self employed taxes canada

Tax Trouble When Self Employed in Canada

Running your own business can be a dream job and has led to many success stories with happy endings. However, that is not always the case, and that dream can turn into a nightmare if you get offside with the tax authorities.

Self employed income tax in Canada is no joke. Whether it is Federal Government income taxes or Federal/Provincial sales taxes (GST/PST), there always seems to be something that needs to be filed or paid. There are lots of different ways you can find yourself in tax trouble when self employed in Canada.

Self Employed Taxes in Canada

Part of the job when you are self employed is to fight the battle of simply filing all of the required remittances on time. This can differ slightly if your business is structured as a corporation or if you are a sole proprietor.

Nevertheless, here are some of the self employment income tax filings required in Canada:

  • Annual tax return – either a T1 for sole proprietors or a T2 for a Corporation
  • Annual T5 slips – for reporting any dividends paid out of a Corporation
  • Annual T4 slips – for reporting wages paid to yourself or employees out of a Corporation
  • Quarterly GST return – typically filed every three months but can sometimes switch to monthly or annually depending on volume. This is a sales tax that self employed must collect
  • Quarterly, or monthly, installment payments for self employed income tax on sole proprietorships. This shows up as prepaid taxes on your personal income tax return.
  • Monthly payroll source deductions – this is an important one. Canada Revenue Agency gets particularly upset if you fall behind on this filing as you have been withholding the funds from your employees’ pay.
  • Monthly PST return – this is a BC provincial sales tax that many businesses must collect and remit to the provincial government. Some provinces have different arrangements for this tax, or don’t have one at all. Hello Alberta !
  • Worksafe BC – while not technically a tax, it is still a requirement to file a pay a premium. More red tape for the self employed.

All of this after you have had to run this business. If you have never experienced it before it is quite the task.

Also, the decision to operate as a sole proprietor or a corporation is a big one and should be carefully discussed with a CPA and a lawyer, if possible.

Not everyone who is self employed has an aptitude for bookkeeping. But your taxes still need to be paid. This podcast covers what you should know about filing taxes when you are self employed.

How to File Self Employment Taxes

It doesn’t really matter who files the self employment taxes; you can do it yourself, your spouse could do it, or an employee, or an independent bookkeeper or even a CPA. The more important thing is to actually file the various self employment tax returns on time.

This will prevent you from being charged a late filing penalty. In addition, after the late filing penalty, the Government will start to charge interest on any unpaid taxes.

Pro tip : even if you don’t have the money to pay the self employed income tax, file the return anyway. At least you have avoided the late filing penalty.

If you are doing it yourself, we would recommend that you register for CRA My Account and CRA My Business Account. This will allow you to quickly see what has been filed and what has not. You can also use CRA Netfile. Any amount owing can then be paid via your online banking. This process is useful because it is quick and you don’t have to phone CRA and stay on hold for extended periods of time.

If a bookkeeper or CPA firm is helping you, they will likely e-file your returns. If numbers are not your thing, we recommend you seek out a bookkeeper or CPA and become their best friend.

In either case, a tax return can always be filed via mail.

Difference Between Income Tax and Sales Tax

Tax for self employed people can be confusing to keep track of. Income tax is an amount paid on the profit you make, or the amount withdrawn from a Corporation via dividends or employment income.

Income tax has a requirement to file a tax return annually but tax is often prepaid during the year by way of installments or is deducted from your pay cheque.

Sales tax, on the other hand, is a tax charged to a purchaser on each transaction. This tax is to be held in trust for the Government and then remitted to them, after any offsets, either monthly or quarterly.

Some would argue that a sales tax is the most fair tax because the more you spend the more you pay.

Too Much Tax Debt

Income tax for self employed people has been the source of many insolvency filings. Once you have missed two or three annual filings, and you owe each year, it is super hard to catch up.

The only way that CRA will take less than what is on their books is to file a Consumer Proposal or a Bankruptcy. This must be done via a Licensed Insolvency Trustee (That’s us).

The Bankruptcy and Insolvency Act trumps the Income Tax Act, so we can stop the Canada Revenue Agency from collecting, unfreeze your bank account, and get a garnish removed from your income.

Timing is critical regarding self employed tax collection in Canada. If you are currently facing this pressure we would recommend that you contact us today.

Len Hiquebran, CPA, CA, LIT

After completing my articling at a local accounting firm, I spent some time working in industry as a controller of a logging company. Subsequently, I joined Chase & Associates in 2017 and began working in the insolvency field. In June 2020 I completed my studies and was granted a license by the Federal Government to be a Licensed Insolvency Trustee.