Here’s what newly self-employed Canadians need to know about income tax deadlines, side-hustle tax deductions and more.
Photo by Andrea Piacquadio from Pexels
During the pandemic, many Canadians have launched a business or started doing freelance, gig or contract work—and some are dealing with business income tax reporting and self-employment tax deductions for the first time.
Nathalie Hatter is one of those with a new side hustle. A corporate travel executive who planned company getaways, she watched as her career stalled in March 2020. “As soon as Canada advised Canadians not to travel, that’s when companies had to cancel their programs,” says Hatter, who lives in Oakville, Ont.
Hatter has elderly parents, so she needed a new job that would be socially distanced and flexible—like dogwalking. She ordered business cards and handed them out to dog owners in her neighbourhood. Soon, Hatter was relying on her earlier chef’s training to bake artisanal dog treats, which she sold at weekend farmers’ markets. Pivot Dog Biscuits was born. “I was selling out every weekend,” she says.
Now, two years on, Hatter has returned to working as a travel consultant, with a very successful dog treat business on the side. She’s currently gearing up to pay taxes by the federal tax deadline of April 30. (It falls on a Sunday this year, so the Canada Revenue Agency says “on or before May 1” will be considered on time.) The filing deadline for self-employed people (and their spouses) is June 15, but any taxes owing are still due April 30 (or May 1, in 2023). “I like to get my taxes in ahead of the curve,” Hatter says.
Having a side business can bring in a lot of extra income. It’s critical to track your business expenses and keep the receipts, so you can claim tax deductions. More considerations if you’re newly self-employed: Your extra income could push you into a higher tax bracket, lead the Canada Revenue Agency (CRA) to ask that you pay taxes in installments and/or require you to register for and start charging GST/HST (more on that below).
These changes might be more than you bargained for when you launched your side venture, but planning ahead, maximizing deductions and reducing your overall income can ensure you maximize your profits while meeting your tax obligations. Here’s how to make that happen.
Absolutely, unless your side hustle brings in just a couple hundred dollars a year (so it’s more of a hobby than a business). Beyond that, any business income is taxable, says Dean Paley, a Chartered Professional Accountant in Burlington, Ont.
To find out how much tax you owe, plug your income into an online tax calculator—Paley recommends Ernst and Young’s. Then add about 10% for Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions. If your net self-employment income plus pensionable employment income is over $3,500, you must begin contributing to CPP/QPP—and, unlike salaried employees, you must pay both the employer and employee portions for CPP.
Sole proprietors—individuals who own a business that is not incorporated—have to report all business income on their personal income taxes using Form T2125, Statement of Business or Professional Activities. Even if the business fails to make a profit, you have to declare a loss, says Paley. “A loss gets deducted against any other income you made in that year,” he says.
If your side hustle generates sales of $30,000 or more (before expenses) within a calendar quarter or over four consecutive quarters (not necessarily a calendar year), you will have to register for a GST/HST number, as you are no longer a “small supplier” according to the CRA. It’s a good idea to get your number before you reach $30,000, or you may find yourself paying GST/HST out of pocket or facing fines. And if you wait, you’ll have to start charging your existing clients or customers 5% to 15% tax (depending on their province) once you do hit $30,000, so you may as well get them in the habit of paying that extra cost early on.
As a self-employed person, you can claim a wide variety of expenses related to your business. Nathalie Hatter, for example, can deduct costs related to her home office, car, payment processing system, advertising and baking supplies.
Larger purchases such as a computer, office furniture or a vehicle used for the business are considered “depreciable property.” You can’t deduct these costs entirely in the tax year you bought them, but over a number of years. Each deduction is called a capital cost allowance (CCA). For her business, Hatter can deduct a portion of the equipment she purchased last year: a new commercial mixer and steel racks.
“The business can claim any expenses used to generate that business income,” says Paley.
Staying on top of your expenses year-round will help you manage cash flow and make tax time easier.
Hatter uses an Excel spreadsheet to track her business costs. She also keeps all of her receipts and sets aside 25% to 30% of her income for tax payments, which experts advise. But she admits that with increased sales, she needs a more sophisticated accounting system. She’s looking to upgrade to an app that tracks her inventory, expenses and payments. Some options include QuickBooks, Square Invoices, Freshbooks, Momenteo and Kashoo.
Tax software programs like TurboTax and Wealthsimple Tax can also help remind you about and carry over unclaimed expenses from one tax year to the next. They can also alert you to home ownership and eco-related credits you may not be aware of.
If you’re unclear on anything, the CRA has a lot of tax information you can access. And if you want professional help, consider hiring an accountant or a bookkeeper—and remember, their fees are tax-deductible.
Lowering your taxable income comes down to solid bookkeeping and some simple investment strategies, says Paley. There are also a few creative ways you may not know about.
One strategy is to split your income with a family member. If your partner or another family member works for your business and falls into a lower income bracket, you can deduct the amount you pay them as an expense. Your employed family members will pay tax on their own personal income, which is taxed at a much lower rate.
Another option is to make donations to registered charities. The federal Charitable Donations Tax Credit can total as much as 33% of the amount you donated.
But a common route is investing as much as possible in a registered retirement savings plan (RRSP), up to your annual contribution limit. “For most people, an RRSP is the main one to invest in,” says Paley. That’s because an RRSP contribution can result in a significant tax reduction or even a tax refund. Plus, RRSP investments grow tax-free. (If you’ve maxed out your RRSP, you can contribute to a tax-free savings account (TFSA), but you won’t receive a tax refund for that.)
What’s most important is to stay on top of tax payments to avoid audits and fines, says Paley. “The government has gone after certain groups,” he says. “And penalties are not that fun.”
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This is so helpful, thanks! But I’m wondering…if you make less than $30k/year and are not registered for GST/HST, can you still claim your business expenses? Thanks!
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
What about executor fees what about expenses occurred after receiving the income fees