client and who has exactly the same working conditions as I do. Why doesn't this large firm have to fulfil the same criteria? If I am ineligible because of these criteria, why doesn't the law apply to the large firm in the same way? There is a double standard when it comes to self-employed workers, who are exploited by their own revenue agencies.
Now, what about intermediaries and the end client with regard to these criteria? There is no problem for them, because we are incorporated into corporations. Currently, they are not the object of legal proceedings, even though they are the ones who control the application of the criteria. They can play with my company as they see fit right now, and there is nothing I can do to protect myself, except to terminate the contract, pay a penalty and leave.
I would ask you now to look at the articles I appended that deal with Macroscope. These are newspaper articles and I don't believe they've been translated. You can see that by using the Macroscope methods, which were developed by DMR, Revenu Québec establishes a control mechanism concerning the carrying out of IT projects, and the same goes for CRA.
Is it right that the most important criterion in the eyes of Revenu Québec, that is, control, should be used by its employees to deliver their famous IT project, and that this criterion should then be used by the auditors to invoice us? To manage an IT project, control is required, just like when you build a bridge, and it must be done on site, like the building of a bridge as well.
Revenu Québec knows the drill: it earned a “nota” in 2008. If you look in the “nota” document, you will see that the CRA was part of this IT development.
Our professions have worked this way for decades, and because the governments need money, they are attacking self-employed workers by using an old law. The economy, technology and other sectors have progressed greatly, but the legislation hasn't. It's just as absurd for us to have several clients as things stand now than it would be for a dentist to have only one client in his chair during a whole year.
You can read the newspaper articles for proof of what I am saying. I did append them, even though you don't have them yet. Do you really think that a computer expert who is working on the equipment of a large business, which is referred to in this document, could provide his own equipment?
If we need 9,000 gigabytes, that is, the memory the department needs to develop a new system, do you think a computer expert could provide this equipment? It's absolutely impossible.
Given that technology has evolved, employers are now allowing permanent employees to work from home. In future, will I be considered a permanent employee, given that permanent employees now have the right to work from home like I do?
As concerns the email from Mr. Jolie, director of the CRA Business and Partnerships Division, and the document received from that same agency, why does the CRA continue to attack self-employed workers by upholding its decision, even though it has never requested any information about my company, and even though it bases its decisions on those of Revenu Québec? Does the CRA check what Revenu Québec says? Is it normal that the rights of the taxpayers should be flouted by an auditor who has the power to decide whether or not he will conduct a more in-depth analysis?
With all the actions I have undertaken, I am sure that the CRA is very familiar with my file. In addition, as you can see by reading Mr. Jolies' email, it would seem that the only solution to our problem is an amendment to the act. And to do this, we must turn to the members of Parliament.
I am thus asking the committee for an amendment to the current act, in order to protect the 2.5 million self-employed workers in Canada from abusive action by the Canada Revenue Agency.
Thank you. That ends my presentation.
Good morning. Thank you for having invited us.
As Mr. Sabourin explained, we took a quick look at the provisions of the act. As we understand it, a person who operates a business is entitled to deduct expenses he or she has incurred to earn income, as stipulated in section 18 of the Income Tax Act. Naturally, by definition, this excludes employee status, given that an employee does not incur expenses to earn an income.
According to what I have learned, some very clever people realized during the 1980s that the creation or interposing of a company between the client or principal and the employee could allow the employee to claim deductions. Naturally, that includes the small business deduction, as set out in subsection 125(7) of the act. That is what triggered the amendment and the anti-avoidance provisions that you have heard of and that prevent this type of very clever tactics.
Naturally, creating a company severs the working relationship. We thus consider that with these anti-avoidance provisions, the act is pursuing a legitimate objective, as has already been the case. However, CRA's interpretation of this provision does not, in our opinion, take into account the real situation of self-employed workers, especially those who work in very specialized sectors such as information technology.
I am raising this issue because in section 125(7) of the act, the criterion used to define a personal services business is extremely vague. This section states: where it can "reasonably be regarded" that the shareholder of the company providing the services to a client could be an employee of the client. Now that could apply both to Jean-Pierre and Fernand. In my opinion, determining what is reasonable is the crux of the matter.
