Tax Advice

7 Things You Need to Know When Filing Freelance Taxes (Canada)

A straightforward guide to help freelancers, gig workers, and small business owners master their taxes and prepare for tax season with confidence.

Death and taxes, amirite? Nothing in life is as certain as these two things, but when it comes to freelance taxes in Canada, there’s plenty you can do to make tax time less daunting.

If you’re earning self-employment income or freelance income, the Canada Revenue Agency (CRA) requires you to file a tax return, even if you’re just getting started. Failing to report self-employment revenue or other business income could result in hefty fines for undeclared taxable income—something the CRA is actively on the lookout for.

Here’s the good news: Filing your taxes as a self-employed individual doesn’t have to be overwhelming. By tracking your eligible expenses like vehicle expenses, accounting fees, or even mortgage interest, you can reduce your taxable income and potentially lower your tax bill. Using tools like tax software or consulting with a tax professional can simplify the process and help you uncover deductions you might have missed.

Ready to dive in? This guide will walk you through everything you need to know about tax filing, including how to claim your business expenses, calculate Canada Pension Plan (CPP) contributions, and ensure you’re prepared for your next tax season. Let’s get started!

1. Should You Register as a Business?

When starting out as a freelancer or small business owner, it’s easy to put off tasks like business registration, accounting, or opening a business bank account while you’re serving customers and making it rain 💰💰💰. But registering your freelance business is something you might not want to leave for “later.”

The first step is deciding whether to operate under your own name or a business name. If you plan to work under your personal name and don’t need separate legal protections for your personal assets, you may not need to register. However, if you’ve got a great business name in mind and want to establish legal boundaries between your personal finances and your freelance income, registering as a business could be a smart move. It can also open doors to business credit, help you claim eligible expenses, and make tax filing easier.

2. Open a Business Bank Account

Once you’ve sorted out your business registration, the next step is to open a business bank account. Here’s why it’s essential for freelancers and self-employed individuals:

• Separate personal and business transactions: A business bank account keeps your business expenses and personal spending separate, which helps avoid confusion when it’s time to file your income tax return. It also simplifies delegating signing authority if your business grows.
• Build business credit: A small business bank account is the foundation for establishing business credit, which is useful for applying for business credit cards, loans, or even lines of credit in your business’ name.
• Look professional: A business bank account signals to clients, vendors, and partners that you’re serious about your professional activities. It positions you as a legitimate business owner while building your business reputation.
• Save time and money during tax season: Having a dedicated account for your business income and expenses makes it easier for your bookkeeper or tax professional to track your finances and claim deductions like vehicle expenses, accounting fees, or even mortgage interest. Here’s more information about buying more time.

Even with a business bank account, some income and expenses won’t flow directly through it, so tracking everything is key. Using accounting software like FreshBooks can make life easier by helping you manage self-employment income, snap photos of receipts for expenses, and track your taxable income year-round. Plus, it’s a great way to ensure nothing gets missed at tax time.

By taking these early steps—registering your business and setting up a dedicated account—you’ll be better prepared to manage your freelance taxes, claim eligible deductions, and grow your business with confidence.

3. Budget for Taxes as a Freelancer

Keeping tight books allows you to estimate how much tax you might have to pay on your business income tax return. Thinking about your tax bill on a month-to-month basis will help you avoid the shock of a massive payout when you file your freelance taxes. The rule of thumb is to set aside 25% of your income as you collect it, to have it ready and available for tax season.

Note that this money accumulates inside your business if you keep personal and business finances separate. You will also have to file Form T2125 Statement of Business or Professional Activities with your personal tax return, as your freelance income is reported separately from other types of income.

4. Understand Your Tax Return

As mentioned, you’ll need to complete Form T2125, which is where you list, in detail, your business income and business expenses.

Working with a tax professional or considering paying taxes year-round should result in good financial records. And you guessed it, filing taxes will be easier!

