Freelancing in Canada

More and more people are working for themselves these days. However, the financial side of freelancing often remains unclear, even though self-employed individuals, like everyone else, must report their income and pay taxes.

Who are freelancers?

Freelancers are self-employed individuals who work on contract for one or more companies and pay their own taxes. They can be journalists, photographers, consultants, or taxi drivers. According to Statistics Canada, in 2023 there were on average 2.6 million self-employed people in Canada, which is 13.2% of the employed population. Self-employed workers represent a diverse group working in various industries.

Self-employment in Canada

To be self-employed in Canada, you don't need to register a business. You can invoice clients in your own name and receive payments to your personal account. If you own a business, you can still earn part of your income as a self-employed person.

Freelancers must pay taxes. As soon as you start earning additional income, you need to report it to the Canada Revenue Agency (CRA). Taxation in Canada is based on a trust principle: everyone assesses their own income and determines the amount of taxes. Failure to declare income is considered a tax violation with possible consequences, such as fines and frequent audits.

Freelancers need to file a tax return regardless of income, whether it's $500 CAD or $50,000 CAD per year. Since taxes are not automatically withheld from freelancers' income, it's recommended to set aside about 25-30% of earnings for taxes. To avoid large sums due at the end of the year, many freelancers prefer to immediately allocate this money to a separate account.

What is HST/GST and how does it work?

HST (Harmonized Sales Tax) and GST (Goods and Services Tax) are taxes on goods and services applied in Canada. As a freelancer, you're required to register for an HST/GST number if your annual self-employment income exceeds $30,000 CAD. This number allows you to charge tax on your services.

For example, if you're registered for HST/GST and invoice a client for $100 CAD, you need to add the appropriate tax rate (e.g., 13% in Ontario), so the total amount will be $113 CAD. Of this $113 CAD, $13 CAD is HST/GST that you collect on behalf of the tax agency, and this money is not your income. These funds must be regularly remitted to the Canada Revenue Agency.

HST/GST reporting is filed separately from the annual tax return. Depending on your income and CRA conditions, reporting can be quarterly or annual. If you expect your income to exceed the $30,000 CAD threshold in the near future, it's better to register in advance to avoid potential penalties for late registration. Regular record-keeping and a separate business bank account will help you track collected tax and avoid financial confusion.

Tracking income and expenses

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For successful freelancing in Canada, it's important to carefully track your income and expenses. This will help not only prepare tax reports correctly but also better control your cash flow, plan your budget, and avoid potential problems with the tax agency. There are several popular tools that can simplify this process.

• Wave — a free platform that allows freelancers to track income and expenses, issue invoices, manage cash flow, and create reports. Wave is a great solution for those just starting to keep books, as it provides access to basic functions at no cost.
• QuickBooks — one of the most popular accounting tools among freelancers and small businesses. QuickBooks allows you to track expenses, invoice clients, integrate with bank accounts, and automate many financial operations.
• FreshBooks — an easy-to-use platform for invoicing, time tracking, and expense management, specifically designed for freelancers and small businesses. FreshBooks also offers a reporting feature so you can see how your business is doing at any time.
• TurboTax — tax preparation and filing software popular among freelancers. TurboTax offers step-by-step guidance through the tax return process, helps account for all possible tax deductions, and even supports GST/HST tax calculations, which are important for freelancers with income over $30,000 per year.

If the idea of filing taxes on your own causes stress, hiring an accountant can be a wise investment. An accountant will help with deductions, optimize taxes, and ensure that reports are filed correctly. Despite the availability of software for self-filing taxes, many freelancers prefer to trust this process to professionals to avoid mistakes and take advantage of all possible deductions.

What expenses can be deducted?

Freelancers in Canada have the right to deduct reasonable work-related expenses from their income, which helps reduce the taxable amount. This is called "expense deduction," and such expenses reduce your total income from which taxes are calculated.

Here are some common categories of expenses that freelancers can deduct:

• mobile phone and internet bills;
• marketing expenses;
• office supplies;
• travel and professional training expenses.

For those working from home, it's also allowed to deduct a portion of utilities, rent, or property taxes, but only proportional to the area of the home office. For example, if the office occupies 10% of the total apartment area, you can deduct 10% of utility bills, rent, or property taxes.

It's important to remember that expenses not directly related to work cannot be deducted. For example, if you use the internet for both work and personal needs, you can only deduct the portion of the bill that actually relates to work. Therefore, it's useful to keep track of the time or volume of internet.

Immigration for the self-employed to Canada

Previously, Canada offered a special immigration program for self-employed individuals, focused on creative and sports professionals. However, as of April 30, 2024, this program has been suspended, and the acceptance of new applications will not resume until January 2027 at the earliest.

This program allowed people with experience in cultural or sports fields to immigrate to Canada, provided they were ready to make a significant contribution to the country's cultural or sports life. Immigration, Refugees and Citizenship Canada (IRCC) suspended the program to process already submitted applications and optimize processing times.

If you were planning to immigrate to Canada through this program, it's worth considering alternative paths suitable for your experience and qualifications. We recommend consulting with our licensed immigration consultants to choose the appropriate option.