How much tax should I pay? When is my tax return due? Am I entitled to any deductions? All of your Canadian self-employment questions answered!
Many, if not most working holidaymakers in Canada seek employment opportunities in the same tried and trusted areas – retail, bars & restaurants, and ski-related roles in the winter resorts being prime examples.
But what if you’ve got a different path in mind? What if you want to make it out on your own?
If you have a skilled trade or a start-up business idea, you might be considering becoming self-employed during your working holiday in Canada.
There are many advantages to being self-employed. For starters you’ll have complete control and freedom over your working life. Fancy sleeping in every morning? Take it, you’re the boss!
But there are also some downsides to becoming self-employed. Some of these relate to tax. Simply put, tax is a slightly more complex subject for a self-employed individual than a typical employee.
However, this should not be seen as prohibitive to becoming self-employed. To ensure compliance with the Canadian tax authorities, there are just a few steps you need to follow.
With this in mind, we’ve created this useful guide of everything you need to know about tax as a self-employed individual in Canada.
So let’s get into it.
Am I self-employed?
It’s pretty easy to tell if you’ll be considered as ‘self-employed’ by the Canadian tax authorities.
In simple terms – if you don’t have an employer and you sell goods or services for money you will be considered a ‘sole proprietor’.
If you’re a sole proprietor, you must report all of your income to the Canada Revenue Agency (CRA) by your personal tax return.
Tax rates – how to calculate your taxes
Taxpayers with employment income in Canada are liable to pay both federal and provincial tax on their earnings.
All taxpayers are entitled to a tax-free allowance ($12,069 in 2019). This means that you can earn up to this amount without paying federal tax on your income.
Canadian tax rates are progressive — the more you earn (over the tax-free allowance), the more tax you’re obliged to pay. Federal tax deductions start from 15 percent on the first $47,630 of taxable income, with the provincial tax (applied in addition to federal tax) depending on the province in which you work.
Federal tax rates and income brackets
Tax Rate Bracket 15% $12,069 - $47,630 20.5% $47,630 - $95,259 25% $95,259 - $147,667 29% $147,667 - $210,371 33% $210,371 and over
Provincial tax rates
Alberta provincial income tax rates
Tax Rate Bracket 10% first $131,220 12% $131,220 - $157,464 13% $157,464 - $209,952 14% $209,952 - $314,982 15% over $314,982
British Columbia provincial income tax rates
Tax Rate Bracket 5.06% First $40,707 7.7% $40,707 - $81,416 10.5% $81,476 - $93,476 12.29% $93.476 – $113,506 14.7% over $153,900
Manitoba provincial income tax rates
Tax Rate Bracket 10.8% First $32,670 12.75% $32,670 - $70,610 17.4% Over $70,610
New Brunswick provincial income tax rates
Tax Rate Bracket 9.68% First $42,592 14.82% $42,592 -$85,184 16.52% $85,184 - $138,491 17.84% $138,491 - $157,778 20.3% Over $157,778
Newfoundland & Labrador provincial income tax rates
Tax Rate Bracket 8.7% First $37,591 14.5% $37,591 - $75,181 15.8% $75,181 - $134,224 17.3% $134,224 - $187,913 18.3% Over $187,913
Northwest Territories provincial income tax rates
Tax Rate Bracket 5.9% First $43,137 8.6% $43,137 - $86,277 12.2% $86,277 - $140,267 14.05% Over $140,267
Nova Scotia provincial income tax rates
Tax Rate Bracket 8.79% First $29,590 14.95% $29,590 - $59,180 16.67% $59,180 - $93,000 17.5% $93,000 - $150,000 21% over $150,000
Nunavut provincial income tax rates
Tax Rate Bracket 4% First $45,414 7% $45,414 - $90,829 9% $90,829 - $147,667 11.5% Over $147,667
Ontario provincial income tax rates
Tax Rate Bracket 5.05% First $43,906 9.15% $43,906 - $87,813 11.16% $87,813 - $150,000 12.16% $150,000 - $220,000 13.16% Over $220,000
Prince Edward Island provincial income tax rates
Tax Rate Bracket 9.8% First $31,984 13.8% $31,984 - $63,969 16.7% Over $63,969
Quebec provincial income tax rates
Tax Rate Bracket 15% First $43,055 20% $43,055 - $86,105 24% $86,105 - $104,765 25.75% Over $104,765
Saskatchewan provincial income tax rates
Tax Rate Bracket 10.75% First $45,225 12.75% $45,225 - $129,214 14.75% Over $129,214
Yukon provincial tax rates
Tax Rate Bracket 6.4% First $47,630 9% $47,630 - $95,259 10.9% $95,259 - $147,667 12.8% $147,667 - $500,000 15% over $500,000
Canadian Pension Plan
While there are lots of positives to being self-employed, you can include ‘Canadian Pension Plan (CPP) contributions’ on your list of cons.
