The Independent Contractor's Guide to Canadian Taxes

Being an independent contractor in Canada comes with benefits that traditional jobs don’t typically offer. You can control when you work, how much or little work you want to take on, and where you operate. However, among the many exciting learning curves of becoming an independent contractor, there’s one aspect that nearly everyone dreads—taxes.

Being an independent contractor in Canada comes with benefits that traditional jobs don’t typically offer. You can control when you work, how much or little work you want to take on, and where you operate. However, among the many exciting learning curves of becoming an independent contractor, there’s one aspect that nearly everyone dreads—taxes.

If your head is spinning with confusing tax terms, figuring out when to take advantage of tax deductions, and deadlines for payments, rest easy. We’re here to guide you through everything you need to know about paying taxes as an independent contractor in Canada.

Business Structure

It may come as no surprise to you that filing taxes as an independent contractor isn’t a cut-and-dry situation. For example, an independent contractor registered as a sole proprietor will file taxes differently than an incorporated independent contractor. 

You can file as an independent contractor in Canada under the following business structures:

  • Sole proprietorship
  • Partnership
  • Corporation

If you have a partnership or a sole proprietorship business, you’ll need to record your income and expenses on a T2125 form, which corresponds with your standard T1 personal income tax return. 

For independent contractors who have a corporation, you’ll need to file a separate annual Canadian income tax return, which is generally a more expensive process. Unless you’re an accountant, you should seek the support of a registered CPA (Chartered Professional Accountant) like those we have at Hart Accounting Services

Types of Taxes You Need to Pay

The CRA (Canada Revenue Agency) is responsible for managing tax laws and policies. They also administer benefit programs and tax credits, but most Canadians recognize them most for being tax collectors. As an independent contractor, you’ll need to pay two main types of tax.

Income Tax

There are two forms of income tax—federal taxes and provincial or territorial taxes. For federal tax, all Canadian residents pay the same taxes based on their income. However, provincial and territorial taxes vary significantly in their number of tax brackets and the minimum and maximum tax percentages.

Therefore, if you’re looking to become an independent contractor and are open to living in a different region of Canada, you could potentially save a lot of money by moving to a territory or province with lower tax rates.

The majority of this article will focus on calculating and paying income tax as an independent contractor, so we’ll be sharing more details on income tax shortly.

Canada Pension Plan Tax

Although there are many benefits of being an independent contractor, one area where employees have it better is with the Canada Pension Plan (CPP). All individuals who make more than $3,500 every year must contribute to the CPP, regardless of if they’re self-employed or work for an employer. The difference, however, is with how much you pay.

As of 2021, the CPP contribution is 10.9%. If you work for an employer, they legally must cover half this amount for you (5.45%).

However, as an independent contractor, you must pay the complete 10.9% on your own. The good news? The CRA caps the maximum CPP amount for all individuals at $6,333. So, if you have a higher income, you won’t have to contribute to CPP after hitting the $6,333 threshold. 

When you’re calculating your estimated quarterly taxes, which we’ll talk about in more detail soon, you can either include your CPP with your quarterly payments or wait until the end of the tax year to make your contribution. In either case, as long as you pay your taxes by the annual April 30th deadline, the CRA won’t charge you CPP penalties.

Optional: Employment Insurance

As an independent contractor in Canada, you don’t have to pay into Employment Insurance (EI). However, if you choose to do so, you’ll gain benefits such as sick leave, maternal leave, and help with taking care of sick children.

How to Calculate Your Federal Taxes

The CRA operates its federal taxes on a bracket system. Each bracket lists a range of income, and you’ll need to pay the given tax rate for each one. We’ll show you an example of how this works shortly, but first, the chart below details the federal Canadian tax brackets for 2021.

Tax Rate

Income Tax Bracket

15%

Up to $49,020

20.5%

$49,020 – $98,040

26%

$98,040 – $151,978

29%

$151,978 – $216,511

33%

$216,511 and over

Federal Tax Example

Let’s say you make $100,000 annually. Of that amount, the CRA will tax you accordingly:

  • $49,020 is taxed at a 15% rate
  • $49,020 is taxed at a 20.5% rate ($98,040 – $49,020 = $49,020)
  • $1,960 is taxed at a 26% rate ($100,000 – $98,040 = $1,960)

As you can see from the example, making $100,000 per year doesn’t mean that you have to pay 26% on the full amount. Instead, tax brackets are in place to ensure that you still make money despite tax rate increases.

When calculating the costs of your federal independent contractor taxes, you’ll likely have business expenses and income deductions that can help you lower your net income. Ideally, you should aim to pay taxes based on your gross income (income before expenses), especially when you’re first starting. 

If you happen to overpay your taxes, don’t worry—the CRA will refund you. Alternatively, if you underpay your taxes, they’ll let you know, too, along with the possibility of interest and penalty charges.

In addition to calculating and saving for federal taxes, you’ll need to do the same for provincial and territorial taxes. We’ll look at those costs next.

