Self-Employed? Here’s How to File Your Taxes in Canada

By Bryce Warnes on February 1, 2018

filing 2017 small business tax return

Being self-employed is about enjoying your independence. Don’t let tax season spoil that. Your obligations to the Canada Revenue Agency (CRA) may seem like a tangle of red tape and paperwork, but it doesn’t have to be that way.

Once you learn the basics of how Canadian self-employed taxes work, and which CRA forms to bookmark, tax filing is as straightforward as Sidney Crosby puttin’ the puck five-hole (almost).

From figuring out how much tax you owe, to knowing which form you have to file (and by what deadline), we’ll walk you through the essentials of what you need to know this tax season.

Are you a sole proprietor?

As soon as you start trading goods or services for money without an employer paying you for it, the federal government considers you a sole proprietor.

At that point, you’re expected to report all income you receive as a sole proprietor to the Canada Revenue Agency (CRA). It’s reported as part of your personal income on your personal tax return.

The scope of this guide

This article is for sole proprietors only, and exclusively covers federal taxes. To learn more about tax obligations specific to your particular province or territory, check out the Government of Canada’s guide to provincial taxes.

How to calculate your taxes

As a self-employed person, your business earnings and your personal income are one and the same. There’s no separate income tax rate for money you make from your business.

However, you do need to pay Canadian Pension Plan (CPP) contributions, and you have the option of making Employment Insurance contributions as well.

So the total of your tax obligations would be income tax + CPP + EI (optional).

Income tax

The income tax rate changes from one year to the next, but here’s what you have to pay for the 2017 financial year.

 

Income portion

Tax rate

$0 – 46,605 15%
$46,605 – 93,208 20.5%
$93,208 – 144,489 26%
$144,489 – 205,842 29%
$205,842+ 33%

 

Your income is taxed progressively

Each “portion” in your income is taxed progressively higher. For instance, say you earn $60,000 a year. All your income up to $46,605 would be taxed at 15%. The remainder would be taxed at 20.5%.

Calculating your income tax

If you don’t feel like doing the arithmetic to figure out your total income tax obligation, we recommend SimpleTax’s online calculator.

Canadian Pension Plan (CPP) contributions

The rate of CPP contributions on your income is 9.9%. Employees have half that amount withheld from their paycheck, while their employer pays the other half.

If you’re self-employed, you’re your own boss. So, you need to pay the full 9.9%.

This 9.9% only applies to part of your income—a range of $3,500 – $55,300.

If you make under $3,500, you can’t contribute to CPP. And anything you earn over $55,300 won’t have CPP taken from it.

Employment Insurance (EI) contributions

Since 2010, contributions to EI have been optional for all self-employed people.

Contributing to EI does come with some significant benefits, including:

  • Maternal leave
  • Parental/adoptive leave
  • Sick leave
  • Benefits for taking care of sick children

If you’d like to learn more about about how you can make voluntary contributions to EI, TaxTips.ca has a helpful guide.

Saving money for taxes

When you work for someone else, the taxes you pay on your income are withheld automatically. But when you work for yourself, that isn’t the case. You’ll have to withhold that money yourself, and remit it to the government.

As a general rule, we recommend setting aside 25-30% of whatever you earn through your business, so you can pay your taxes later.

Exactly how much you actually pay will depend on your tax bracket and the deductions you qualify for. But so long as you bank 25-30%, the worst case scenario is that you’ll have some extra money left over after paying taxes.

How to file your taxes

If you’re self-employed, you don’t actually pay “business” income tax. So you file your tax return with Form T1 as personal income. You’ll also need to fill out Form T2125 to list your deductible business expenses.

Tax filing forms

These are the three government forms every self-employed Canadian needs to be familiar with.

Form T1

When you file your taxes as a sole prop, your business income is treated as personal income, and reported on your personal tax return—Form T1, General Income Tax and Benefit Return.

The income you earn as a self-employed person is listed on Line 104 (“Employment income not reported on a T4 slip.”)

Form T1 is also where you report any personal deductions for which you’re eligible—for instance, ones that apply if you support a dependant, or live in a northern territory/province.

Form T2125

Even though you report your income on Form T1, the CRA wants to know about all your business activities during the year. So you also need to file a business return—Form T2125, Statement of Business or Professional Activities.

You use this form to list your deductible business expenses.

T4A slips

If you’re an independent contractor, expect a Form T4A, Statement of Pension, Retirement, Annuity, and Other Income from every client you worked with during the year. The client fills out one copy of the form, reporting how much they paid you, and submits it to the CRA. They fill out a second form, and send it to you. Using your T4As for the year, you can determine how much revenue you earned from each client, and in total.

This is when keeping tidy financial records comes in handy.

Everyone who hires an independent contractor—that’s you—must submit a T4A slip. They have until the end of February in the year following the financial year they’re reporting to deliver your copy.