The problem is also that presumptions are used to infer things. These presumptions may be linked to specific circumstances. A whole array of criteria may be used, such as work organization, schedules or many other things. Naturally, when you put all this together, CRA bureaucrats are quick to state that they are dealing with an employee.
So let's come back to the crux of the matter. By the very nature of their work, IT experts deal with different realities. As Mr. Garceau said, an IT worker who must develop computer hardware or software for a large business cannot move the computer system into his home office. This type of constraint means that at first glance, his status would seem to correspond to that of a PSB, under subsection 125(7). However, when you look more closely at the situation, you can see that given the nature of his work, a close analysis must be done to determine whether it is or not a PSB. Does this require that the CRA issue a new interpretation bulletin or other measures to better inform these people as to where they stand? The criteria used to determine what a PSB is have not really evolved in technological sectors. In my opinion, that is a major problem.
The other major problem arises from the fact that entrepreneurs, businesses and even governments demand that these people be incorporated into corporations because they want the working relationship to disappear.
They don't want to pay employment insurance premiums and to have to take on these burdens, these payroll taxes. They are complicit to some extent given that they have helped give birth to a presumption by Revenue Canada that these workers are PSBs.
Could the Standing Committee on Finance not propose a form requiring the work providers to inform Revenue Canada that they are requiring the subcontractor to incorporate, and that they can then intervene when there's any issue of opposition?
Furthermore, these people live in uncertainty for 12 months, and the following year, they might have to pay assessments if they indicated in their income tax return that they were entitled to the small business deduction and to deduct their expenses. This creates uncertainty for them, which is also a problem.
I don't know whether, in such cases, there could be recourse to an advance ruling or a simple mechanism like that. For example, it could be established that in the next 30 days, if the department is unable to make a determination on the status of that worker, the burden of proof would be reversed and we would then presume that the worker is not a PSB. Furthermore, if there are any assessments, the department will have the responsibility of showing that it is one.
In my opinion, this kind of measure could help these people. There may be many others. We are giving you some suggestions, but ultimately it is up to you, the wise members of the House of Commons, to find solutions.
Whatever the case might be, there is a gap between the evolution of the legislation and the evolution of technologies. Mario and I have prepared documents for you. I hope that they will help you continue your study.
I want to thank all the witnesses for being with us today.
I can't tell you how happy I am to meet you and to see that the Standing Committee on Finance is undertaking a study on this issue. I had the pleasure of working on this file with my Bloc Québécois and NDP colleagues as well as with my Liberal colleagues. We worked hard to make sure that the committee would look at this issue.
If I've understood correctly what everyone is saying, the phenomenon of self-employed workers or entrepreneurs is nothing new or temporary. It will continue and will continue to grow.
Mr. Fahey provided data to the committee, on behalf of his association. Unfortunately, I don't have the English version. On page 4, it reads as follows:
In fact, Canada has seen significant growth in self-employment over the last couple of decades, especially among those who incorporated. The 2006 census shows that while there was an 8.5% increase in employees between 2001 and 2006, there was an 18.6% increase in the incorporated self-employed during the same period.
If we look at data that has come out since the beginning of the recession, we note that there are even more people looking for entrepreneurial work.
I'm going to read something to you and I'm going to ask what you think. This is a motion that I gave notice of already in the House. I won't read it in full, because it takes up a full page.
||(a) amending subsection 125(7) of the Income Tax Act to include a provision under which a business would not be defined as a "personal services business" if there were a clear "supplier-client" service contract in effect rather than an "employee-employer" contract, regardless of the number of workers employed by the supplier; (b) to amend the Income Tax Act to define a "supplier-client" service contract as one that (i) describes a specific deliverable that the supplier is to provide to the client and stipulates that under no circumstances do the parties intend to establish an employer-employee relationship, (ii) stipulates that neither party may have access to benefits provided by the other's human resources unit, including employee benefits, promotions, training, and career planning;
It goes on to read: "[to establish] a separate tax rate", etc.
I'm going to ask the committee members for permission to distribute this document—it is bilingual—to everyone, including the witnesses.
