Warren Orlans is an experienced taxation and financial services writer with 10-years' experience working in the Canada Revenue Agency's collections department, learning, teaching, and helping taxpayers. Warren has an MBA from Lansbridge University and a Spec Hols Degree from York University.
The good news is that filing as self-employed is not complicated. All that’s required is the reporting of your self-employed or business income, on form T2125, the Statement of Business or Professional Activities, in addition to the reporting of your income on your T1 General.
You can reduce the amount of business income that you earned because the CRA allows the self employed the opportunity to deduct expenses from that income.
The other important differences for self-employed Canadians includes the filing deadline for tax returns, and the requirement for paying into the Canada Pension Plan (CPP).Easy, fast, and even fun. Wealthsimple Tax is CRA-certified tax software that you’ll actually want to use. And you only pay what you want, no catch — get started.
Business income vs employment income
Business income includes money earned from a:
an undertaking of any kind, an adventure or concern in the nature of trade, or any other activity you carry on with the intention to earn a profit, provided there is evidence to support that intention
Employment income includes money earned from:
salary received from an employer
Self-employment income reported on Form T4A
When you work for an employer, you receive a T4 slip at tax time. This slip tells you how much you earned throughout the year and provides you with the numbers you need to fill out your T1 return.
When you’re self-employed or earning business income, you might receive a Form T4A — the Statement of Pension, Retirement, Annuity, and Other Income — from your clients by the end of February the following year. T4A slips include the total dollar amount for each job.
Calculating gross and net self-employment income using Form T2125
As a self-employed person, you must fill out Form T2125, the Statement of Business or Professional Activities. This form helps you calculate your gross income, which is the total amount of money you earned during the year. The T2125 also provides self-employed Canadians with the opportunity to deduct allowable expenses from your gross income to lower your taxable income so you pay less in income taxes.
When you’re self-employed, these deductions can have a big impact on your bottom line by reducing the amount of tax that you have to pay.
On Form T2125, expect to provide the following details:
your source(s) of business income
description of the business, including a description of your products and services, and the industry that your business operates in
income that comes from internet business activities, including, but not limited to affiliate sales, ad traffic revenue and referral fees. The CRA requires the URL of those sites to be provided as well.
goods and Services Tax (GST)/Harmonized Sales Tax (HST) you paid and received
expenses incurred while attempting to earn a profit
After completing Form T2125, use the net and gross income figures to complete your T1 return.
You must include all your income when you calculate it for tax purposes. If you fail to report all your income, you may have to pay a penalty of 10% of the amount you failed to report after your first omission. Repeated failures to report the income can result in a doubling of that penalty to 20%. With repeated failures, that penalty can continue to double.
How much to set aside for taxes
There is no accurate way to determine the amount of money to set aside during the year so that you can pay your taxes in full upon filing. There are, however, some key factors to include when determining how to stay on top of your tax obligations.
The general rule is to set aside between 25% and 30% of the income earned for taxes. That range makes up the need to pay for the following taxes:
Federal income tax
Provincial income tax
GST/HST (if registered)
This number will change as your income fluctuates and as tax rates change.
Self-employed tax rates
Federal tax rates for 2022 are: 15% on the first $50,197 of taxable income 20.5% on taxable income between $50,197 and $100,392 26% on taxable income between $100,392 and $155,625 29% on taxable income between $155,625 and $221,708 33% on any taxable income over $221,708
Provincial tax rates can be found on the CRA website, here.
Contributing to the Canadian Pension Plan
Canadians between the age of 18 to 70 who have net self-employment income and pensionable employment income greater than $3,500, have to contribute to the Canada Pension Plan (CPP). Regular workers contribute a particular percentage of their wages above $3,500, up to an annual maximum, while their employer contributes an equal amount. These rates change each year so be aware of current rates by checking the CRA website, here.
Self-employed Canadians, however, do not have employers deducting CPP from their pay, matching that amount and remitting it to the CRA, so they are responsible for both their portion of CPP and what would have been their employer’s contribution.
For 2023, self-employed Canadians must prepare to pay to the CRA 10.5% of their income, up to a maximum of $7,508.90.
It is very important to claim all of your business-related expenses on your T2125 in order to reduce the amount of business income you owe. In addition to lowering your tax payable, you’re also putting together the most accurate picture of your business’s overall health. Some of the most common expenses for self-employed Canadians include:
Advertising: business cards, flyers, online marketing, etc.
Vehicle expenses: gas, maintenance, insurance, lease payments, repairs, cleanings, oil changes and registration fees may all be deductible if you use your vehicle for the purpose of earning business income. It’s important to have your vehicle's mileage figure at the beginning of the year, and at the end of the year, as well as a travel log book which corresponds to a calendar.
Bank fees (a commonly overlooked deduction)
Office supplies: pens, paper, paper clips, printer ink, etc.
Inventory: if you purchase products to re-sell, the cost of those products is a deduction.
Business-use-of-home expenses: if you operate your business out of your home, you may be able to deduct a portion of your household expenses at tax time. This includes a portion of your rent and utilities. Gather your bills and receipts for power, heat, rent, security, hydro, etc. You are only able to deduct the percentage of these expenses that correspond to the percentage of your house that you use solely for earning business income.
Cell phone: if you use your phone for business, a portion of that expense can be claimed as well. Have your cell phone bills on hand.
For the complete list of eligible business expenses, visit the CRA’s section on Business Expenses.
How self-employed individuals can file tax online
If you’re new to the world of self-employment, preparing your first tax return may seem like a challenge. Fortunately, there are many online tax products that make the self-employed tax filing process simple. These products automatically pull any tax slips that have been issued to you in your name directly from the CRA website, and walk you through your return, including the T2125 reporting of business income, and finally through the fun part: the business-related expenses which reduce your business income owing.
To file online, you have to be a resident of Canada, and you can’t have filed bankruptcy in the current tax year or the previous year. To be able to automatically pull your tax slips, you have to be registered with CRA’s MyAccount.
Your personal income tax return is due to the CRA, with full payment, by midnight on April 30th (provided the 30th is not a Saturday, Sunday, or statutory holiday, otherwise it becomes the next business day).
Once you earn self-employment income, your tax return is due to the CRA by June 15 of the following year (unless June 15 falls on a weekend or holiday), however any taxes owing to the CRA are still due by April 30. As a result, it’s important to have your return ready to be filed by April 30 if you suspect you might owe taxes to the CRA.
If the CRA determines that you must pay your taxes in installments, they will notify you. Installment payments are due on March 15, June 15, September 15, and December 15 every year. If the due date is on a weekend or public holiday, it moves to the following business day. Due to the seasonal nature of their business, farmers and fishers only have to make one installment payment by the last day of the year.
Relevant CRA forms for self-employed individuals
Self-employed business income is reported on the form T2125, Statement of Business or Professional Activities. This form can help you calculate your gross income and your net income (loss), which are required when you complete your T1, General income and benefit return.
In order to maximize your deductions and minimize your taxes owing, it’s imperative that you keep all your receipts.
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