CPP provides contributors and their families with partial replacement of earnings in cases of retirement, disability, or death. Almost all individuals who make over $3,500 a year working in Canada (outside Quebec, which has its own system) contribute to CPP.
Employees contribute 4.95 percent of their gross pay in CPP for each pay period. This amounts to half of the contribution, with the employer paying the other half. However, if you’re self-employed, you will have to pay the full CPP amount (9.9 percent) by yourself.
It’s important to note that you will only need to pay CPP on income you earn from $3,500 – $55,300. In other words, if you earn under $3,500 you will not need to pay CPP contributions. And you will not need to deduct any CPP from earnings you make over $55,300.
It’s also important to keep in mind that you must report details of your CPP contributions on your tax return.
Employment Insurance (EI)
The EI program provides temporary income support to unemployed workers while they look for employment or to upgrade their skills. The EI program also provides special benefits to workers who take time off work due to illness, pregnancy, caring for a new-born or newly adopted child (and more).
Contributing to the EI program is optional for all self-employed people in Canada and the rate is 1.66 percent of earnings
GST, HST, and PST – what’s the difference and do I need to pay it?
GST – General Sales Tax
PST – Provincial Sales Tax
HST – Harmonized Sales Tax
Some provinces have combined their GST and PST into a single tax – HST. Others charge them separately.
If you earn more than $30,000 of net taxable income in a year you will be required to collect federal sales tax and send it to the government. However, you’ll be considered a ‘small supplier’ if you earn less than this amount. Small suppliers are not required to collect GST/HST/PST.
If you are required to collect federal sales tax you will need to apply for a GST/HST/PST number.
Once you have your number, you will need to organise a payment plan with the CRA. These taxes are paid to the Canadian government on either an annual, quarterly, or monthly schedule.
Can I use any business expenses to reduce my tax liability?
Yes! If you’re self-employed in Canada there are a number of business expenses you can include on your tax return.
Some common examples of business expenses include:
Legal and accounting fees
Telephone and utilities
Meals and entertainment
Motor vehicle expenses
In general, it’s possible to deduct any reasonable expense you incurred in order to earn your business income.
However, personal expenses are not eligible. For example – if you work from home and you use your internet connection for business 70 percent of the time and personal use 30 percent of the time, you can only deduct 70 percent of your internet bill.
If you intend to deduct expenses from your tax bill it’s vital that you keep good records and your receipts in case you are subject to an audit from the CRA.
How to pay and file your tax
Employees in Canada have tax automatically deducted from their wages for each pay period. But if you’re self-employed you will have to make your own tax deductions.
So how much should you deduct?
Exactly how much you will have to pay will depend on your tax bracket (see tax rates above) and the deductions you qualify for. However, it’s generally advisable to set aside 25-30 percent of everything you earn through your business in order to pay your tax bill.
Below are the three government documents that every self-employed person in Canada will need to be familiar with.
T-1 General – the form used in Canada by taxpayers to file their personal income tax return.
The below types of income must be declared on this form:
- Employment income
- Self-employment income
- Foreign income
- Capital gains
- Rental income
Income you earn from self-employed should be listed on Line 104 of the form. After applicable deductions, the net income and taxable income are determined, and federal and provincial or territorial tax are calculated to give the total payable amount.
Form T2125 – you’ll need to file this form in order to detail all of your business activities during the year to the CRA. You also use this form to list your deductible business expenses.
T4A slips – if you’re an independent contractor, you’ll receive 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 therefore also a total sum of earnings from all clients.
These slips should prove useful when it comes to keeping tidy financial records.
It’s important to note that, if your client does not file a particular T4A slip, it will still be your responsibility to report the income.
Filing your return
Paper – you can choose to print out a paper form, fill it in, and mail it to the CRA.
Electronic – or you can fill it out online. This is much faster and easier than printing and mailing the forms yourself.
Agent – confused about the tax filing process? Why not enlist the help of a tax agent like Taxback.com? Their tax team will file your tax return for you and ensure you are 100 percent compliant with the Canadian tax authorities.
Paying your taxes
There are a range of options for paying your taxes – whether through online debit or credit card payment, or via a financial institution or wire service.
Here are the most important tax deadlines that every self-employed worker in Canada should keep in mind.
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.
This is the first day you can file your taxes online or by phone.
If you pay income tax in installments, your first quarterly payment is due on this date.
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.
This is the tax filing deadline for full-time self-employed people (you must still pay your tax by April 30).