@nilz For option 1, yes, you'd be considered a sole proprietorship and you'll be able to deduct certain expenses. Most of which you'd be able to deduct as an employee if they fill out the appropriate form that says you work from home.
Incorporation is a different matter. Having had to do that in the past for what was essentially a self-proprietorship I would say don't bother. When you really only have 1 client (and you're not going to easily get around that), you're going to pay essentially the same in taxes either way. Incorporating may give you some VERY slight liability protection, but incorporated or not, you should get some basic insurance for liability and errors & omissions. Likely best bet is to talk to an insurance broker for your industry on what exactly you should get.
Personally, having done both, I'd go with being an employee, especially given what you've provided. In both cases you're being paid the same, and they're offering to adjust annually based on exchange rates. As an employee in Canada, they're going to pay half your CPP and EI and you'll be eligible for EI. As a self-prop you'd have to opt into EI and its rarely worth it.