The Canada Revenue Agency provides online tax filing services, so you can e-file your income tax return entirely online. And if it’s your 2nd or 3rd time around, you might know that you can save a bunch of time by auto-filling your income tax return using last year’s financials.

Don’t throw away your spreadsheet and receipts when you’ve finished completing the tax forms because you may need to send them to the CRA.

5. Calculate Taxable Income

Taxable income is the simple calculation of your net income—the total amount of freelance income your business earned in the last year, minus all of your deductible expenses from the same year. Expenses are tax deductions, which means it’s worthwhile keeping track of every deductible expense year-round. They lower the amount of taxable income you earn, which reduces your income tax payment.

So, which expenses are deductible during tax season?

Deductible Expenses

Here’s a short list of some things that can be used to lower income taxes, but for a more comprehensive breakdown, check out this article: Your Complete Guide to Reimbursable Expenses.

• office supplies
• marketing (printing flyers, paying for online ads)
• hardware (laptop, a microphone for client calls)
• vehicle expenses and travel costs
• mobile phone and internet bills
• meals and entertainment
• training and professional development

What Is the Home Office Deduction?

As a freelancer working in Canada, you can deduct the costs of working from home and running a home office. This doesn’t mean that you can claim every expense your house incurs, but there are certain things you should definitely claim.

Home office deductions are based on the size of your home office. The more of your home you use for your business, the bigger a percentage you can use as a home office deduction. For example, if your home office takes up 15% of the square footage in your home, you can claim 15% of the bills pertaining to your home as deductible expenses. However, if you own your own home, think twice, or talk to your tax professional before claiming more than 40% for your home office. Deductible bills for your home office include:

• water bills
• heating bills
• gas bills
• home insurance
• rent
• mortgage
• property taxes
• repairs and maintenance
• phone bills
• internet bills

6. Maximize Your RRSP or Pension Allowance

Guess what? As a freelancer, you have to take care of yourself, and that includes when you stop working and retire. Sure, you have access to the Canada Pension Plan, but the Canada Pension Plan isn’t enough to live on once you stop working. Being self-employed means you’re not in a union with a pension set up for you or a company with an RRSP program. It’s 100% your responsibility to take part of your self-employment income every month and put some aside for retirement. Whether that takes shape as an RRSP or another type of long-term investment, it’s all on you to take care of it. One thing to note about RRSP contributions is they are tax-deductible expenses: They lower your taxable business income, so you pay less income tax.

7. Don’t Forget to Pay Your GST/HST

How much do you know about GST/HST? GST/HST (goods and services tax/harmonized sales tax) are the federal and provincial taxes and change depending on the province you live in. GST is levied on goods and services purchased in Canada, and HST is a consumption tax levied in provinces that opted to harmonize their provincial sales tax (PST) with the federal GST. HST combines both taxes into a single value-added sales tax.

Whether you’re a registered business or not, freelancers may have to collect GST/HST on the services and products they sell and then pay that tax to the government.

It sounds like a pain in the butt, but what many people don’t know starting out is that you can also claim “input tax credits” on GST/HST that you paid on goods and services you need to run your business. Basically, you deduct the GST/HST you pay from the final amount of GST/HST that you need to pay to the government. Filing a GST/HST return is an important part of your income taxes.

Think You’re GST/HST Exempt?

In Canada, if your gross business revenue is less than $30,000 over four consecutive calendar quarters or in a single tax year, you’re considered a small supplier. Small suppliers are exempt from registering, charging, and remitting GST/HST. This threshold applies to self-employed individuals, freelancers, and small business owners earning self-employment income or business income.

Gross revenue refers to your total earnings before deducting business expenses, like vehicle expenses, accounting fees, or capital cost allowance. If your revenue stays under the $30,000 mark, you can skip registering for the GST/HST. However, once you exceed this threshold—even by a single dollar—you must register and start charging GST/HST.

How to Register For GST/HST

If your income crosses the $30,000 threshold, you’re required to register for GST/HST within 29 days. You can complete the process in several ways:

• Online: The Canada Revenue Agency (CRA) website allows quick and convenient registration.
• By phone: You can call the CRA to register directly.
• By mail or fax: Download the GST/HST registration form from the CRA website and send it in.

