How to Do Your Taxes in Canada
The new year has recently begun, which means tax season is fast approaching. Although the deadline isn’t for another few months, it’s not too early to start thinking about filing your taxes. After all, you can file your tax return for 2020 online starting on February 22, 2021.
Filing your return varies, depending on whether you work as a full-time employee for a company or as a sole proprietor, a freelancer, or an independent contractor.
Here is Wealth Rocket’s step-by-step guide for how to do your taxes in Canada.
Table of Contents
How to File your Taxes as an Employee
Whether you’re a part-time or full-time employee, this is usually the simplest return. It’s highly unlikely that you’ll need anyone else’s help when filing.
Here’s how to do your taxes in Canada as an employee.
1. Make Sure You Have all Your Paperwork
Before getting started, you’ll want to get all your tax information together.
This includes any tax slips such as T3s (for trust income), T4s (statement of remuneration from your employer), and T5s (for investment income).
You may also have tax slips for contributions to a registered retirement savings plan (RRSP) or statements showing how much student loan interest you have paid.
2. Know What Can Be Deducted
There are many tax credits and deductions you can take advantage of to reduce your overall tax bill. Claiming RRSP contributions, charitable donations, tuition expenses, and student loan interest can lead to a larger refund.
3. Filing Options
Once you’ve organized your paperwork, you can file your tax return.
There are several tax software options available online, including TurboTax Free, SimpleTax, or StudioTax.
Many tax preparation providers now allow you to file your taxes through a web browser or mobile app instead of downloading tax software.
Some also allow you to file multiple tax returns. If you get a login error, you might want to delete your cookies and try again.
You can also use the ‘auto fill my return’ option if you use NETFILE-certified software once you’ve registered for ‘my account’ through the Canada Revenue Agency (CRA). This feature allows Canadians to fill in parts of their return automatically.
If you don’t know how to do your taxes online in Canada or want more tax information, there are also free tax clinics available through many community organizations. These clinics are available to students, newcomers, seniors, people with disabilities, or individuals with a modest income who also have a simple tax situation. Due to the pandemic, these clinics are now virtual.
How to File Your Taxes as a Sole Proprietor
Being self-employed, the CRA considers you to be a sole proprietor. You earn business income from the products or services you sell instead of receiving a wage or salary from an employer.
If the whole tax filing process seems too complicated, you might want to hire an accountant to take care of everything for you.
In the meantime, here’s a guide on how to do your taxes in Canada as a sole proprietor.
1. Your Tax Filing Deadline Is Different
Most Canadians will be rushing to meet the tax filing deadline of April 30, 2021. However, you have until June 15, 2021, to submit your return. Still, you must pay any taxes owed by April 30 like everyone else, or you’ll face tax penalties.
2. You Need to File a T2125 Form
As a sole proprietor, you don’t need to file a separate return when reporting business income. All income reported on your T1 is the general income tax return.
However, the difference is that you need to also report all business income on a T2125 form. If you have more than one business, you need to use a separate form for each.
Several business-operating costs that you can claim as deductions, including:
- Operating expenses such as advertising, legal and professional fees, start-up costs, office supplies, and phone and internet service
- Office expenses if you rent an office or have a home office
- Travel and entertainment expenses, which you can deduct for business-related event costs such as flights, hotels, public transportation, and conferences. These will be more useful when the pandemic ends, and
- Vehicle expenses such as insurance, repairs, and gas. If you use your vehicle for both personal and business use, you can deduct a percentage of the costs based on how often you use the vehicle for business
You should also include these costs on your T2125 form.
3. Set Aside Money for Taxes
As a sole proprietor, you’ll usually owe the government and won’t receive a refund. That’s because all of your income is now gross and not net.
Not only do you need to set aside money for federal and provincial taxes, but you’ll also have to pay both the employee and employer portions of contributions to the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP).
In 2020, that number was 10.5% (5.25% each) for the CPP and 11.4% (5.7% each) for the QPP.
A good rule of thumb is to set aside about 25% of your gross income to pay for taxes and other deductions.
If you gross less than $30,000 in sales a year, you don’t need to collect the goods and services tax (GST) or harmonized sales tax (HST) because you’re considered by the CRA to be a small supplier.
However, if your sales are more than $30,000, you must collect GST/HST.
Alternatively, you can voluntarily register for the GST/HST if you think you might have sales of more than $30,000 or want to claim input tax credits (ITCs) on some of the GST/HST you pay for the goods or services you purchase.
How to File Your Taxes as a Freelancer
As a freelancer, you’re likely also working as a full-time employee. If you freelance full-time, you’ll be considered self-employed or a sole proprietor. However, freelancing on a part-time basis means you get to take advantage of some of the same benefits as sole proprietors.
1. Hold on to Your Invoices and Receipts
When you freelance and also work full time, things get a little more complicated on the tax front. You should keep track of all of your invoices as well as your expenses. Save everything in a desktop folder on your computer or print it all out so it’s easy to find later.
2. Report all Income and Claim any Expenses
Freelance income is considered income — plain and simple. Even if you make $100 from freelancing, it’s still taxable income.
Like sole proprietors, you’re also eligible to claim business-related expenses as a freelancer.
Both your income and expenses need to be filed in a T2125 form. See the section above on sole proprietors for examples of what can is expendable.
3. Budget for Taxes
Since freelance income is taxable and your customers don’t deduct any federal or provincial taxes at source, you should set aside some funds to pay any taxes you may owe.
If you don’t want to pay taxes on the additional income you earn, you can put all of the money into an RRSP, provided you have enough room.
How to File Your Taxes as an Independent Contractor
Hairdressers and taxi drivers often fall under the independent contractor category and are often considered self-employed or sole proprietors.
1. You May Receive a T4A
As an independent contractor, you own the equipment you use and are not an employee. During tax season, instead of a T4, you’ll receive a T4A which will list your income, but there won’t be any tax or payroll deductions.
2. Report Income and Claim Expenses
While you might receive a T4A, your income also needs to be added to a T2125 form.
In this, you should also claim any expenses you incur as an independent contractor. The sole proprietor section goes into greater detail on what you can claim as an expense.
3. Save a Little for Tax Payments
Like other self-employed individuals, since you won’t have anything deducted from your pay, you’ll likely owe taxes. In preparation for this, you should have some money saved up when tax payments are due.
Frequently Asked Questions
Yes, doing your taxes for free is an option you can take advantage of if you’re an employee.
You can also do your taxes for free if you’re a sole proprietor, freelancer, or independent contractor as long as the software supports the T2125 form.
Although, if you’re not an employee, a professional may be able to find additional tax savings and provide advice, and the cost of hiring one can even write off an expense.
Yes, you can make various tax payments, such as individual income tax payments, benefits repayments, and GST/HST payments, in several different ways. The most common ways to pay are:
- By cheque at a Canada Post outlet or financial institution,
- Online through your financial institution’s website or my payment’ on the CRA’s website, or
- By credit card, PayPal, or Interac e-Transfer through a third-party service provider.
Yes, filing your taxes late is allowed. However, if you owe anything, you’ll have to pay the penalty.
According to the CRA, “the penalty is 5% of any balance owing, plus 1% of the balance owing for each full month that the return is late, to a maximum of 12 months.”
Also, the penalty may be higher if you were charged a late-filing penalty on any return in the three previous years.