But, if they’re late to do so, or they forget, or your copy gets lost in the mail, it’s still up to you to report that income. In that case, you’ll want to make sure you recorded it somewhere, or that your bookkeeper did so automatically, so you can accurately report your income on Form T1.

Deductible business expenses

Business expenses are any costs you incur in the course of running your business. And, if you keep good records, you may be able to deduct some of them from your taxes.

Not sure what qualifies as a deductible expense? Check out the CRA’s thorough guide on deductions.

Every qualified business expense needs to be backed up with an itemized receipt, in case of a CRA audit.

For ambiguous expenses—ones that could be interpreted as being for personal use, rather than professional—take care to make a note on the receipt about the purpose of the expense. For example, if you grab lunch with a client in order to discuss a project, write on the back of the receipt who you met and what you talked about.

Some business expenses are only partially deductible. For instance, if you have a home office, and you use your internet connection for freelance work 80% of the time, and for Netflix the other 20% of the time, you can only deduct 80% of your internet bill.

Home office expenses are a delicate operation, since they differ from business to business. We recommend asking your CPA before you try to claim them. If you’re curious, this Globe and Mail article is a great primer on the nuances of home office deductions. 

Self-employed tax filing deadlines

The most important tax day of the year for self-employed individuals is April 30. This is the deadline for paying and possibly filing your taxes.

Why “possibly”? In the eyes of the government, you only qualify as “self-employed” if you run your own business full-time. Self-employed individuals don’t have to file their taxes until June 15. But they still need to send their tax payments by April 30.

If you run your business part-time, and work for someone else the rest of the time, you’re not technically self-employed. So you need to file and pay your taxes on April 30.

This page from the CRA is targeted at employers, but you can find more information there to help you determine whether you’re an employee or self-employed.

January 31st, 2018

If you have a GST/HST number and you make quarterly payments, this is the deadline for remitting payments for the previous quarterly reporting period.

February 20, 2018

This is the first day you can file your taxes online via NETFILE. If you prefer working over the phone, you can call 1-800-959-1110 to file through TELEFILE.

March 15, 2018

If you pay income tax in installments, your first quarterly payment is due today.

April 30, 2018

This is the tax filing deadline for individuals and sole proprietorships who are not self-employed full-time.

Regardless of when you file, all sole proprietors must also pay their taxes by this date.

If you have a GST/HST number, this is the deadline for remitting payments for the previous quarterly reporting period.

June 15, 2018

This is the tax filing deadline for full-time self-employed people.

 

 

GST, HST, and PST

When your business has a general sales tax (GST), harmonized sales tax (HST), and/or provincial sales tax (PST) number, you must collect tax on all sales you make and send that money to the government.

Who collects GST/HST

You’re only required to collect federal sales tax if your net taxable income for the year is over $30,000. If you earn less than that, the federal government classifies you as a “Small Supplier,” and you aren’t responsible for collecting GST or HST.

Heads up, though. The CRA won’t tell you if you qualify for a GST/HST number. It’s up to you to keep track of your income, and apply for a number when you earn more than $30,000 in a year. Learn more about registering a GST/HST number from the CRA’s guide.

HST vs. PST

Some provinces have combined their GST and PST into a single tax, HST. Others charge them separately. For a full overview, and to learn about the obligations in your province, the Canada Business Network offers a comprehensive guide.

Remitting GST and HST

Both HST and GST are remitted to the Government of Canada. (The federal government distributes to the provinces their share of HST.)

Depending on your income, this remittance could occur on an annual, quarterly, or monthly schedule.

You remit your GST/HST at the same time that you file Form GST34.

Once you get a GST/HST number, the CRA sets you up with a payment plan and the forms you need to submit. If you don’t have a number, but learning about federal sales tax gives you a thrill, you can check out the CRA’s guide.

Filing and paying your taxes

Paper filing

If you choose, you can print out a paper form, fill it out, and mail it to the CRA. Get started with the CRA’s directory of forms and publications.

Electronic filing

Electronic filing is the fastest and easiest way to get your taxes filed (we highly recommend it). You can do it through the CRA’s NETFILE service, but first, you’ll have to open a My Account with the CRA. You’ll need supporting documentation to do so. For a complete guide, see the CRA’s page on filing your taxes.

Paying your taxes

You have a wide range of options for paying your taxes, whether through online debit or credit, or via a financial institution or wire service. The CRA has a handy table to help you determine which options you qualify for.

If you’re new to filing self-employed taxes, we’d be remiss to not mention that there are CRA penalties for being late and making mistakes. The easiest way to make sure your taxes are filed correctly, on time, and without the wrath of the CRA, is to team up with a financial pro. For our tips on hiring the CPA of your dreams check out How to Find, Hire, and Work with an Accountant.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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Bryce Warnes

Bryce writes for Bench, the online bookkeeping service for entrepreneurs.