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While there are many benefits to being self-employed such as being your own boss and setting your own hours there are also some downsides. One, in particular, is filing your taxes as a self-employed person. While you simply get a T4 slip when you are an employee, you don’t get that same luxury as a self-employed individual. Most self-employed individuals will use a T2125, among other forms, to do their taxes. As a result, doing your self employed taxes in Canada can be a little bit more complicated and difficult to deal with. 

How To File Your Taxes As A Self-Employed Individual?

To file your taxes, you can use NETFILE or a tax software to file online. You can also use a tax specialist to file your tax return through the CRA’s EFILE service. If you file online, you can expect your tax refund (if applicable) faster. If you file a paper tax return, it could take as long as 10 to 12 weeks for it to be processed.  

To file your income taxes as a self-employed person, you’ll need three main forms:

Form T1 

As noted earlier, as a sole proprietor your business income is treated like a personal income, which means you’ll need to report it on Form T1, General Income Tax and Benefit Return. Your self-employed income is listed on Line 104. This form is also where personal deductions are reported.

Form T2125

In addition to reporting your income on Form T1, you’ll also need to file a business return using Form T2125, Statement of Business or Professional Activities. This lets the CRA know about your business activities throughout the tax year. This form is also used to list your deductible expenses for your business. 

T4A Slips

If you work as an independent contractor, your clients will complete and submit Form T4A (Statement of Pension, Retirement, Annuity, and Other Income) to the CRA when they file their taxes. This form allows your clients to report how much they paid you. Each client you work with will also send you a T4A, which will tell you how much you earned from each client.

Your clients have until the end of February in the following year to send you your copy. But even if they don’t, you’ll still be obligated to ensure this information is recorded so that it can be accurately reported on your Form T1. 

Self-Employed Taxes Canada: Filing Deadlines

Self-employed Canadians have an extra month to file their taxes for the 2022 tax year compared to employees. While individuals have until May 2, 2023 to file their taxes, the deadline for self-employed Canadians is June 15, 2023.

How To Calculate Your Self-Employed Taxes Canada

The tax rate you pay is the same for all your business earnings and personal income as a self-employed individual. The tax rate you are charged depends on your income level, as outlined in the chart below:

Federal Tax RateFederal Income Tax Brackets
15%Applicable to taxable income up to $53,359
20.5%Applicable to taxable income over $53,359 up to $106,717
26%Applicable to taxable income over $106,717 up to $165,430
29%Applicable to taxable income over $165,430 up to $235,675
33%Applicable to taxable income over $235,675

That said, you’ll need to make Canadian Pension Plan (CPP) contributions. If you so choose, you can also make Employment Insurance (EI) contributions, though this is optional.

In total, your tax obligations would include income tax and CPP (as well as optional EI, if applicable).

How Much Money Do You Need To Put Aside For CPP Contributions? 

The tax rate for CPP contributions is 9.9%. Half of this amount is typically withheld from salaried employees’ paycheques, and employers pay the remaining half. But for self-employed individuals, you must pay the full amount, since you are essentially your own employer.

That said, this 9.9% rate applies only to a portion of your income, between $3,500 to $55,300. That means if you earn less than $3,500, you don’t need to contribute to CPP, and if you earn more than $55,300, you’d stop deducting CPP contributions when you reach that amount.  

Do you live in Quebec? Find out about your QPP contributions.

What Can You Do If You Can’t Pay Your Taxes?

Request Taxpayer Relief

If you’ve gone through serious financial hardships or life events, you may be able to have any late penalties and interest charges waived for not paying your taxes. This will give you some flexibility and time to pay your taxes.

Make A Payment Arrangement With The CRA

If you’re unable to cover the cost of your taxes, you can ask the CRA to create a payment schedule for you. This will allow you to pay your taxes in installments instead of one lump sum payment. Depending on your circumstances, you may be eligible to pay your taxes over 5 years (plus tax and fees).

Use A Personal Loan

If you’re unable to make an agreement with the CRA, consider taking out a personal loan. You can not only spread the costs of your tax payments over a few months to several years but, you can consolidate other debts with it. Consolidating high-interest debt into a low-interest personal loan can save you a lot of interest over time.

To get the best rates your overall financial health should be good, this includes your income, debt and credit score. If you’re unsure of your credit score, be sure to check it and improve it, if it’s low. You can easily check your credit score for free with numerous platforms such as Compare Hub.

