Self Employed in Canada? What You Should Know About Taxes You May Owe

If you are one of the many Canadians now working a side gig your taxes will be rather different this year

Increasingly Canadians are taking advantage of an increase in side job and freelance opportunities to boost their income while retaining the freedom to establish their own work hours and standards. This has been even truer recently as factors like inflation and higher mortgage interest rates have seen incomes that were once perfectly adequate stretched to the limit.

The fact that any additional income is taxable is a drawback for independent contractors that they often don’t give that much thought to, at least not in the beginning. However, taxes apply to sole proprietorships, self-employed individuals, and freelancers alike.

Do I Have To File Taxes If I Work As A Gig Worker In Canada?

No matter how much money you generate from your side job, you will need to report it to the CRA come tax time. According to the various legislations on the books, any intentional failure to report income is considered tax evasion.

Although it is unlikely that the CRA will pursue you for very small sums, it is always better to err on the side of caution and abide by all tax regulations. Even if your income was minimal this past year, you should still learn about how gig workers are taxed as you will presumably earn more money in the future.

Gig workers can invoice under their own names because it is not legally necessary for them to establish a business in order to perform freelance labour. If you would rather use a company name on your invoices, that firm must be registered in the province in which you conduct business. That will also alter your tax situation, so at that time you might want to speak with a tax expert for assistance in making the appropriate decisions.

Plan Ahead of Time and Have a Tax Strategy

Regardless of whether you are self-employed, a freelancer, or a small business taking on gig work, it is imperative to keep account of all your earnings and expenses. Money can be saved by deducting operating costs from gross income when running your business. For instance, an Uber driver can deduct car maintenance costs from the money they make while working as a driver for Uber.

It’s important to be well organized because, if you gather everything at the end of the week, month, or even year, expenses incurred while working on your side hustle could be easily neglected. You should make use of the numerous apps and online tools that are available to you in order to help you preserve a digital record of all your receipts and track your business income and expenses.

For gig workers, keeping their personal and professional income separate is also a good idea. To begin with, it can help your clients perceive your small business as more authentic while also assisting you in keeping better tabs on sales and expenses. By separating the two from the beginning, you may be able to avoid the trouble of having to trawl through your personal spending to find business expenses when tax season approaches.

Additionally, because there is less ambiguity regarding what qualifies as a professional or business deduction vs a personal cost, expenses are simpler to justify to the CRA. It’s strictly forbidden to deduct personal costs from self-employment income while filing taxes.

Make What You Can of Tax Breaks Available to You

Depending on how your company is classified, you might be eligible for a variety of deductions. In order to determine which group you fit into, you might need to perform some basic research.

If you rent out your home on Airbnb, for instance, you can be categorized as a landlord or a hospitality business operator based on the services you offer during your guests’ stays.

If all you did was grant your visitors access to the property, that would make you a landlord, and any money you earned would be regarded as rental revenue. However, you are operating a hospitality business if you provide services like breakfast, laundry, or cleaning. In this case, whether the income generated by your home is categorized as rental income or income from a hospitality business depends on the scope of your services.

Using the same example, you can subtract housing expenses from income derived through Airbnb agreements that is deemed rental income. Deductions for mortgage interest, utilities, property tax, maintenance, and repairs are all acceptable in this case.

To ensure that the sums are equal to the area of your home that is rented out and the period of time that it was rented out, expenses will need to be prorated. You can only deduct 25% of your total eligible expenses, for instance, if you only rented out half of your house for six months out of the year (50 percent for half of the space rented x 50 percent for half of the year).

If all of this information seems daunting, hiring an accountant for tax season is a smart option. If you choose this option, keep all of your bills and receipts, even the personal ones. These will be used by an accountant to determine if they can help lower your tax obligation as well as proof of any claims you do make.

Quarterly Tax Payments and GST/HST Considerations

A freelancer must register for a GST or HST account whenever their annual income exceeds $30,000. To be clear, only income from freelancing counts toward this criterion; income from traditional employment is not factored in.

As a gig worker, you must pay your taxes in quarterly payments if your annual income exceeds $30,000. Once you obtain a GST or HST number, you must begin collecting taxes from your freelance clients. The province where your client’s tax base is located determines the applicable tax rate. For instance, a Toronto business must bill its Montreal client at the 5% GST rate for Quebec.

The GST or HST that you collect must be given to the government. The good news is that you can reduce the amount you owe the government by deducting the GST or HST you paid on business expenses. Again, keeping track of all your invoices and receipts can help you determine the GST or HST that is owed as can sage advice from a tax professional.

It can be very tempting to attempt completing your taxes yourself if this is your first year filing as a freelancer or gig worker. However, it’s also quite simple to make unfortunate errors. The quality of any tax program depends on the data you input. Therefore, the program won’t know if you are mislabeling expenses or forgetting to include paid or unpaid invoices, and it cannot assist you or prod you to change things if you do.

All of this can be avoided if you hire an accounting professional to prepare your taxes. We make sure to ask you enough pertinent questions in the moment to make sure you don’t forget anything. We can even help you plan your future taxes, as well as show you how to make the most of the income increase you should hopefully experience this year or when it might be the right time to transition from freelancer to small business owner.

There has never been a better time to start than now as it is tax season, so get in touch with us right now and let’s get started!