How to File Taxes as an International Freelancer

The COVID-19 pandemic has proved that with the help of the Internet, work outside one’s country is possible while staying at home. As a result, the number of freelancers working full-time or part-time with clients in and outside their home country has increased.

While freelancing allows freelancers to work from anywhere, filing and paying taxes as a freelancer in Canada can be tricky, especially for those not yet aware of the processes. Knowing how to file taxes as an international freelancer in Canada is helpful because freelancers are legally required to file their income here. Failure to do so would result in you being fined up to 10% of the amount you didn’t report.

To get you started with the process of filing taxes as a freelancer in Canada, here are steps and tips you may need to take and consider:

Step 1: Set yourself up

The key to smoothly accomplishing your tax return every year is setting things up initially. As a freelancer, choose whether you will work under your own or a business name. If you wish to use your legal name, you don’t need to register as a business. However, if you want to use a business name, register it as a legal business in Canada. It would be best if you also considered opening a business bank account.

Once you have decided, the next thing to do as part of setting yourself up is by keeping all your ongoing income and business expenses records. While you can do this the old fashion way, you can also use business apps to record your income and expenses. Also, consider downloading an Excel template for income and business tracking. Aside from recording them, it is recommended that you keep your paper receipts in a dedicated folder.

Step 2: Set aside money for taxes

To avoid being surprised with the value of your tax or being burdened with paying a lump sum payment for your tax bill, it is recommended that you keep 25% of your monthly income for your tax bill so that you have saved enough funds to pay for your tax once tax season is nearing.

Step 3: Understand your tax return

Even if you are an international freelancer, you must complete the Form T2125 Statement of Business or Professional Activities. In this form, you will provide a more thorough list of your income and expenses as a freelancer. So long as you keep good records during the year, you can be confident that completing these forms won’t be too hard for you.

To assist with your tax filing, the Canada Revenue Agency (CRA) offers an online tax filing service. With this, you can e-file your tax return online and return it to make changes if necessary. To make the process faster, you may also consider auto-filling in your tax income with the previous year’s figures.

Even if you’ve completed the tax forms, keep your spreadsheets and receipts because you may need to send them to the CRA, depending on your situation.

Step 4: Calculate your deductible expenses

Your tax income is your net income or the total amount you earned the previous calendar year minus the total of your deductible expenses in the same calendar year. Yes, tracking and computing your deductible expenses is worth it, as it lessens the tax you have to pay.

The following is a list of deductible expenses:

• Office Supplies
• Marketing costs
• Resources needed for business
• Mobile phone and internet bill
• Meals and entertainment you need as part of your business
• Travel costs
• Ongoing training and professional development

Canada’s tax laws allow you to deduct the cost of running your home office if you work from home. However, you need to be careful because you cannot claim anything you used for your personal needs as part of your home office deduction. Instead, you must calculate what percentage of your house bills go to your business needs.

Your home office deduction will depend on the size of your home office. Meaning if your home office occupies 25% of your home’s square footage, you can claim 25% of your home bills as deductible expenses. Bills that are deductible for your home office include:

• Heating bills
• Water bills
• Phone bills
• Internet bills
• Mortgage on your property
• Home Insurance
• Property taxes

Again, you can always get help from tax return software to skip the calculation and other arduous steps in filing and completing your tax returns.

Step 5: Maximize your pension allowance

When you are a freelancer, expect that you are responsible for your retirement. No one will pay your pension on your behalf. That is why it is recommended that you make it a habit to contribute a fixed amount to your RRSP each year. These contributions are considered deductible expenses, and your money grows tax-free.

Step 6: Pay your Goods and Services Tax (GST) and Harmonized Sales Tax (HST)

GST is a federal tax levied on goods and services bought in Canada. HST is a consumption tax imposed in provinces that charge a provincial sales tax (PST) and GST to combine both taxes into one value-added sales tax.

As a freelancer, you must collect GST or HST on the products and services you sell. Afterwards, pay that tax to the government. You can also claim “input tax credits” on the GST or HST that you paid on products and services you need to operate your business. This means you can deduct the GST or HST you paid on resources for your business from the final GST or HST you need to pay the government. Remember, filing your GST or HST is an essential part of your tax obligation.

“Small suppliers” or businesses with revenues below $30,000 over each tax year are exempted from charging and paying GST or HST. Your gross income is equivalent to the amount you earn before deducting your business’ expenses.

However, you must register for GST or HST if your income is over $30,000 in a calendar year. You can call, mail, fax, or register online at the CRA website. Assuming that you are obliged to collect GST or HST, calculating it at the correct rate is important. GST or HST is calculated based on the province of your client, not yours. You might handle different rates if you have clients located in various provinces in Canada.

After registering, you need to file a GST or HST return either monthly, quarterly, or annually. You also need to remit GST or HST payments, often at the same time as you file our GST returns. Your invoices are required for you to complete your GST or HST return. Take note that you need to remit GST or HRT for each invoice you submit, even if it hasn’t been paid.

Remember: GST and HST operate only within Canada. If you are an international freelancer with clients outside of Canada, you do not need to charge your international client.

What If You’re Employed and an Independent Contractor?

If you have full-time work and do freelancing on the evenings or weekends, know that this may result in you having an increased taxable income for the year, putting you into a higher tax bracket. Once you reach a particular tax bracket, you will be taxed at the new rate for each additional dollar you own, not your total income.

Let us assume that the tax rate for incomes below $75,000 is 25%. The tax rate for $75,001 to $100,000 is 30%. So, if you earn $50,000 from your full-time work and $30 from your freelance work in a tax year, only the dollars you earn above $75,001 will be taxed at 30%. Your first $75,000 will be taxed at 25%. This is the marginal tax rate.

Tax Filing Deadline for Freelancers

The deadline for filing taxes for individual tax returns for 2023 is April 30. Self-employed individuals have until June 15.

If you fail to pay your taxes by April 30 each year, the interest rates will compound daily and will be based on the prescribed interest rates that can change every three months. On the other hand, if you file your tax return after June 15th as a self-employed freelancer, you will be fined a penalty by the CRA, which is 5% of your tax balance plus an additional 1%.

If you do not file your taxes, you may be liable to criminal charges, which could lead to substantial fines or jail time.

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