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When the risk is yours alone
Many Canadians are opting for the joys and challenges of self-employment, either because they have lost a job in a period of economic uncertainty or they are looking for the flexibility of working for themselves. More than 2.5 million Canadians are now self-employed and the self-employed sector expanded four per cent a year throughout the 1990s, according to Statistics Canada.

Rethink your plan
Setting up shop on your own requires a complete rethinking of your financial plan. You are likely moving from a position where your employer protected you with a package of benefits for life, health and disability, to one where you are shouldering all the risk alone.

Many newly self-employed people don't realize how much they have at stake. Once your severance package, if you had one, has run out, you are without insurance coverage. Your family is unprotected should you die or become disabled. You should meet with an insurance and financial advisor to review the protection needs of yourself and your family. A member of Advocis will recommend insuring your debt.

Insure yourself
Then your priorities will be life and disability insurance. Disability insurance can be difficult for self-employed people to obtain as many companies want to see two years of tax results. Health and dental insurance would be next, if you can afford it. Self-employed people are able to write off some health insurance premiums at tax time.

Need for cash
Most people starting out need a cash float to keep them going until income starts arriving. You may need to rent office space or work space, invest in materials and supplies. Even if you work out of your home, you almost certainly will need a computer and furniture, phone and Internet lines.

How will you live until your first client pays? Some people may have a severance to tide them over, but many need a bank loan or line of credit to cover the costs of starting up. The bank will demand a personal guarantee on this loan, putting your home and any other possessions at risk as well.

Tax considerations
Your advisor can refer you to a small business expert to help you with setting up your record-keeping. You will need a Business Number, a number given by Ottawa to identify your business if you pay wages or collect GST. You may need advice about handling GST and what kind of financial records must you keep.

Costs of Self Employment
Before the end of your first year you will face major tax considerations. You will be paying your own CPP and EI and, if your income is high enough, you may be expected to make quarterly tax instalments. Fortunately, you will have expenses to deduct, including a capital cost allowance on computers, automobiles and property and business expenses such as advertising, administration fees, salaries, materials, telecommunications costs, travel and 50 per cent of meals and entertainment expenses.

“A bull market begins on pessimism, grows on skepticism, matures on optimism and dies on Euphoria.”

Raymond E. Jackson Retired

Simon J. Jackson, CFP, CPCA Senior Financial Advisor, Manulife Securities Incorporated Life Insurance Advisor, Manulife Securities Insurance Inc.