What Does Freelance Tax Include?
There is no such thing as freelance tax. Freelancers have to pay normal personal income tax on their profit and two extra taxes that employees never have to worry about: CPP contributions at the maximum self-employed rate and sales tax after exceeding a certain limit.
You are a sole proprietor from the very beginning when you charge your first customer for your work in order to earn money. There are no forms to be filled out. The advantage is that it is easy. The disadvantage is that personal and business finances are one and the same, hence a CRA reassessment falls right on your shoulders.
| Key figure | What it means |
| $30,000 | Revenue over four quarters before GST/HST registration |
| June 15 | Filing deadline for self-employed people |
| April 30 | Payment deadline, with no extension |
| 6 years | How long to keep your records |
Independent Contractor Or Employee?
Labeling yourself as an independent contractor doesn’t automatically mean that this is how you should be categorized. The Canada Revenue Agency takes into consideration not what you call yourself, but rather whether you control the hours and methods used, what equipment you use, whether you can make money or lose money on each assignment, and whether you are dealing with more than one client or just within one enterprise.
A web designer with four clients, a personal computer, and a quote based price is self-employed. A programmer with certain hours, working on a client’s computer, and supervised is probably an employee with an invoice. Reclassification will mean losses to both parties involved: the person paying must pay the unpaid CPP and EI, whereas you won’t get your deductions anymore. If you get most of your income from one source, you should have it reviewed.
The Two Deadlines Freelancers Confuse
Freelancing allows you six more weeks to submit your tax documents, but not to make payment.
| Obligation | Due |
| T1 return with T2125 | June 15 |
| Amount outstanding | April 30 |
| GST/HST annual return | June 15 (payment April 30) |
| Tax payments | March 15, June 15, Sept 15, Dec 15 |
Interest will be charged starting May 1 on any amount unpaid. Late submission of tax documents results in a 5% penalty of the amount outstanding and a 1% monthly penalty for up to 12 months. Ensure that you submit your documents on time, even if you cannot afford to pay.
Tip for the deadline: If you do not have the exact bill by April 30, pay your best estimate and correct it when filing.
GST/HST: The $30,000 Threshold
Registration is required once your taxable income exceeds $30,000 in four consecutive quarters. How you cross it determines:
A single large quarter: You become registered starting the day of the sale that pushed you over the line. You owe tax on that sale.
Growth over time: You have a grace period and become registered in the next month.
You charge your client the rate in their province, not yours. A Toronto freelancer selling services to a Vancouver client charges 5% GST, not 13% HST. Clients in Quebec also require QST registration with Revenu Québec.
What You Can Deduct
The criterion is whether the expense was incurred in generating business income. Common deductible expenses include software, professional membership, insurance, advertising, website expenses, transaction fees, accounting services and supplies.
Be aware of these restrictions:
- Meals: Only 50% is deductible.
- Vehicle:Only the portion used for business, and it must be documented with a log.
- Equipment:Spread out over several years through capital cost allowance; not all at once. Only half of the usual first year deduction is allowed.
Plan your major expenses well. Equipment that is ready for use by December 31 is eligible for its first-year deduction in that year. However, the same equipment, if purchased on January 3, will have to wait until next year.
The Home Office Claim
Calculate what portion of your workspace is relative to the area of your entire home. If the room is being shared, deduct from the percentage based on the period when it is not being used as a workspace. Multiply the result by the rent, electricity, insurance and internet fees.
This type of claim cannot produce losses, but any excess amount will carry forward. Never use the capital cost allowance for your house because this might reduce your exemption as a principal residence.
CPP: Paying Both Halves
You share half of CPP contributions with your company. Both are paid; one is a deduction while the other is a non-refundable tax credit, so the effective amount you pay will be less. Employment insurance is not mandatory, but if you want to use special benefits such as parental leave, then you must sign up long before you need them.
Practically, it is all about cash flow. Someone who earns $70,000 per year is obligated to pay taxes plus thousands of dollars in CPP contributions, and nothing will be deducted. Set aside a fixed percentage of each fee separately from GST/HST.
Installments
You will need to pay installments on a quarterly basis if the tax owing exceeds $3,000 this year and any one of the previous two years. In the case of Quebec, the limit is $1,800 per year. Just one large year won’t cause that; however, you can use the reminder amounts sent by the Canada Revenue Agency, pay installments for one quarter from the previous year’s tax, or estimate this year’s tax, but that may attract interest if you guess wrong.
When to Incorporate
The corporation has a lower tax rate on the profits it earns, but the profits that are drawn out are re-taxed, which means that it just allows for tax deferral, and not any tax savings. The incorporation would only be beneficial if the profit is kept within the company.
| Sole Proprietor | Corporation | |
| Rate | T1 with T2125 | T2 with your T1 |
| Year end | December 31 | Your choice |
| Early losses | Reduce other income | Limited to company |
| Cost of compliance | Lower | Higher annually |
Some of the bigger clients only work with incorporated businesses, and limited liability also has some value.
Mistakes Made by Freelancers
- Using the collected GST/HST
- Thinking that June 15 includes payment
- Using personal expenses for business
- Not keeping logs of vehicle use
- Writing off equipment costs in full in the purchase year
- Not recognizing income until the money is received
- Using the same tax rate of your province for everyone
FAQ’s
Frequently Asked Questions
Should I register my business?
No. You are a sole proprietor as soon as you issue your first invoice. Register only if you require a trade name or a GST/HST account.
When is my return due?
The return is due June 15, with payment due April 30.
Do I pay CPP on my freelance income?
Yes, for both parts, partially offset by a deduction and credit.
What per cent should I take out of each payment?
Keep GST/HST payments separate. Take out income tax and CPP; many freelancers take out about 25–30% of net income, but calculate your own percentages.
Do I report foreign client income?
Yes, in Canadian dollars. If you have foreign property valued at more than $100,000, then you must file Form T1135.
Can renters claim a home office?
Yes, based on their use of the home office in relation to rent and other expenses.
Conclusion
The pain of being a freelance contractor is mostly decided within the year, not at tax time. Maintain a dedicated business account, retain a certain portion of money for GST/HST, tax and mileage while driving; watch out for the thresholds – $30,000 sales tax, $3,000 instalments and incorporate your way to savings.
Late on your filing, GST/HST registration missing and unsure of how much you owe? Betataxes offers a review of your past year and provides an upfront quotation on a fixed price.
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