Filing taxes as a self employed Canadian

2016 data from Statistics Canada tells us that there are roughly 2.8 million Canadians who define themselves as self-employed. If you don’t think that’s a remarkable figure, consider that just 30 years ago, there were just 1.7 million self-employed Canadians — that’s a 64 percent increase in the number of Canadians who work for themselves. In fact, in 2013, the self-employed sector made up 15 percent of the overall labour force.

High self-employment rates are increasingly becoming a norm across the developed world, as the number of full-time jobs decrease, and people are compelled to figure out how to make money on their own.

Unfortunately in Canada, our tax code has barely changed to reflect the prevalence and precarity of the self-employment sector. But there are a couple of things you can do within the existing tax system to make sure you’re not overpaying or underpaying on taxes.

Register for an HST account

If you make more than $30,000 a year as a self-employed individual, you have to register for an HST account. The whole idea behind an HST account is to make sure that you’re paying the government a small portion of the income you’re collecting from providing a service. If you’re a fitness trainer for instance, you should charge your clients your fee plus HST, and keep that HST portion aside for when you file your taxes.

According to personal finance expert, Shannon Lee Martin, you aren’t compelled to obtain an HST number (same thing as registering for an account), if you earn less than $30,000.

“It just might be a smart thing to do from a marketing point of view — if you don’t charge HST, people will know you make less than $30,000. Always think of yourself as a business,” Martin says.

Also remember that as a self-employed individual you’re eligible to get claim money back from the government that you paid in HST, that is, if that particular expense was for the use of your business. .

You can write off your expenses!

This is an absolute must-do. Keep every single receipt for what you consider a “business expense” in order to be able to write your expenses off in your taxes.

So, if you earn $20,000 in a year, and you spent $5,000 on items related to your work (say a train ticket to a different city for a writing assignment), you only have to pay income tax on $15,000. The caveat though is you must have proof that you spent that money for business use. For instance, you can’t have your parents buy you an iPad and write that off as a business expense when the money for the device did not come out of your own bank account. (If you work from home, you also get to write off some of your living expenses — because that washroom is technically a staff washroom now!)

To incorporate, or not to incorporate

The general sentiment out there is that it’s much more lucrative from a tax point of view to incorporate yourself as a business when self-employed. I took this question to Shannon Lee Martin, and her immediate response was “walk before you run.”

“Incorporating is a bigger deal than many people think. There’s a lot of administrative work that goes into it, and you have to be extremely precise in your accounting.”

Corporate profits aren’t taxed as much as income in Canada. But in order to get a tax benefit from incorporating yourself, you will need to make a significant corporate profit — more than what you make in income.

“Say you make a profit of $60,000 from your business. This amount will only be taxed at a corporate rate if you don’t use that $60,000 for your personal, everyday living,” says Martin.

If you do use your $60,000 in profits as a personal income, you won’t get that corporate tax break, which would negate the whole idea of incorporating yourself to begin with.

Put aside money for income taxes

This is as basic as it gets. As a freelancer, your income taxes aren’t paid for you. Say you’re a freelance writer, and you pocket about $2,000 a month in cash from writing gigs. You owe the government a percentage of this two grand — it may be tempting to spend it all, but rest be assured the taxman will come knocking on your door.

The amount you pay in income taxes when self-employed varies depending on your cumulative income for that year, but be sure to put aside roughly 15 to 30 percent of your income in a savings account so you’re not scrounging around for cash when you get an income tax bill from the government. The CRA actually has a pretty good tip sheet for how much income tax you have to pay in a year based on your annual income.

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In conclusion, it’s terribly important, if you’re self-employed to keep track of every single expense. Doing your taxes will become an absolute nightmare if you’re disorganized during the year, and don’t have a system (even just a simple Excel spreadsheet will do) of listing down all your business expenses. Of course, it’s easy to look at a gross amount of income on a cheque and think it all belongs to you, but if you go about it that way, come tax season, you’ll be in for quite a shock.

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