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What self-employed contractors need to know about taxes

Last updated: May. 3, 2023 

Are you an employee or self-employed contractor?

There’s a big difference, and understanding the differences between the two can have a significant impact on your income tax.

If you’re working as a self-employed, independent contractor or thinking of becoming one, here are some things you should know.

What is a self-employed contractor in Canada?

Self-employed contractors set their own terms and decide how and when to perform the required work. You don’t have anyone overseeing your activities and you’re free to work when, and for whom you choose, and may provide your services to different payers at the same time.

Being a self-employed contractor can also make it easier for those you work for. Because you’re not on their payroll, they don’t have to deduct taxes, make EI and CPP contributions, or follow employment standards legislation.

All that freedom comes with risks. When you’re a contract employee, there is little to no job security. You have no guarantee of steady income and may either make a profit or incur a loss. If you lose a job or are terminated by the company that contracted you, you are going to be left without severance.

Should you become unemployed, you won’t be able to collect EI because you didn’t pay into it.

Because the work is contracted, you do not receive benefits, sick pay, or holiday pay. Unless this was negotiated into a contract. For the most part though, this is why independent contractors charge a higher rate than employees are paid.

Read more on the differences between being an employee and a self-employed contractor

I’m a self-employed contractor. What do I need to file my tax return?

If you’re a sole-proprietor, self-employed or a certain type of partnership*, you must fill out your T1 General, that’s your standard personal income tax return.

You must also complete a separate T2125 “Statement of Business or Professional Activities”. This is where you specify:

  • business and professional income earned
  • Your cost of goods sold and your gross profit
  • List your business expenses and capital cost allowance to calculate your taxable net business income or loss

If you’re in farming or fishing, you’ll have to fill out industry specific versions of this form (T2042 or T2121).

GST remittances

If you earn more than $30,000 a year (or four consecutive quarters or a single quarter) you also need to charge and collect GST/HST.

You then need to file GST/HST returns to the CRA. When you register for the GST/HST, the CRA will usually assign an annual reporting period. However, you may choose take advantage of optional reporting periods as well.

If you do not have a GST number yet, it’s easy to obtain one. Before you register for a GST/HST account, you will first need to obtain a business number. This will act as your business ID for all CRA dealings.

Incorporated? You may already have a business number and a corporate income tax account.

To set up a business number, a GST/HST account, and any other account you may need (for example, a payroll deduction account), you can visit the CRA’s online Business Registration at your convenience.

Keeping up with your tax obligations can be challenging. If you unsure of what to do, or when you need to complete certain filings, speak to a professional tax provider.

Sub-contractor payments and paperwork

It can take a lot of time for self-employed workers and independent contractors to navigate Canada’s complex tax legislation. It also takes time for businesses to understand the tax essentials of self-employed contractors.

A good example is understanding what needs to get reported on the T5018 information return. If you’re an individual, partnership, trust, or corporation and more than 50% of the business’ income comes from construction, and you make payments to subcontractors for construction services, you need to report the amount paid or credited.

Payments to independent contractors and subcontractors can be reported on either a calendar-year or fiscal-year basis, and are due 6 months after the reporting period.

A T5018 slip must be filed for any payment over $500. One T5018 slip is filed for each independent contractor and a summary slip is also reported to the CRA.

Failing to file a T5018 will result in penalties, which can get costly. The CRA issues late filing penalties based on the number of T5018 slips filed late and the number of days late. The late filing penalty continues to accrue interest until paid in full.

To report payments to subcontractors for construction work, including any GST/HST and provincial/territorial sales tax, you must:

  • Complete the T5018 slip
  • Complete the Statement of Contract Payments, or
  • Provide a listing of all payments made to subcontractors, on a line-by-line basis in column format with all the information required on the slip.

The listing needs to have all the summary information, including the total payments to each of the subcontractors, the total number of subcontractors who received these payments, and the signature of an authorized person.

This applies even if you are a Canadian resident paying another Canadian resident for construction services performed outside of Canada.

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Keep your records organized

The law requires you to keep records of all your transactions to be able to support your income and expense claims. You must keep daily records of your income and expenses, along with vouchers and receipts.

If you don’t maintain records and are audited by the CRA, you could face hefty fines and penalties.

Keep your records for at least six years after your last Notice of Assessment, which is as far back as the CRA will ask to see them in the event of an audit. You can keep the physical receipts or digital copies.

RELATED: 7 simple ways to organize your receipts.

What can a self-employed contractor write off on their taxes?

On your T2125, you report your business income and the expenses you can claim to reduce your taxable income. These expenses include but are not limited to:

  • Accounting, bookkeeping and tax preparation fees
  • Bad debts
  • Business advertising
  • Depreciation expense (Capital Cost Allowance)
  • Equipment rentals
  • Meals and entertainment
  • Office supplies, photocopying, printing
  • Vehicle expenses
  • Supplies and tools

Filing your taxes with the Canada Revenue Agency for employed individuals is pretty straightforward. The employer deducts income tax, employment insurance and other required deductions from the paycheque and a a T4 is issued annually to support the individual filing of the tax return.

As a self-employed contractor, it’s up to you keep track of your income and deductions to calculate the taxes you will owe to the Canada Revenue Agency each year.

Work from home expenses

If your business is run primarily through a home office, you can deduct a percentage of costs related to the business.

According to the Canada Revenue Agency, if your home office takes up 10% of the total floor space, you can deduct 10% of home maintenance costs, including home insurance, utilities and cleaning materials. You can also claim depreciation expenses on fixed assets.

You can claim this expense as a tax deduction if the work space in your home is the principal place of business, or you use the space only to earn business income and meet regularly with customers in the work space.

There are also some tax credits that you may be eligible to claim. Read our blog to learn more about tax credits for small business owners.

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To help you get started, we created the Ultimate Guide to Tax Planning and Preparation for the Canadian Farmer, Contractor, and Small Business Owner, a comprehensive resource that provides deeper insight into tax planning and preparation.

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