Canadian Income Tax for Freelancers
Answers to Questions About Canadian Income Tax for Freelancers
Starting a small business is not always something that people plan to do; sometimes they take on occasional part-time work without any intention of turning it into a full time business. However, taking on part-time work still has tax implications, as this reader question about Canadian income tax for freelancers illustrates.
Reader Question: I hope I'm not stepping over the line if I ask you a question about invoicing and Canadian taxes.
I recently got a freelance graphic design contract in Toronto which will earn me about $1,000. My client has asked me to invoice him, but I have no idea what I should send over. I do not plan on taking this sole proprietorship full time; it will always be rare work I find during the years. The questions I have are:
- Do I need to register a business?
- What must go on the invoice exactly (my own legal name and address?)
- How do I declare this on my tax return?
- Do I need to charge my client Harmonized Sales Tax (HST)?
Response: These are commonly-asked questions by freelancers. In order, here are the answers to your questions:
1. Freelancing is running a business!
First off, you are operating as a business if you are freelancing. It doesn't matter how much work you are doing; if you're doing something outside what you do as an employee in the U.S. or Canada and are getting paid for it, you're running a business and must comply with the applicable legal and regulatory requirements, such as paying taxes on the extra income (See Business Income).
2. You don't have to register a business in your own name
Your invoice should have your legal name or a registered business name. In the U.S. and Canada, you don't have to register a sole proprietorship business if you are using your legal name as the business name. If you decide to use a different name it must be registered, which means performing a name search and conforming to the business name rules.
Do I Need to Register a Business Name? explains more about this.
3. The income must be declared as business income
Any income generated from freelancing must be declared on your income tax; you have to declare all your worldwide income on your return. In the U.S., you would report payments for freelancing on Internal Revenue Service (IRS) form 1099-MISC (this should be provided to you by any business that has paid you $600 or more in a tax year). See Who Must Receive Form 1099-MISC?
In Canada you would declare freelancing payments as business income on Form T2125, which is part of your T1 tax return. See How to Complete the T1 Canadian Income Tax Form as a Business for information on how to enter business income and expenses.
One of the great things about running a side business is that you will be able to claim business expenses on your income tax. For deducting business expenses on your U.S. tax return, see:
- How to Determine Ordinary Necessary Business Expenses
- What Business Expenses Are Tax-Deductible?
- Business Tax Deductions - Save on Your Business Taxes
- Reporting Deductible Business Expenses on Federal Taxes
For information on Canadian business taxes, see the Canadian Tax and Your Business page - it has a whole section full of articles on business income tax deductions as well as information on all kinds of other related Canadian tax topics, including:
- Canadian Tax & Your Business
- Small Business Tax Deductions
- Guide to Canadian Payroll Deductions
- Do I have to fill out income tax form T2125?
4. Charging Your Client Sales Taxes
In terms of invoicing your work, in the province of Ontario, you would normally charge HST - but when it comes to GST/HST there is a Small Supplier exemption which allows you not to register for and/or collect it if you make less than $30,000 annually in business income. (Note that you can register for the GST/HST voluntarily if you wish. Here's why you may wish to do so.)
In this case you don't need to charge GST/HST to your client unless you choose to register for GST/HST.
The following sample invoice templates show you exactly what you have to have on your invoice depending on whether you are charging sales taxes or not.
In your case, because you don't have any taxes to charge, you would use the Simple Invoice Template:
- How to Invoice Selling Products With No Taxes (Simple Invoice Template)
- How to Invoice Selling Services With No Taxes (Simple Invoice Template)
- How to Invoice With HST in Canada (Harmonized Sales Tax)