Filing Self Employed Taxes in Canada: What You Need To Know

If you’re a self employed worker, you’ll need to complete your own tax filing, and make sure you’re correctly paying any taxes owed. This can be a complex and time consuming exercise, especially if you’re new to it. Use this guide to get an overview of the taxes you need to think about, and take professional advice to make sure your tax return is correctly completed and settled in good time.

A quick note before we get started. Tax is complex, and tax rates can change each year. The information here is intended as a guide only - check out the full, up to date, details online on the Canadian government website** and/or seek help from a professional.**

This article will cover:

• What is the tax rate in Canada for self employed people
• What are possible deductions
• What can you claim on your taxes
• How do taxes work when you have clients abroad

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What is the tax rate in Canada for self employed people?

The tax you’ll pay depends on the income you receive, with different tax brackets applying to different income levels. This produces a progressive tax system - in effect meaning lower earners pay a lower percentage overall on their income compared to higher earners.

Here are the 2020 federal tax rates¹:

• 15% on the first $48,535 of taxable income, +
• 20.5% on the next $48,534 of taxable income (on taxable income over 48,535 up to $97,069), +
• 26% on the next $53,404 of taxable income (on taxable income over $97,069 up to $150,473), +
• 29% on the next $63,895 of taxable income (on taxable income over 150,473 up to $214,368), +
• 33% of taxable income over $214,368

In addition to federal taxes, there are provincial and territorial taxes to pay. In most cases, these are calculated in a similar way to federal taxes. For example, here are the tax rates for Ontario and Alberta¹.

Ontario:

• 5.05% on the first $44,740 of taxable income, +
• 9.15% on the next $44,742, +
• 11.16% on the next $60,518, +
• 12.16% on the next $70,000, +
• 13.16 % on the amount over $220,000

Alberta:

• 10% on the first $131,220 of taxable income, +
• 12% on the next $26,244, +
• 13% on the next $52,488, +
• 14% on the next $104,976, +
• 15% on the amount over $314,928

It’s worth noting that taxes in Quebec are calculated differently. If you’re living in Quebec, make sure you investigate the rules for this area before you get started.

As well as personal taxes, you’ll need to register for GST/HST if your sales exceed $30,000 in a calendar quarter². You may need to collect and pay GST/HST on sales you make of products which are eligible for these additional taxes. The rates and rules may vary depending on your location, and the location of your customer, so be sure to get the up to date information for your business³.

What are possible tax deductions in Canada, when you’re self employed?

You may be able to deduct some of the operating expenses of your business from your income, before calculating your taxes. There’s a long list of the types of deductions which may be allowable, depending on your business type, and the specifics of your spending. You can get the full detail, and some guidance, online on the Canadian government website - or you can take professional advice if you’re still unsure.

To give you an idea, here are a few of the more common deductions you may consider when filing your self-employed taxes⁴:

• Business start up costs
• Business taxes, fees and licenses
• Transport and fuel costs, or necessary business travel
• Some household expenses if you work from home, or office rent if not
• Interest and bank charges
• Office expenses such as postage or printing ink
• Legal and professional fees

What can you claim on your taxes, as a self employed worker in Canada?

Although there are many different types of deductions you may be able to apply when filing your taxes, there are also strict rules about what can and can not be counted. To give an example, you may be able to deduct the cost of some office expenses, but while consumable goods like pens and paper could be deductible, different rules apply to things like calculators and office chairs. These items are considered capital costs, and as such these costs can not be deducted as office expenses⁴.

If you make a mistake when calculating tax and under-report the amount you need to pay, you may find you need to pay a fine or penalty. It’s not worth risking, so make sure you’re clear on the deduction rules, or take professional advice when you file your self-employed taxes.

How does it work with Canadian taxes when you have clients abroad?

What taxes you’ll need to pay - and where - can vary depending on things like your tax residency, and the type of work you do.

In broad terms, if you’re a tax resident in Canada, you’ll pay most of your taxes in Canada. So, for example, if you’re a freelance worker and take on a project with a company based in the US, most likely you’ll declare and pay tax on your income from that project to the Canadian Revenue Authority. You may need to complete a W8-BEN form, which is submitted to the US tax authorities, to ensure you don’t pay double taxes on this income⁵.

However, if you’re selling items online to a customer in some areas of the US, you may find you need to collect and remit sales tax to the state authorities. If you make sales through a platform like Etsy, the platform may handle this for you⁶. However, if you’re selling direct, you’ll need to understand the rules for the areas and countries in which you operate.

If you work with overseas clients and want a better way to receive payments in foreign currencies, like: US dollars, euros, British pounds and Australian or New Zealand dollars, take a look at the multi-currency account from Wise. With Wise Business you can receive payments in these currencies fee free. Hold the currencies in your account, or switch back to Canadian using the mid-market exchange rate to withdraw back to your regular bank account. You’ll only ever pay a low, transparent fee, and may save compared to using your normal bank for foreign currency transactions.

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How much money should you set aside for taxes as a self employed person in Canada?

To avoid a shock when it comes to filing your taxes, it makes sense to set aside some money from each payment you receive throughout the year.

The exact amount you need to withhold will depend on the deductible expenses you incur, and the turnover of your business, as well as the total tax you’ll need to pay which can vary depending on your location. However, as a rule of thumb, online experts suggest holding at least 15%, to a maximum of 25% of all income to ensure you can pay your taxes with ease⁷.

Is there a tax calculator for self employed people in Canada?

You can find a table which helps you calculate your federal income tax, online on the Canadian government website, or within the document you use for filing¹.

There are also other calculators available online which allow you to estimate your full federal and provincial taxes, by entering details of your income. These resources may be free to use⁸, or come at a cost as part of an accounting package⁹. However, it’s worth noting that these tools aren’t official government resources, so should not be relied upon. The free resources may also not suit self employed workers, so make sure you find one which meets your needs.

How long do you have to keep your tax records in Canada?

You must hold all of your records, including evidence of deductions and bank statements, for 6 years¹⁰. The CRA may request a review within that time, and will require these documents to confirm you have correctly filed and paid your taxes.

As a self employed worker, doing your taxes is unlikely to be the most enjoyable part of your work. However, by keeping on top of the tax you need to pay throughout the year, and retaining all of your documentation as evidence, you shouldn’t have any nasty surprises when it comes to filing and paying your self-employed taxes. Get the advice and professional support you need to make sure you get your taxes right, and save time and money for your business.

Find out more about Wise Business

Sources used for this article:
1.CRA - Canadian income tax rates for individuals
2.CRA - When to register for and start charging the GST/HST
3.CRA - How place of supply affects GST/HST rates
4.CRA - Business expenses
5.Blog - Tax Tips for Canadians Who Work for U.S. Companies
6.Etsy - Marketplace Sales Tax: Where Etsy Collects and Remits State Sales Tax
7.Blog - Taxes 101: How to file if you’re self employed
8.Tax calculator
9.Tax calculator
10.CRA - How long should you keep your income tax records?
*All sources checked on June 19, 2020