Guide to Independent Contractor Taxes in Canada- The Gig Economy

tax implications for gig workers in Canada

The rapidly expanding gig economy in Canada provides countless opportunities to work from the comfort of your home and perform other “gig jobs.” Independent contractors, freelancers, and gig workers are reshaping the traditional employment landscape, offering their skills and services on a project basis. Many Canadians are capitalizing on a boom in freelance positions and side hustle gigs to earn some extra income while enjoying the flexibility to set their own work guidelines and standards. However, among the many exciting learning curves of becoming an independent contractor, there’s one aspect that nearly everyone dreads—taxes.

Do Canadian Gig Workers Have to Pay Taxes?

Many Canadians who rely on the gig economy for extra income or do gig jobs as their main source of income mistakenly believe that they do not have to pay taxes. However, a gig worker’s income is not tax-free. Regardless of the amount earned from your side hustle, you are required to report it to the CRA when tax season comes around. Failure to report income can be considered tax evasion and may result in serious penalties. In Canada, the tax filing deadline for self-employed people is June 15. If you have any questions about the gig economy and Canadian taxes, you can direct them to a knowledgeable tax accountant in Toronto.

What Are a Gig Worker’s Tax Obligations in Canada?

Whether you call yourself an influencer, freelancer, content creator, gig worker, free agent, or independent contractor, in the eyes of the Canada Revenue Agency ("CRA"), you are self-employed. Regardless of how many years you have been in business, you are required to use the self-employment form (Form T2125, Statement of Business, or Professional Activities) when filing your personal taxes. At this point, you must declare all the income you invoiced for during the tax year and list any write-offs or deductibles you wish to claim.

One thing to know about tax obligations for gig workers is that there are strict requirements for keeping extensive records about the services performed and the income earned. Since these gig platforms do not withhold taxes from a freelancer’s payments, it is a freelancer’s responsibility to pay taxes to the CRA.

Can Gig Workers Deduct Business Expenses?

Freelancers and independent contractors may also be eligible to deduct certain business expenses related to their income earned from gig work. However, to deduct expenses related to self-employment, workers in Canada must keep proper records of:

  • All earnings from gig jobs and self-employment
  • Details about each gig job
  • Details of the expenses incurred by the taxpayer while performing the job (and any receipts or invoices to prove the expenses)

Maintaining proper and detailed records related to their gig work can help a taxpayer deduct eligible expenses. Tax deductions for gig workers can be complicated, which is why many freelancers choose to seek tax advice from an experienced tax accountant.

GST/HST and Taxes for Gig Workers

You might be wondering if you should register your business to collect the federal goods and services tax (GST) and in some provinces, the harmonized federal-provincial tax (HST).

Once your gig starts earning over $30,000, you’ll need to register for a GST/HST number and begin charging your clients GST/HST. The HST amount varies depending on your home province/territory, and like your income tax payments, you may be asked to submit quarterly installments if you make above a certain amount. When registered for HST, you can claim Input Tax Credits (ITCs) for the HST you paid on business-related expenses. This reduces the amount of HST you remit and helps manage your overall tax liability.

It's important to note that non-residents of Canada are also beholden to HST obligations when working in Canada.

CPP and EI Contributions

Calculate and Contribute to CPP:

As a self-employed individual in Canada, you are responsible for both the employer and employee portions of CPP contributions. Be diligent in calculating and remitting these contributions, as they contribute to your future retirement benefits.

EI Considerations:

While independent contractors are not required to contribute to EI, it’s crucial to plan for potential income gaps during periods without gigs. Explore alternative income protection options, such as private insurance or creating a personal emergency fund.

What are the Penalties for Late Payments?

If a tax deadline is missed, you will pay interest on the amount you owe every month. This can add up over time, which is why we suggest that gig workers take a critical look at payment deadlines and work around the year to ensure the right amount is saved when those timelines approach.

What Happens if a Gig Worker Does Not Pay Taxes?

While it is not likely that the CRA will come after an individual who earns an insignificant amount of money from gig work, there is always a risk of being accused of tax evasion. That is why it is vital to understand how gig workers are taxed in Canada and what steps to take to file taxes accurately and on time.

Why is it Important to Put Money Aside?

To avoid financial strain during tax season, set aside a portion of your income for taxes. Having a dedicated tax savings account ensures you have the funds available when it’s time to remit quarterly payments or settle your annual tax bill. As an independent contractor, the money you receive from clients might look good in your account, but it's not entirely yours. This can be a tricky mindset to adopt, especially for new freelancers who are used to having their taxes subtracted from their cheques automatically by an employer. Nevertheless, putting aside a portion of the money you receive into a separate banking account or investment is a critical habit to adopt.

 Should You Incorporate Your Business? 

There are various factors to consider before incorporating your business. In addition to compliance costs relating to incorporating, the structure of the business needs to be aligned with your personal circumstances. An experienced accountant in Toronto can help guide you through the crucial decisions leading to a more successful business - and help you determine whether incorporating is the right step.

Do Not Let Your Taxes Deter You from Pursuing Your Passion

Thriving in Canada’s gig economy as an independent contractor comes with its set of challenges, but with strategic tax planning, you can optimize your financial position. By understanding your tax obligations, keeping meticulous records, and leveraging available deductions and credits, you can navigate the complexities of self-employment taxes successfully. Whether you’re an artist, consultant, or freelancer, our expert team of professional accountants in Toronto is committed to ensuring your tax affairs are planned optimally and that your business and income streams are structured in a strategic and coordinated manner. Our goal is to take tax preparations and obligations off your plate so you can focus on building your business. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances and ensure you comply with CRA reporting and payroll deductions.

Frequently Asked Questions

How much money should I set aside for my taxes?

Typically, the rule of thumb is that you should set aside 25% of your income for taxes. If you are in a higher tax bracket or collect GST/HST, then you may want to set aside a bit more, closer to 35%.

What if I have cross-border clients?

Income generated from clients outside of Canada still needs to be reported to the CRA, but these clients do not need to be charged GST or HST. However, it is recommended that foreign income be separated in the event of an audit.

Should I do my taxes myself?

You should consider working with a tax professional or accountant if you are new to self-employment or have complex income and expenses. Tax professionals and accountants can help minimize your tax payable and maximize the benefits that you are entitled to. However, understanding the taxation system in Canada is a powerful tool, especially for a business owner or self-employed individual. If your income and expenses are quite simple, it might be worth your while to take a stab at filing your taxes on your own. As your business grows, your knowledge of taxes will grow, making you a stronger entrepreneur.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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