The CRA provides step-by-step guides for each method, making the process straightforward. Once registered, you’ll need to collect GST/HST on all eligible sales, regardless of whether your revenue dips below $30,000 in the future.

What if You Voluntarily Register?

Even if you’re under the $30,000 threshold, you may choose to voluntarily register for GST/HST. This allows you to claim input tax credits (ITCs) for GST/HST paid on eligible expenses, such as property taxes, mortgage interest, training costs, or equipment leasing costs. ITCs can reduce your overall tax bill, making voluntary registration a savvy move for some freelancers and gig workers.

However, once you register, you’re required to collect and remit GST/HST on all taxable sales and file regular GST/HST returns, even if your revenue remains below $30,000.

Stay Compliant

Failing to register for GST/HST when your revenue exceeds $30,000 can result in significant penalties and interest charges. Keeping accurate records of your freelance income, expenses, and taxable sales will help ensure you stay compliant with CRA requirements.

For more information, check out the CRA’s GST/HST guide or consult a tax professional to see how GST/HST registration applies to your freelance work or business activities.

How Do You Calculate GST/HST?

Collecting and calculating GST/HST is easier than you might think. Once you collect GST/HST, it’s important to calculate it at the correct rate. GST/HST is calculated based on the delivery address (specifically the province) your customer or client is in. It is not based on the province you live or work in. That means if you have clients in a few different provinces, you will have to calculate GST/HST individually for each one. Consult the CRA website to get the correct rate.

GST/HST only applies within Canada, so if you’re a freelance designer who works for clients in the U.S., you won’t need to charge them GST/HST.

Filing a GST/HST Return for Tax Season

You registered for GST/HST. You collected all GST/HST and calculated proper GST/HST rates for each province you worked in. Now it’s time to file a GST/HST return. Filing GST/HST can be done monthly, quarterly, or annually. When you register, the CRA will tell you how often you need to file. You also need to remit the GST/HST payment, which is usually done when you file your GST/HST returns. However, if you file annually, you may be required to make quarterly installments.

You’ll need all invoices for a specific period to complete your GST/HST return, and you have to remit GST/HST for every invoice you submit, even if it hasn’t yet been paid to you. Check out the CRA website for details about filing your GST/HST return.

Filing Income Taxes as a Freelancer vs. Using a Tax Professional

We get it—being a freelance business owner often means juggling multiple responsibilities, and it’s tempting to handle everything yourself to make sure it’s done right. While you can’t avoid including your freelance income and self-employment revenue on your taxes, you don’t have to do it all alone. If tax filing isn’t your forte, consider outsourcing this task to a tax professional or using tax software to simplify the process.

Hiring a bookkeeper or accountant can be a smart move. For a small portion of your business income, a professional can prepare your income tax return, calculate your taxable income, claim all your eligible expenses, and even help you secure your tax refund. The best part? The accounting fees you pay to these experts qualify as a business expense, meaning you can deduct their costs to lower your overall income tax—a win-win for your finances.

That said, even if you hire help, it’s still essential to track your self-employment income and expenses incurred throughout the year. Using accounting software like FreshBooks can make it easier to manage vehicle expenses, property taxes, and other costs tied to your business or professional activities. Plus, staying organized year-round ensures you won’t miss out on valuable deductions like capital cost allowance, mortgage interest, or input tax credits for GST/HST paid on purchases.

Ultimately, whether you decide to file your freelance taxes independently or hire a professional, the key to a stress-free tax season is preparation. By keeping your records in order, knowing what qualifies as a business expense, and planning for required Canada Pension Plan (CPP) contributions, you’ll be well-equipped to manage your self-employed taxes and keep more of what you earn.

So, don’t stress about tax time—embrace the tools and resources available to help you navigate freelancer taxes in Canada with confidence.

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This post was updated in December 2024.