Canada’s gig economy has grown since the pandemic. Being your boss, deciding your working hours, what work you do, how you do it, and who you work with, gives you a sense of control and power. But with great power comes great responsibility, such as searching for work, maintaining your equipment, and accepting the consequences if things don’t work out. It can take you time to navigate through taxes for independent contractors, but here is something to get you started.

Are You an Independent Contractor as Per The CRA?

The first challenge in doing taxes is deciphering your eligibility and which rules apply to you. The most common mistake is misclassifying income and expenses. The Canada Revenue Agency (CRA) has clear definitions for most cases.

To start from the very beginning, determine whether the CRA considers you an independent contractor. For this, you need to pass three tests:

• Control: You are an independent contractor if you control your fees, working hours, and work methodology. You do not have anyone overseeing your work. Instead, you can be a supervisor and hire an employee or subcontractor.
• Own your equipment: You are an independent contractor if you own the equipment, software, and subscriptions required to perform your work. For instance, a photographer owns the camera, lens, and photo correction software. You can deduct the equipment cost from your income by depreciating it over its useful life.
• Risk of loss: You are an independent contractor if you bear the risk of loss due to damage to the equipment, loss of the client, or reduced income. You can also claim this loss to get tax benefits.

You can be both an independent contractor on weekends and an employee on weekdays. For instance, a software developer at a large company may also work as a pianist in a band. In this case, income from music will be taxed as self-employed income.

Mistake to Avoid: Ensure you meet all three tests before you file taxes as an independent contractor. If you work on a contractual basis but the client provides the equipment, you are not an independent contractor, and you may wrongly calculate your taxes, leading to penalties and interest.

How Taxes Work for Independent Contractors

When you earn money as an independent contractor, you have to manage every aspect of your income, including taxes. The CRA will tax you on multiple fronts.

Income tax: You pay federal and provincial tax on the net profit earned after deducting the expenses incurred to do the job. These expenses include utility bills, software subscriptions, travel costs, fuel, vehicle expenses, marketing and advertising costs, health insurance, bank fees, and any other miscellaneous costs. The federal tax is the same throughout Canada, but provincial taxes differ. If your work is flexible, you may want to consider relocating to a province with lower tax rates.

Mistakes to Avoid: Business expenses are more complicated, as certain expenses have multiple conditions and eligibility requirements. And if you are deducting your personal expenses as business expenses, you could face penalties and interest on the actual tax liability if CRA finds out. Maintain detailed records of each expense, including receipts, for at least six years to substantiate your expenses to the CRA.

Goods and Services Tax/Harmonized Sales Tax (GST/HST): You pay GST when your revenue exceeds $30,000 in four consecutive quarters or a single quarter. You first need to register with the GST, for which you need a business number (BN). Once you obtain the GST number, you must charge it to your clients and clearly show the bifurcation on the invoice. You can deduct the GST paid to purchase goods or services for work performed from the GST collected from clients and remit the net amount to the CRA.

For instance, you collected $1,000 in GST and paid $100 in GST on a laptop. You can deduct $100 and remit $900 GST to the CRA. You must verify the applicable GST rate for your business and prepare tax-compliant invoices. Failure to file and pay GST will attract tax penalties. It is better to seek professional help to avoid receiving letters from the CRA demanding GST.

Canada Pension Plan deduction: If you are earning more than $3,500 in annual income, whether from salary or business, you must contribute to the CPP. Independent contractors must contribute 11.9% of their pensionable earnings (2025 income above $3,500 and up to $71,300) towards CPP. If you earn more than $71,300, you have to contribute 8% up to $81,200 in your 2025 income.You can remit your CPP contribution to the CRA on a quarterly or annual basis. Thankfully, the CPP contribution is capped at $8,860.2 for 2025. Failure to remit your CPP contribution to the CRA will attract interest and penalties.

Advanced tax: Income tax becomes due as soon as you earn it. Your employer deducted the tax and CPP from your salary and remitted it to the CRA. Now that you are your own boss, you must calculate your tax and remit it to the CRA every quarter by March 15, June 15, September 15, and December 15.

In the first year, you are not required to pay advance tax. However, from the second year onwards, you should pay advance tax to avoid paying interest on unpaid tax. The CRA calculates your advance tax based on your previous year’s tax return and sends you a notice.

Mistake to Avoid: While you can pay the tax amount mentioned in the CRA notice, it is better to calculate your tax based on the income earned so far, as independent contractors have fluctuating income. It is better to pay more tax than less because less tax accumulates interest, and more tax brings a refund.

How to Calculate Your Tax Liability

Paying advance tax and CPP, and accumulating invoices and business receipts throughout the year, makes tax season easier.

The first step is to accumulate bank and credit card statements, business receipts from clients, investment records, and other relevant income documents. Only take the income before GST. (Income tax and GST are two separate things and need to be filed separately.)

Next, deduct all expenses incurred to complete the job. After these deductions, you will arrive at the taxable income on which you calculate the federal tax.   

Taxable income threshold for 2025 Federal Tax rate

Taxable income threshold for 2025	Federal Tax rate
$57,375 or less, plus	15%
over $57,375 up to $114,750, plus	20.50%
over $114,750 up to $177,882, plus	26%
over $177,882 up to $253,414, plus	29%
over $253,414	33%

If your taxable income after all deductions is $100,000, you will calculate 15% on $57,375 and 20.5% on $42,625, which comes to $17,344. Similarly, you calculate provincial income tax.

Filing Taxes

To file income tax, you have to fill out Form T1 General Income Tax and Benefit Return and list your independent contractor income on Line 104. Your clients will provide a T4A slip listing the details of the business payments made during the year to you and the CRA. Ensure the details on the T4A slip and your income tax returns match.

Next, fill out Form T2125, wherein you list your deductible expenses.

You can file your returns using the CRA’s NETFILE system. Paying taxes and filing them are different. Ensure you pay the taxes by April 30 and file your returns by June 15. Remember, it is better to pay a little extra tax than pay less. You can get the refund after the CRA assesses your returns and sends you the notice of assessment.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You File Your Taxes

All this may be a little overwhelming. You can hire a professional accountant to help you set up the process, explain to you what to claim and what not to, and file your tax returns on time. At Edelkoort Smethurst CPAs LLP, our accountants and bookkeepers provide services that include tax filing and bookkeeping. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting and bookkeeping expertise, contact us online or by telephone at 905-517-2297.