Federal Taxes vs. Provincial and Territorial Taxes

Assuming that you’re a Canadian resident living outside of Quebec, you’ll calculate your provincial or territorial tax the same way you do your federal tax. The difference is that unlike federal tax, which has a set percentage based on income regardless of where you live, provincial and territorial taxes vary depending on your location. 

When filing your taxes, you’ll calculate your provincial or territorial taxes by using Form 428. However, it’s important to know what tax rates you can expect before filing so that you can stash away money for your provincial or territorial taxes.

Keep in mind that each province breaks down its tax rates differently between these percentages. Some offer as few as three tax percentages total, while British Columbia, for example, offers seven unique tax brackets.

If you’re a Quebec resident, click here for instructions on how to go about calculating your tax. For residents of all other provinces and territories, the chart below shows the minimum and maximum tax rates for 2021. 

Province or Territory

Minimum Tax

Maximum Tax

Newfoundland and Labrador

8.7% on the first $38,081

18.3% on any amount over $190,363

Prince Edward Island

9.8% on the first $31,984

16.7% on any amount over $63,969

Nova Scotia

8.79% on the first $29,590

21% on any amount over $150,000

New Brunswick

9.68% on the first $43,835

20.3% on any amount over $162,383

Ontario

5.05% on the first $45,142

13.16% on any amount over 220,000

Manitoba

10.8% on the first $33,723

17.4% on any amount over $72,885

Saskatchewan

10.5% on the first $45,677

14.5% on any amount over $130,506

Alberta

10% on the first $131,220

15% on any amount over $314,928

British Columbia

5.06% on the first $42,184

20.5% on any amount over $222,420

Yukon

6.4% on the first $49,020

15% on any amount over $500,000

Northwest Territories

5.9% on the first $44,396

14.05% on any amount over $144,362

Nunavut

4% on the first $46,740

11.5% on any amount over $151,978

 

For details on the range of tax brackets within these minimum and maximum amounts for every Canadian province and territory, visit the CRA’s website.  

Taking Advantage of Tax Deductions

Tax deductions, which are commonly called write-offs, offer independent contractors the ability to remove expenses from their taxable income. One of the requirements for being classified as an independent contractor is that you’re responsible for purchasing all materials, software, etc., in order to run your contracting business.

When preparing your tax deductions, you’ll need to list them on your T2125 form. We’ll show you examples of the items that you can legally write off, but remember that they must always apply to your independent contractor work with the purpose of helping you maintain your business or increase profit. In fact, you’ll need to show proof that you purchased the items via sending the CRA receipts, invoices, or other documents confirming your purchases.

Below are examples of categories that you can use to write off your independent contractor business expenses. 

Operation: Any items that are at the core of running your business. Examples include rental space, office supplies, payroll, repairs, and utilities. If you work from home, you can deduct your home office space. That said, you must be cautious when writing off a portion of your home, so it’s best to contact an experienced CPA for guidance, such as those we have at Hart Accounting Services.

Travel: If your contract work involves travel, you can deduct transportation expenses, meals, accommodations, and parking fees, among other costs. If you own a vehicle that you use for both work and business, you can write off a portion of it as you would with your home office space.

Marketing: The cost of websites, software that’ll help you run your business, and any other advertising or marketing expense that you have all qualify for tax deductions.

Bad Debt: If you have a client that owes you money and they don’t pay, you can deduct the amount they owe you (called “bad debt”) from your taxes. It’s not fair for you to pay taxes on the money you didn’t receive, but you still have to show proof of it as receivable income. 

Health Insurance: Private health insurance premiums are tax-deductible for independent contractors.

Professional Development: Whether you need to pay fees to keep up with professional certifications related to your contract work or incur expenses for seminars and other activities relating to professional development, these are all write-off eligible.

Bank Fees: Assuming you have a bank account specifically for your independent contract work, you can write off interest and bank charges. You can also deduct the interest you pay on borrowed money for your business.

The CRA is well aware that people try to write off personal expenses as business expenses. Therefore, if you have a business expense that may seem like a personal expense, consider writing details about the business exchange on the back of the receipt. For example, if you take a client out to lunch, write down the client’s name and the topics you discussed.

Step-by-step Guide on Filing Your Taxes

When you’re preparing to file your taxes as an independent contractor, you have two options:

  • Do it by yourself
  • Hire an accountant 

At Hart Accounting Services, we’re experts in independent contractor tax laws. Our goal is to make tax season easy and stress-free for you while helping you minimize the amount of taxes you have to pay by ensuring that you maximize your deductions.

However, if you prefer to file taxes on your own, below are the steps you’ll need to follow if you’re filing as a contractor under sole proprietorship or a partnership.

Step 1: Fill out Form T1, which is called the General Income Tax and Benefit Return. You’ll list your independent contractor income on Line 104.

As an independent contractor, the company that hires you for your services will fill out a T4A slip and send it to the CRA. They’ll also send a copy of it to you. Make sure to keep track of your T4A slips, as it’ll make your life easier when you go to file taxes. It also ensures the reported numbers that the CRA receives match the numbers you send them.

