Becoming a Self-Employed
In Canada, a self employed person is defined in the Income Tax Act as:
A - An independent working person who contracts their services to other individuals or parties.
B - A sole business owner who directs all the activities of a business.
C - A partner who has jointly pooled resources with at least one other person to run a business with the intention of making profit.
If you fall into one of these categories, then along with the other 2.7 self employed Canadians, the Canadian Revenue Agency (CRA) will consider you self employed for tax purposes and you will be required to make certain information available to the authorities.
Self Employed Worker or Employee?
Working out whether you are self employed or employed in Canada is important as the status you have will directly impact on any benefits you are due under Employment Insurance, what taxes are due under the Income Tax Act and how you are treated under the Canada Pension Plan. Factors that will indicate that you are self employed include what level of control you have over your work activities, whether you provide your own tools, what level of financial risk you are exposed to and what is set out in any written contracts. In the province of Quebec, the laws differ slightly from those in other Canadian territories.
Tax Deductible Expenses in Canada
In Canada there are a number of expenses which the self employed can legitimately deduct from their earnings before they have to pay any tax. These include; supplies, rent, up to 50% of the cost of meals and entertainment, travel, telephone costs and vehicle expenses.
If your office is at home, you can deduct a percentage of your home costs including; electricity, heat, maintenance costs, insurance, property taxes and mortgage interest. To claim these expenses you simply divide the number of rooms in the house used for business with the number of rooms you have and use this as a percentage to claim against your costs. It's important to keep receipts for anything you claim as an expense. This will be especially helpful if you are selected for a government audit at some point in the future.
If you have received an income through self employment in Canada, then you must file the information with the CRA before their filing deadline. The return for 2012 has to be returned before the 30th April 2013, and the return for 2013 must be filed by the 30th April 2014. It is very important to meet the filing deadlines as failure to do so could result in your access to certain credits such as GST or child tax benefits being delayed.
How to Get a Tax Return
If you need to file a tax return for earnings as a self employed person, there are a number of ways in which the document can be accessed. Perhaps the simplest is to go the CRA website and download a General Income Tax and Benefit Return, or you can complete an online order form for a hard copy to be sent to you. You can also order the form to be mailed to you by calling the CRA's order number. Alternatively, you can pick up the form in person from any Service Canada Office or postal outlet that you visit. If your local office is out of stock, check back regularly as they are restocked often.
The filing can be completed online or by post to the appropriate CRA office for your province. The CRA suggest that you should keep all documents relating to your tax return for 6 years after it is filed.
You can make payments on any tax you owe through online or telephone banking services, by completing a Form T7DR at your bank, or by sending a cheque or money order. The tax must be paid by the filing date of April 30th of the following year. If you owe more than 3,000 dollars in tax, you will be required to make payments by instalments. For residents of Quebec, the limit is lower at 1,800 dollars.
Instalments must be paid on the 15th of March, June, September and December that year, or the next working day if these dates fall on a weekend. Payments made by post are only considered paid on the day they are received by the CRA.
The tax you will pay on your self employed income depends on how much you earn. For 2013, if you earn up to 43,561 dollars, you pay tax at 22%. For over 87,123 dollars, it is 26%, and for amounts over 135,054 dollars, it is 29%. You can earn 11,038 dollars before you are required to pay any tax at all. Full details of these rates of taxation are shown on the CRA website.
Canada Pension Plan and Self Employment
The contributions you are required to make to the Canada Pension Plan will be based on your net income. (i.e. your income after allowable expenses have been deducted). If you overpay in any one year, you can claim back any over contributions you have made. In 2012, the percentage contribution rate was 9.9% up to a maximum of 4,613 dollars per year. This is calculated and returned along with your tax calculations on your annual return. Only if you earn fewer than 3,500 dollars from your self employment will you be exempt from making contributions to the Pension Plan.
Getting Help with Self Employment Taxes and Regulations
Becoming self employed can often feel quite overwhelming when you start looking at all the regulations which you must comply with. However, there is plenty of help available in the form of training guides from the CRA website and guides produced by the Government of Canada. Also, once you have finally adjusted to thinking of yourself as self employed and gone so far as to run through the process, you will find that all the paperwork will come as second nature, leaving you free to focus on what's important to you - the day to day running of your business.