Working remotely is becoming common worldwide, so if you've clicked this article, chances are you are working as a freelancer or remote worker in Canada. Data shows that in 2023, around 2.65 million people were self-employed in Canada. Gig work, a form of employment with short-term tasks, projects, or jobs, continues to be a prevalent form of self-employment in the Canadian labor market.
Remote work introduces unique tax considerations. In this article, you will learn how to file taxes as a freelancer in Canada.
Understanding the Tax Obligations of Freelancers in Canada
Freelancers in Canada are considered self-employed and responsible for calculating and paying their tax requirements.
Income sources of freelancers include:
- Selling a product or offering a service
- Having a side hustle job working on weekends
- Being a small supplier
Driving for a rideshare company
Thus, if you are freelancing, you need to report your income and expenses to the Canada Revenue Agency (CRA), pay your taxes, and make contributions to the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP). Experts recommend that freelancers set aside around 30% of their income to cover taxes and CPP contributions. When filing taxes, freelancers can deduct work-related expenses such as utility bills, marketing costs, equipment, software subscriptions, business insurance, professional development, and other expenses related to your business, to name a few.
Different Tax Forms for Freelancers
Depending on the structure of your freelancing business, you need to complete different forms during tax season.
Sole Proprietorships
If your freelancing business is a sole proprietorship, you must complete the T2125 form when reporting your taxable income. For your personal tax, fill out the T1 general form and Form T4A (Statement of Pension, Retirement, Annuity and Other Income). If your income is over CAD 30,000, you must register for a GST/HST number and fill out Form GST34.
Note: If you do not earn more than CAD 30,000, you can still register for the GST/HST. You can register at the CRA website. Payments can be made monthly, quarterly, or annually. Once registered to collect GST/HST, you must continue collecting it until you close your business.
Unincorporated Partnerships
If your freelancing business is a partnership, file the T5013 Statement of Partnership Information with your return. For personal tax, file a T1 general form and complete the T2125 form.
Corporations
For corporations, fill out the T2 form. For your personal tax, submit the T1 general form.
How to Complete Form T2125
The T2125 form is the Statement of Business or Professional Activities designed to calculate self-employment business and professional income. Professionals such as accountants and doctors use this form. Business income is profit from a profession—except for regulated industries. Examples include profit from trade, manufacturing, and other activities designed to make income.
Note: You must complete separate T2125 forms for each business if you have multiple freelance businesses.
A freelancer’s tax rate depends on the tax bracket they will fall into and their total net income. After filling out all sections of the T2125 form, you will know the total amount of tax you need to pay.
Part 1
In this section, provide your complete and accurate identification information such as:
- Name and business address
- Business name
- Industry code and main product or service
Fiscal tax year
Part 2
This section is for Internet business activities. Note the web pages where you earn income and the percentage of income you earn from the web pages and websites.
Part 3
Complete the section relevant to your freelancing business:
- 3A: Business income: Gross sales or income, plus GST/HST.
- 3B: Professional income Gross professional fees, plus GST/HST.
- 3C: Gross business or professional income.
3D: Cost of goods sold profit.
Part 4
In this section, list all the expenses you can deduct. Deduct the total expenses from your gross business, professional income, or gross profit to get your net income before adjustments.
Part 7
In this section, you will be calculating business-use-of-home expenses. This means that if the office you work in is in. Your home you can include the costs of that home office in this section. Some of the expenses you can include are:
- Heat
- Electricity
- Maintenance
- Insurance
- Property taxes
Mortgage interest
In this part of the form, you must also compute the personal use part, capital cost allowance, and amount carried forward from previous years.
Chart A
This section is where you list car-related business expenses such as:
- Fuel and oil
- Electricity (for zero-emission vehicles)
- Maintenance and repairs
- Business parking fees
- Car registration and license fees
- Insurance
Do not forget to record the total kilometers the vehicle has driven during the fiscal period.
Area A
In this section, record your capital expenses, which refers to anything that offers “lasting benefit” to your business, including computers or furniture. As a capital cost allowance, you don’t claim the full amount of the purchase in the year you bought these assets. Instead, you can claim a portion or set amount of the total cost of the purchase over a few years. The amount you will claim each year will depend on the expense category.
Filing Income Tax Return
A freelancer can prepare their own taxes and file them themselves. Or they can hire a professional tax preparer to do the work on their behalf.
Taxes can be filed online using tax software. Paper returns are also possible, but it is more convenient to file taxes online.
Hiring a CPA tax professional to file taxes on a freelancer’s behalf is often recommended, especially if a freelancer has a variety of income sources and deductions. Professionals can also identify additional deductions in their taxes.
Deadlines for Tax Filing
Canada has different deadlines for income tax filing. The deadline for a personal tax return is April 30. The end of the year for personal income tax is December 31.
The self-employment tax return is due on June 15, and any taxes owed are due on April 30. To simplify, your payment is due before the tax return is due. If you pay your tax in installments, the deadlines are March 15, June 15, September 15, and December 15.
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