Step 2: Fill out Form T2125. That form is specific to your independent contractor business, and it’s where you’ll indicate all of your deductible expenses.

Step 3: Submit your paperwork electronically or by mail. Ideally, you should file your taxes via the CRA’s NETFILE system. It’s the quickest way to file your taxes, and you’ll be able to confirm that your form arrived.

Alternatively, you can fill out a paper application and mail it to the CRA. You can find a list of the CRA’s printable paper forms here.

Independent Contractor Tax Deadlines

When you first file your taxes as an independent contractor, you can wait until the end of the tax year (April) and make your payments then. However, after that first year, you’ll have to pay quarterly estimated taxes. Make sure to mark it on your calendar—you’ll get fined if you don’t pay.

Estimated Tax Payment Deadlines for 2021:

  • March 15th
  • June 15th
  • September 15th 
  • December 15th

The good news is that paying your quarterly independent contractor taxes is easy. Each quarter, you’ll receive a notice from the CRA telling you how much money you need to pay based on the income you made the year before.

That said, the amount of quarterly taxes you pay is ultimately up to you and your careful calculations. For example, if you find yourself making less money than the year before, feel free to lower your quarterly payments.

Alternatively, if you’re making more money, it’s best to increase your payments to avoid paying a large lump sum at the end of the fiscal year. 

Regardless of your income situation, make sure to calculate your estimated tax payments based on the tax brackets we showed you here instead of blindly guessing a number. Nevertheless, it’s hard to hit the exact number until it comes time to file, especially when considering deductions. Therefore, if you underpay, you’ll need to send the CRA the difference. If you overpay, they’ll refund you at tax time.

As a final note on this subject, the CRA will calculate its new quarterly tax payments that they estimate for you each year. Just remember—the number is an estimate, so run your own calculations to avoid over or underpaying a substantial amount.

Canadian Tax Payment Methods

Now that you understand when and how much you have to pay in taxes as an independent contractor, you might be wondering—how do you pay?

You have the following payment options to choose from:

  • My Payment (the CRA’s online system that connects with your bank access card)
  • Online banking
  • Pre-authorized debit
  • Credit card
  • In-person at a bank or Canada Post outlet

Don’t panic if you don’t receive a receipt right away from the CRA, as they can take a while to send one to you. In the meantime, you can check your online account to verify whether your payment arrived.

Tax Mistakes to Avoid

Now that you have a grasp of how to file your taxes as an independent contractor, below are three mistakes you should avoid. 

Not Saving Money for Taxes

When you work for an employer, they automatically deduct taxes from your paycheck. However, when you work for yourself, you are responsible for managing your own tax payments, whether that be in a lump sum at the end of April or in installments.

As you earn income, calculate the amount of taxes you’ll owe based on the information we shared here and use the Canada Revenue Agency’s federal and provincial tax rates as a guide. 

That said, it’s best to cushion your calculations by basing your tax estimations off your gross income (income before you take deductions). By doing so, you could create a refund for yourself at tax time that many traditional employees get when they file their taxes.

Lack of Knowledge About Write-Offs

A significant benefit to being an independent contractor in Canada is that you can write off business expenses, which helps lower your taxes.

If you work from home and, assuming you have a set area that you use strictly for work, you can write off a portion of your rent and utility costs. To avoid any legal issues, you’ll need to ensure that the space you’re writing off is equal to the ratio of that area when compared to the rest of your home’s square footage.

Many independent contractors pay more taxes they need to because they either don’t understand or don’t get creative with the types of things they can write off. For example, if your contract work requires you to be in shape, you could write off your gym membership. Alternatively, independent contractor writers can write off items such as Microsoft Office subscriptions and Grammarly software.

Although writing off as many expenses as possible is valuable to lower your taxes, you mustn’t exaggerate. If the Canadian authorities audit you and find that you claimed questionable expenditures concerning your business, you could find yourself paying hefty fines.

Claiming to be an Independent Contractor When You’re Not

Sometimes an independent contractor status is cut and dry. Other times, there’s a grey area. For example, if you do contract work with a company, but they supply you with a laptop, software, or any other physical items that you need to complete the job, you can’t file as an independent contractor.

To help you determine whether you can claim independent contractor status under Canadian law, below are the criteria that you’ll need to meet:

  • Provide all of your own tools to perform your work
  • Control or near-total control over your schedule and the number of hours you work
  • Agree to shoulder the risk of monetary loss upon creating a contract with a new client

Tax Support for Independent Contractors

We hope this information gave you a foundation for knowing how to file your taxes. However, from big businesses to small businesses to independent contractors, we understand that the tax process is intimidating. 

For this reason, Hart Accounting Services is ready to help you with your tax filing needs. We’ll recommend how much you should pay in quarterly estimated taxes and make sure you comply with all CRA regulations so you don’t have to worry about unexpected fines.

Taxes don’t wait, so neither should you. Contact us today and learn about the outstanding service we offer to our independent contractor clients.

Call Now: (647) 360-7172