I know that you haven't seen everything. However, do you think this is something that the government should look at, in consultation with all the stakeholders, in order to see if this might be a solution?This is the 21st century after all.
At the outset, I would like to thank my colleague Mr. Mulcair for supporting the motion I tabled in the House. On the subject of this motion, I would like to mention that my colleague, Ms. Hall Findlay, has raised two aspects that could be amended.
First of all, the second line of paragraph (c) states that there will be a "[...] a separate tax rate for self-employed workers equal to the tax rate for small businesses;". Ms. Hall Findlay is saying that, further to testimony we will be hearing from the Canada Revenue Agency with respect to the impact on income, this rate may be separate. Personally, I think that the rate should remain equal, but I am sensitive to the arguments raised by my colleague.
The second matter pertains to the third line of paragraph (d), where it says: "[...] a self-employed worker or an employee of another company [...]". She is suggesting that we replace this part with: "[...] an entity or company including a non-incorporated or sole ownership company [...]". Her wording is a little bit more complete.
I would like to go back to the issue of inequality and inconsistency in legislation. I find it very interesting that the Canada Revenue Agency can decide that the contract of an incorporated company is not valid—after all, it is not a court of justice—that the contract between the provider and another company is not valid, that the individual should be treated tax-wise as an employee and that these laws do not apply to large corporations.
The same company, who is now deemed to be an employee, is denied employment insurance because, according to the latter, it is not an employee. In addition, we are told that, according to the CSST—I would imagine there is not too much difference with the Canada Labour Code—it is, in fact, a company.
You will agree with me that, sooner or later, the government will have to review the Canada Income Tax Act in its entirety so that it reflects the reality of today's society with respect to the economy and companies. I see that several of you are in agreement.
I would like to ask another question.
Yes, Mr. Garceau?
Good afternoon, Mr. Chair and members of the committee.
My name is Lucie Bergevin and I am the Director General of the Audit Professional Services Directorate.
With me today are Mr. Wayne Adams, Director General of the Income Tax Rulings Directorate, and Ms. Susan Betts, Director of Technical Applications.
A personal services business is defined in subsection 125(7) of the Income Tax Act, as a business that provides the services of an "incorporated employee" to an entity, where the "incorporated employee" would otherwise reasonably be regarded as an employee.
From a tax perspective, the critical issue relating to a personal services business is whether an incorporated individual is considered to be an employee of the client or an independent contractor, when providing services to a client.
Let's say an employee who is a resident in Canada resigns from his job with a corporate employer. The individual establishes a new corporation. He has his new corporation enter into a contract to provide his services back to his previous employer. The individual is referred to as an "incorporated employee".
In effect, the "incorporated employee" could be using the new corporation to convert employment income into active business income of the corporation, which would be eligible for the small business deduction. Consequently, the "incorporated employee" would benefit from the lower tax rates offered by the corporation.
Therefore, the key question is this: if it were not for the service corporation, would there be an employment relationship between the individual providing the service and the entity receiving the service?
In fact, the personal services business income tax legislation came into effect in 1981 to prevent employees from incorporating simply in order to gain access to the small business deduction and favourable tax rates.
In practical terms, the goal of this provision is to create a level playing field in that incorporated individuals, who are in reality considered to be employees, are treated the same way for tax purposes as a regular employee.
If an "incorporated employee" falls under the income tax definition of a personal services business, it is subjected to corporate tax at the full corporate rate.
In addition, subsection 18(1) of the Income Tax Act limits the deductions that a personal services business can claim to generally only those deductions that employees can claim. The corporation cannot deduct the variety of expenses that would be available to other types of businesses.
Examples of expenses that are not deductible by a personal services business include bank charges, office supplies, professional fees, repairs and maintenance, capital cost allowance and advertising expenses.
An exception is provided where the corporation employs more than five full-time employees. The business will not be considered to be a personal service business and it will therefore be eligible for the lower tax rate and usual business deductions.
In conclusion, whether a person is an employee or a self-employed contractor is a question of fact, which can only be determined following a complete analysis of the service contract. CRA has a guide RC4110, Employee or Self-Employed, which assists in determining the nature of the contract.
Thank you Mr. Chair, and we will be happy to take questions from members of the committee.