At a glance
The pros and cons of self-employment
How do I become an independent contractor?
Improving your chances of qualifying as an independent contractor
The tax advantages of self-employment in Canada
How to select a business year-end
Handling business losses when self-employed
GST/HST and QST rules for self-employment
Recordkeeping requirements for self-employment
Other tax and legal considerations
How BDO can help
Appendix: What is an independent contractor vs. an employee?
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If you’re tired of office politics and dreaming of working for yourself, you’re not alone. Becoming an independent contractor is a possibility many individuals consider. You may have experienced downsizing and are seeking new work, or you may want more independence and have decided to set out on your own. Or perhaps you and your current employer have discussed restructuring your work arrangement so that you would be considered self-employed.
Whatever the reason, this guide can help you decide whether becoming self-employed is the right move for you.
The pros and cons of self-employment
There are definite tax advantages to being a self-employed individual, such as being able to deduct expenses from your income when you prepare your tax return each year. We’ll review the type of expenses you can deduct, in the Deducting expenses as a self-employed individual section of this guide.
Before making a decision, however, there are many other factors you need to consider. These include:
As an example, if you make the maximum CPP contribution in 2025 of $4,034.10 ($4,339.20 for QPP) your employer also contributes that amount on your behalf. As a self-employed individual, you must pay all CPP contributions yourself, meaning your maximum annual premium will increase to $8,068.20 ($8,678.40 for QPP) in 2025.
There are also second additional contributions (CPP2/QPP2) on pensionable earnings above $71,300, up to $81,200. This means there is a maximum annual employee and employer contribution of $396 each for CPP2/QPP2 and self-employed individuals would have to pay $792 for CPP2/QPP2.
The employer portion of these premiums is deductible by self-employed individuals.
PRPPs were introduced by the federal government in 2012 as self-funded retirement plans that could improve the range of retirement savings options for self-employed Canadians and others who do not have employer-sponsored pension plans. However, while some provincial governments have implemented legislation covering PRPPs and a few Canadian insurance companies offer them to eligible individuals, PRPPs are not available in all provinces.
It’s also important to remember that if your total income tax liability, less the portion that was withheld at source, is greater than $3,000 for both the current year and either of the two preceding years, you must make tax instalments for the current year. In Quebec, where provincial tax is collected by the province, the threshold is $1,800 for federal tax and $1,800 for provincial tax.
Tax instalments are usually made quarterly, and there are penalties for under-paying. To learn more, read our guide, Tax Bulletin: Failure to pay tax instalments can be costly.
If you are a self-employed person in Quebec, you are required to make contributions to the QPIP with your annual tax return, and you can also receive maternity, paternity, and parental benefits through this plan. As a resident of Quebec, you can also choose to participate in the federal EI program for sickness and compassionate care benefits.
We’re not trying to convince you to be an employee rather than an independent contractor. It’s simply important to understand all the factors that should be considered when deciding if self-employment is the right move. Keep in mind that one of the reasons independent contractors often make more money than employees for equivalent work is to compensate for the lack of employee benefits.
Incorporating your own business can also provide certain tax advantages. For example, you may be eligible for the small business deduction on active business income up to certain thresholds, which can lower your corporate taxes and provide more funds to re-invest into your business.
However, if you decide to go this route, you may be subject to limitations under the personal services business rules.
Becoming a personal services business (PSB) corporation
If you decide to become self-employed and also incorporate your business, you need to be aware of the PSB rules.
The PSB rules will apply if all of the following conditions are met:
- Income of the business is from services rendered by an individual, referred to as an “incorporated employee.”
- The incorporated employee rendering the services, or a related person, is a specified shareholder. A specified shareholder is a person who owns, directly or indirectly, at any time during the year, 10% or more of the issued shares of any class of the corporation or of any related corporation.
- The incorporated employee might reasonably be regarded as an officer or employee of the entity for which the services are provided if the corporation is ignored (we discuss this in more detail in the next section).
- The corporation does not employ more than five full-time employees throughout the year.
When the PSB rules apply, the corporation’s income will not be eligible for the small business deduction. Instead, it will be subject to the full federal and provincial corporate tax rates plus an additional 5% tax on PSB income.
Deductions claimed by the corporation against PSB income will also be restricted. Generally, deductions are limited to salaries paid and employment benefits provided to the incorporated employee. The PSB can also deduct amounts that would have been deductible by an employee for selling property and negotiating contracts, as well as legal expenses incurred by the corporation in collecting amounts owing for services rendered.
In addition to these restrictions on deductions, the corporate rate of tax paid on PSB income is higher than both regular business income and income eligible for the small business deduction. This higher rate makes the integration cost of earning PSB income in a corporation greater than if the income was earned personally, and not through the corporation.
