Self-Employed Taxation in Canada

What is a Self-employed person?

The Canadian Revenue Agency (CRA) distinguishes between employees and self-employed individuals. This status determines a worker’s entitlement to benefits under the Employment Insurance Act, the Canada Pension Plan, and the Income Tax Act.

The following are some criteria that the CRA uses to identify a self-employed individual:

• A self-employed individual usually works independently
• The worker does not have anyone overseeing their activities
• The worker is generally free to work when and for whom they choose and may provide their services to different payers at the same time
• The worker can accept or refuse work from the payer
• The working relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship

Rate of Self-employed in Canada

According to a report by Statistics Canada, there were approximately 2,650,600 self-employed workers in 2022.

Another eye-opening statistic is the shift in the composition of Canada’s own-account workers or workers without employees working for them.

Traditionally dominated by the agriculture industry, the grouping was surpassed by Professional, scientific, and technical services with 18% of all own-account workers in 2021, followed by construction (12.6%) and healthcare and social assistance (12.1%). Agriculture only accounted for a meager 4.8%

What’s behind the rise of self-employment

Self-employment is increasingly adopted by many young professionals attracted to the independence and opportunities afforded by this model. Many factors, including the rise of non-traditional arrangements like gig work and work-from-home, also contribute to the situation.

Advantages of self-employment

The Covid-pandemic in 2020 and layoffs in the Tech industry are just a handful of events that exposed the vulnerabilities of conventional systems. It gave people a reason to consider alternatives like self-employment.

The apparent advantage of this model is freedom. The individual is free to chart their growth and work. Some of the motivations cited in a FreshBooks 2021 report on Canadian Self-Employment were:

• Greater career control
• Greater fulfillment
• Financial reasons
• Family reasons
• To change career
• For Health-related reasons
• To leave a Negative work situation

Self-employment among Software Developers

The nature of the tech industry helped its seamless transition to a remote work environment during the height of the pandemic. It was widely adopted by many companies that continue the practice even after the pandemic.

The success of this tried and tested model also opened the doors for many software developers and similar tech profiles who can now look for more opportunities as independent remote workers and freelancers. It quickly gained popularity for the same advantages stated previously.

Self-employment and taxation

With all the freedom and advantages comes the burden of keeping track of your receipts and figuring out your tax obligations as a self-employed individual. Getting professional help, especially if you’re just starting out, is recommended to save you many headaches.

Let’s dive into Canada’s taxation model and the implications for a self-employed worker.

How the Canadian Income Tax system works

Canada follows a graduated or progressive income tax system that taxes individuals according to their income. The system also allows taxpayers to qualify for deductions and exemptions subtracted from the total income to arrive at the Taxable income.

Canadian citizens, residents, and non-residents are subject to income tax for any income gained for employment in Canada, carrying business in Canada, and capital gains from Canadian taxable property.

Canada has both a Federal tax and a Provincial or territorial tax, depending on your place of residence. Canada employs a joint Income tax collection system managed by the Canada Revenue Agency (CRA). The agency collects income taxes for the federal government and the provinces, except for Quebec and the territories. Residents outside of Quebec need only file a single tax return form.

Proper Taxation norms play a large part in helping maintain Canada’s high living standards and support structures like Medicare. Its importance cannot be understated, and neglecting or falsifying your tax returns will lead to severe consequences down the line.

According to the CRA publication T4002, failing to report all income in a year or the last three years will result in a penalty of 10% of the amount not reported after the first omission. The penalty increases to 50% of the unreported tax (a minimum of $100) in case of gross negligence, omissions, or false statements.

Canadian Income Tax rules on self-employed and freelancers

Canada’s tax regulations cover self-employed workers and freelancers.

As a self-employed individual, the Canadian Revenue Agency (CRA) taxes your business income earned from a profession, trade, manufacture or any undertaking in the nature of trade or profit.

Self-employed professionals must file a T2125 Statement of Business or Professional Activities form. If your job includes providing services to a company as a self-employed individual, the company should issue your T4A slip. This form, also known as a ‘Statement of Pension, Retirement, Annuity, and Other Income,’ covers exchanges that are not within the ambit of regular employer-employee paycheques like contract work.

The T2125 Statement of Business or Professional Activities form

Self-employed individuals can declare their business or professional income with the T2125 form. The CRA requires you to file separate forms for each individual business or profession that will be submitted along with your Income Tax and Benefit Return.

For self-employed Canadians working for foreign companies

The Line 10400 of your Income Tax Return lists all income not accounted for in a T4 or T4A slip. This includes your foreign employment income earned from a foreign employer.

Foreign currency earned this way must first be converted to Canadian dollars using the current Bank of Canada exchange rate. The CRA will also accept rates prescribed by other sources if they are verifiable, widely available, published by an independent provider on an ongoing basis, recognized by the market, in accordance with well-accepted business principles, used to prepare financial statements, or regularly used from year to year.

Alternative Currency exchange platforms like Remitbee can help maximize your saving here with minimal exchange fees that are a fraction of those offered by major Canadian Banks.

Deductibles for self-employed workers

Tax Deductible expenses are necessary expenses that contribute to your business’s ability to generate income. These deductions are meant to reduce your taxable income.

The deductions you’re entitled to as a self-employed worker are mentioned in Part 4 of the CRA publication T4002.

Some examples of deductions include:

• Business Operating Expenses
• Office and Home Office Expenses
• Entertainment and Business Travel Expenses
• Business Vehicle Expenses

Federal Income tax brackets

The tax brackets for 2022 were as follows:

Final word

While self-employed can cover many professions, the article is mainly written with tech workers in mind. This is relevant to the current layoffs in this industry and the situation facing thousands of released professionals. Going the self-employed route can help them weather the predicted recession in the Canadian economy. The article should briefly explain how self-employment works and the tax regulations that govern it in 2023.