Do Self-Employed Individuals Have To Make EI Contributions?

As mentioned earlier, EI contributions are optional for self-employed Canadians. However, there are certain perks to EI contributions that you may want to consider before opting out, such as the following:

  • Maternal leave or Parental leave
  • Adoptive leave
  • Sick leave
  • Benefits of caring for sick children

Expenses You Can Deduct On Your Self-Employed Taxes In Canada

As a self-employed person, there are certain deductions you can make to lower your taxable income amount and pay fewer taxes overall, such as the following.

Business Expenses 

Money spent to operate your business is considered a business expense, which can be claimed as a deduction on your tax return. The following are some business expenses you can claim:

  • Start-up costs (such as interest on funds borrowed to start your business)
  • Advertising costs
  • Delivery/shipping fees
  • Professional fees (such as legal, tax, or accounting fees)
  • Office supplies
  • Communication equipment costs (such as telephone, mobile phone, and internet fees for your business)
  • Utility fees

Find out if a business loan is a tax-deductible.

Vehicle Expenses 

If you use your vehicle exclusively for business purposes, you can deduct all expenses associated with the vehicle, such as the following:

  • Insurance
  • Gas
  • Maintenance and repair
  • Parking 

If you use the vehicle for both business and personal reasons, you can deduct a percentage of these expenses based on how frequently the vehicle is used for business purposes. For instance, if you drive your car 20,000 km a year and 10,000 km of that is used for your business, you can deduct 50% of your vehicle expenses from your income.

Office And Home Office Expenses

If you lease office space, you can deduct the cost of rent on your tax return. If you work out of your home, you can deduct your home office expenses as well.

In the case of a home office, there are two claim methods you can choose from:

  • Temporary flat rate method – Due to the COVID-19 pandemic, you can claim $2 (up to $500) for each day you worked from home for the tax year 2021 and 2022. 
  • Detailed method – With this method, you’d need to calculate the size of your home office based on a percentage of the square footage of your entire home. For instance, if your home is 2,000 square feet and your home office is 150 square feet, your office is roughly 7.5% of your home. That means you can deduct 7.5% of your mortgage interest or lease, utilities, insurance, repairs, and other related fees on your income tax return.

Self-Employed Taxes Canada FAQs

How much money should I put aside for my taxes?

Ideally, you should put aside anywhere from 25% to 30% of your earnings from your business so you have enough to cover your taxes.

How will the Covid-19 benefits affect my taxes?

If you received any one of the government’s benefits during the pandemic — such as the Canada Emergency Response Benefit (CERB),  Canada Recovery Benefit (CRB), Canada Emergency Student Benefit (CESB), Canada Recovery Sickness Benefit (CRSB), or Canada Recovery Caregiving Benefit (CRCB) — you’ll need to report this amount when you file your taxes, as they are considered a form of income. 

How long should I keep my receipts? 

Once you are done preparing taxes in a given year, you may want to throw away all of your old expenses receipts, bills, and invoices, but that is not a good idea. The CRA can have an audit go up to 6 years in the past so it is a good idea to keep paperwork for at least that long to ensure you are safe in the unfortunate case of an audit. If you are audited and don’t have the receipts to prove your claims or expenses deducted on your return, you could be penalized. 

Should I incorporate my business?

When it comes to incorporating, there are two reasons why people do it. One is to protect yourself and limit liability, while the other is for tax purposes. Of course, everyone who is a freelancer or runs a business doesn’t need to incorporate, but the choice is yours. If you make a lot as a company (and thus are in a higher tax bracket), incorporating can save you lots of money. This is because corporate profits are taxed at around 20 percent overall, which is much less than you would be paying in personal income tax if you are making a lot of money. 

Do I need to charge gst/hst? 

In addition to claiming your business income, you will eventually need to start charging GST/HST once your revenue once it passes $30,000 a year. Before you can do this, you must, of course, register for a GST/HST number which can be done easily and quickly on the CRA website. You will file this return once a year, normally when you send in your income tax return.

Bottom Line On Self-Employed Taxes Canada

Handling your taxes as a self-employed individual can be difficult and it is easy to sometimes miss certain deductions or other important parts of your return. Also, if done incorrectly, your return can get you in trouble as well. Instead of spending hours struggling through your taxes and still potentially missing things, it could be wise to hire the help of a professional.

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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