Tax situation of a self-employed Canadian business owner is a bit more complex than that of an employee. So, what is the major difference between being an employee earning a paycheck compared to being self-employed? Well, when you are self-employed there are two areas where you differ from regular employees’ contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI).
Who is considered Self-Employed by Canada Revenue Agency (CRA)?
There are a ton of various terms for being self-employed. If you are sole-proprietor or a partner of a business, a freelancer, an independent contractor, or even doing Direct sales as a side hustle, all of these would fall under the umbrella of self-employed. CRA simply considers you to be self-employed if you are earning income by yourself, outside of an employer. You are self-employed unless you have formed a corporation. When you incorporate your small business, you are not technically self-employed for tax purposes.
There are scenarios where the worker or payer is unsure of the worker’s employment status, either can ask for the CRA ruling or can get some knowledge from a tax accountant. The ruling determines the status of whether the individual is an employee or self-employed.
To request for CPP/EI ruling you can:
- log in to My Business Account if you are a payer and select “Request a CPP/EI Ruling”
- log in to My Account if you are a payer or a worker and select “Request a CPP/EI Ruling”
- ask your authorized representative to request a ruling for you. They can log in to Represent a client and select “Request a CPP/EI Ruling”
- write a letter or print and complete Form CPT1, Request for a CPP/EI Ruling – Employee or Self-employed? And mail it to your designated tax services office.
For more details see Guide RC4110, Employee or Self-Employed?
The time limit for requesting a ruling: A worker or a payer can request a ruling by June 29 of the year following the year to which the question relates. For example, if the concerned year is 2020, the ruling request must be made no later than June 29, 2021.
CPP for Self-Employed
The Canada Pension Plan (CPP) is a mandatory defined-contribution plan that provides all individuals working in Canada with pension income when they retire. Any individual above 18 years of age, working in Canada and earning more than $3,500 a year, must contribute a percentage of their income to the CPP. The objective behind CPP is to help individuals replace some portion of their income when they retire.
Self-employed individuals are on the hook for both the employee and employer contributions. It means as an employee you only pay half of your CPP premiums and your employer pays the other half, but when you are self-employed you must pay the full premium amount. All salaries paid by the small business, including the owner-manager’s salary, are subject to CPP deductions at source (DAS).
When you turn 18, Service Canada starts collecting CPP contributions on the annual income you earn above $3,500 and up to the maximum pensionable earnings limit. The government sets a limit every year, depending on the average income and inflation. The following table mentions the CPP rates and limits for the years 2021 and 2020.
| Year | Yearly Maximum Pensionable Earnings (YMPE) – $ | Self-Employment Contribution rate | Self Employed Maximum Contribution – $ |
| 2021 | 61,600 | 10.9% | 6,332.90 |
| 2020 | 58,700 | 10.5% | 5,796.00 |
Working:
Self-Employment Contribution rate = Employee/Employer Contribution Rate * 2
Rate for the year 2021= 5.45%*2 = 10.9%
Rate for the year 2020 =5.25%*2 = 10.5%
Self Employed Maximum Contribution = (YMPE) * Self-Employment Contribution rate For the year 2021= (61,600 – 3,500) * 10.9% = 6,332.90
For the year 2020= (58,700 – 3,500) * 10.5% = 5,796.00
CPP contributions from self-employment are based on the net income of your business. To calculate your annual contributions at tax time, start with line 1 on 5000 – Schedule 8 (CPP Contributions on self-employment and other earnings) and transfer the numbers as directed to your personal tax return.
Please note if still unsure about the things, we recommend to contact an accounting firm rather by doing things by yourself.
EI For Self-Employed
Self-employed individuals do not have to pay EI premiums, it is not mandatory when you are self-employed. However, under the Employment Insurance Act, self-employed Canadians, and permanent residents– those who work for themselves– can apply for EI special benefits if they are registered for access to the EI program. You can have access to EI special benefits if you register with the Canada Employment Insurance Commission. While this EI measure extends certain EI benefits to self-employed individuals, enrolment is completely voluntary.
Employment Insurance (EI) is a program designed for the self-employed. If you run your own business or control more than 40% of your corporation’s voting shares, this program can provide you with access to special benefits as early as 12 months after registering. The six types of benefits available are as follows:
- Maternity benefits – for people who are away from work because they are pregnant or have recently given birth.
- Parental benefits – for parents who are away from work to care for their new-born or newly adopted child.
- Sickness benefits – for people who cannot work for medical reasons.
- Family caregiver benefit for children – for people who provide care or support to a critically ill or injured person under 18.
- Family caregiver benefit for adults – for people who provide care or support to a critically ill or injured person 18 or over.
- Compassionate care benefits – for people who provide care or support to a person who requires end-of-life care.
Prior to claiming benefits, the self-employed Canadians are required to meet the following eligibility criteria:
- Be a Canadian citizen or permanent resident.
- Be registered in the self-employed program for at least 12 months
- Have decreased the amount of time spent on business by more than 40% for at least one week.
- Have earned a minimum amount of self-employed earnings between January 1 and December 31 of the year before you apply for benefits.
Federal EI Premium rates and maximums
| Year | Maximum annual insurable income | Rate% | Maximum annual employee premium | Maximum annual employer premium |
| 2021 | $56,300 | 1.58 | $889.54 | $1245.36 |
| 2020 | $54,200 | 1.58 | $856.36 | $1198.90 |
After you register for the EI program, you will be responsible for paying premiums when you file your income tax return each year. You will pay premiums based on your self-employed income for the entire calendar year, starting the year you register. The CRA will confirm the amount of your premiums based on the self-employed income you report in your tax return.
Opting in for the program means you will need to register for the Self-Employed EI Benefit Program, and you can do so through your My Service Canada Account. When self-employed persons opt into the EI program to access special benefits, they pay the same EI premium rate as employees pay.
EI premiums are paid when the self-employed individual files his annual Income Tax and Benefit Return using Schedule 13 (Employment Insurance Premiums on Self-Employment and Other Eligible Earnings). Unlike with the regular EI program, self-employed workers do not have to pay the employer’s portion of EI premiums.
If you have got to do your self-employed taxes in Canada and you still have confusion about the management and impact of CPP and EI contributions considering 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 towards proper management of your finances.