Being an independent contractor can have significant tax benefits in Canada. In many cases, you can deduct home office costs, mileage to travel to your client’s place of business and other expenses.
Employed vs. Self-employed
Before we get into the details about independent contractor taxes, it’s important to explain the difference between being employed and self-employed. If you are employed with a company, you will not be eligible for independent contractor tax deductions.
What’s the definition of self-employment?
You should have control over your own schedule and hours. Ideally, you should have more than one client so that it does not appear that you are employed for a single company. You should provide your own equipment for the work, such as the computer at your home office or maintenance tools.
You should have a contract that specifies that you are a contractor and not an employee. However, you need to meet the requirements of a contractor. In the past, the Canada Revenue Agency has ruled that a person is an employee – even though they had a contract specifying that they were a contractor.
In addition, be aware that employees have certain rights that contractors may not have. Employees must be given notice that their employment is being terminated or be paid severance in lieu of notice. On the other hand, contractors may see their contracts ended without notice. If it’s important that you receive advance warning about your work being cut off, be sure to include this in your contract.
Tax advantages for self-employed contractors
Now that we’ve determined that you are self-employed, what are the tax advantages? Here are some of the common independent contractor tax deductions:
- Home office: If you have a home office that you use for your business, you can deduct a portion of your rent/mortgage interest, utilities and other expenses. The Canada Revenue Agency has specific rules on how to calculate this deduction so be sure check them.
- Vehicle costs: If you travel to your client’s place of business for meetings or to perform work, you can deduct a share of your vehicle costs. This is one of the tax advantages for self-employed contractors – expensing commuting costs! You should keep a log of your business travel so that you can calculate the number of kilometres driven for business and personal reasons. Be sure to keep receipts for all of your vehicle expenses, including gas, maintenance, insurance and registration. At the end of the year, you can calculate the share that you can expense based on the kilometres driven.
- Professional fees: If you hire a lawyer to review your contracts or an accountant to file your tax return, you can claim these expenses.
- Equipment: If you work from your home office, you can claim depreciation costs for your computer, printer and other equipment. If you are a tradesman, you can expense your tools and supplies.
Filing taxes as an independent contractor in Canada
As an independent contractor, you include all of your revenue as income on your personal tax return every April. However, as indicated above, you claim independent contractor tax deductions to reduce your taxable income and your tax bill!
Tax mistakes for self-employed contractors
Contractors often aren’t familiar with all of the tax rules and either miss deductions or try to write off expenses that are not allowed. Here are some of the common independent contractor tax errors:
- Not knowing what you can and can’t write off: As indicated above, you can write off a range of expenses, including home office, vehicle and equipment. If you work in a specialized field and are unsure about some of your expenses, check with an accountant. It will be worth an hour or two of their professional advice if you can come up with additional independent contractor tax deductions.
- Not setting money aside for owed taxes: When you are self-employed, your client will not deduct any income tax from your payment like they would if you were an employee. So at the end of the year, you will include your self-employment earnings on your tax return. You may owe money to the CRA. Therefore, it’s highly recommended to set aside some money each month for taxes so that you are not hit by a big bill at the end of the year. You’ll be glad you did.
- Not being sure of employment status: You should have a contract that spells out that you are a contractor. And follow all of the rules to make sure that you maintain your self-employed classification.
Independent contractor taxes
As an independent contractor, you will be required to charge your clients sales tax. Depending on your province, this will be HST or GST plus provincial sales tax. Including sales tax on your invoice is required by law and helps to maintain your status as an independent contractor.
Only very small businesses with sales of less than $30,000 per year are exempt from having to collect sales taxes.
Here’s the good news: When you file your sales tax return, you can claim an input tax credit. This means that if you purchased a computer, office supplies or other material, you can deduct the tax paid from the amount you have to remit to the government.
In summary
When considering whether you are employed vs. self-employed, it’s important to make sure that you meet the Canada Revenue Agency requirements. Simply because you want to be self-employed, doesn’t mean that you are! Once you have determined that you are an independent contractor, be sure to specify this in any client contracts. In addition, contracts should state any remuneration that you would receive if the customer decides to terminate your contract. Finally, as a contractor be sure to take advantages of any independent contractor tax breaks that are available.
