As a salaried employee, filing your taxes should be pretty straightforward. Your employer deducts the appropriate amount of income tax from your paycheque. When you’re a contractor, it’s your responsibility to keep track of how much you owe in taxes to the Canada Revenue Agency (CRA). While some expenses can be deducted fully in the current tax year, others must be depreciated over many years.
Are You an Employee or Independent Contractor?
Before you complete your tax return, it’s important to determine whether you’re an employee or an independent contractor. In some cases, it may seem relatively simple, but in others, it may be more ambiguous.
The CRA has established the following four factors to determine whether you’re an employee or independent contractor:
- Do you have control over when you’re paid and where the work is performed?
- Do you own your tools, or does your employer provide your work tools?
- Do you have the opportunity to make a profit from your business relationship as well as the risk of losing money?
- How closely do you work with your employer?
Tax Advantages of Being a Contractor
When you’re an independent contractor, you can claim deductions for the business expenses you incur in the day-to-day operation of your business. You can claim business expense costs, such as traveling and meals out with clients, to decrease your tax bill at the end of the year.
Tax Disadvantages of Being a Contractor
If you work as an employee for a company, your employer makes half of your contributions for Canada Pension Plan and premiums for Employment Insurance on your behalf. If you’re an independent contractor, you have to pay both the employer and employee amounts for CPP and EI.
When you’re a contractor, you can end up with a large tax bill because your taxes aren’t withheld at the source. Budget during the year to ensure you have enough money to pay your outstanding balance to the CRA on time.
As an independent contractor, you’re required to complete Form T2125 (Statement of Business or Professional Activities).
- Complete a separate copy of Form T2125 for each business that you operate.
- At the top of Form T2125, you enter the amount and type of income you earned, such as fees and sales commission.
- Below that, enter eligible expenses you’d like to deduct.
Review the CRA’s full list of expenses. Some can be fully deducted, while you can only deduct half for expenses that include meals and entertainment.
As with ownership of a rental property, you can claim tangible assets required to operate your business, such as computers and furniture. To do this, you need to claim them as a capital cost allowance and depreciate them over many years. The CRA provides the deprecation amount and the number of years. At the bottom, you determine if you have a net income or loss and report it on your tax return.