The integration cost combines the corporate tax rate and the personal tax cost of paying corporate profits as dividends to the owner-manager. When the risk of a PSB exists, it will usually be to your advantage to pay the PSB income out to the owner-manager in the form of a salary.
From 2022 to 2024, the CRA conducted an educational outreach program, which identified that a large portion of potential PSBs operated in three industries:
- Transportation and warehousing
- Professional, scientific, and technical services
- Construction
Furthermore, the CRA found that a significant number of PSBs identified were incorrectly claiming the small business deduction and were not paying income tax at the PSB rate. Based on these findings, taxpayers, especially those in the identified key industries, should not be surprised if the CRA increases its audit and compliance efforts related to PSB activities.
In order to successfully incorporate and not have a PSB, your services to all clients should meet the test of being an independent contractor as set out below.
If you are self-employed and are also considering incorporating your business, consult your BDO advisor.
How do I become an independent contractor?
You can’t just state that you are self-employed and expect to be treated that way for tax purposes. A series of common law tests have evolved from decisions in the Canadian courts that are used to determine whether you are an employee or an independent contractor. If the tests currently indicate that you are an employee, you’ll have to make fundamental changes to your arrangements with payers to be considered self-employed.
The factors that determine whether or not you are an independent contractor differ in Quebec. In particular, the rules in Quebec under civil law generally place a much greater emphasis on the control the employer has over an employee, although the courts in Quebec have not always ruled consistently on this issue.
No matter where you live, you should always consult with your BDO advisor before attempting to become an independent contractor.
If you want to be considered self-employed, it’s important that the CRA also views your arrangement in that light. If it doesn’t, you could find yourself being disallowed all the tax deductions available to independent contractors but not employees—which means your tax bill could be substantially higher.
In addition, the organizations you work for have a lot at stake if they treat you as self-employed when you’re really an employee. They are responsible for paying a number of federal and provincial taxes on your salary, including EI premiums, CPP contributions, workers’ compensation levies, and other payroll taxes. Also, they are responsible for collecting and remitting employee income tax and the employee portion of EI premiums and CPP contributions. If they mistakenly treat you as an independent contractor, they will not have deducted and remitted income tax or your EI and CPP contributions. When these remittances have not been properly made on behalf of an employee, the CRA will apply a penalty from 10%-20% of the amount owing, in addition to interest on the late payments.
Factors that determine independent contractor status
Below are six key factors that have evolved from court cases, which the CRA also considers to be important in determining your status as either an employee or an independent contractor. A more detailed chart of some key indicators of status as an employee vs. an independent contractor for each of these factors can be found in the Appendix at the end of this guide.
As workers’ relationships with hirers continue to evolve, the courts and the CRA may also consider the intention of both a worker and a hirer when entering a working arrangement. Specifically, they consider whether you both intended to enter into a contract of service (an employer-employee relationship) or a contract for services (a business relationship). It’s important for both you and your hirer to clearly define your working arrangement and ensure that you have a common intent when entering an agreement. This test often acts as a tiebreaker when the results of the above six factors are inconclusive.
Remember: no one test will determine whether you are considered to be an employee or an independent contractor. One or more of the above tests may not apply when analyzing all the facts surrounding a particular relationship or they may be weighted differently in particular cases.
For example, the test of control may be difficult to apply to professionals, knowledge workers, and skilled tradespeople, as their expertise and specialized training tends to allow them to work independently—but they can still be considered employees when the tests are applied to all of the facts.
How to avoid the risk of reassessment
To avoid reassessments, it’s important to ensure the CRA will consider you to be self-employed based on the tests noted above. However, the way these tests are applied and the weight given to various facts can vary, making it possible for the CRA to reach a different conclusion than you expect.
The good news is, you can ask the CRA to determine if your relationship with a particular hirer is one of an independent contractor or an employee. By filing Form CPT1, they will rule on your status for the purposes of paying CPP and EI premiums. Consider filing this if it's important for you and your hirer to be absolutely certain of your status in the eyes of the CRA.
Note that the factors used to determine whether or not you are an independent contractor differ in Quebec. Always consult with your BDO advisor before attempting to become an independent contractor.
Improving your chances of qualifying as an independent contractor
With these tests in mind, there are a number of steps you can take to improve the likelihood you’ll be considered an independent contractor by the CRA. If you’re self-employed, make sure you take the following steps.
The contract should allow you to hire your own employees to do the job, if necessary. It should also specifically state that you are an independent contractor and you have not entered into an employment contract with the hirer. The fact that you and your hirer have specifically agreed that you are not an employee will be a factor in your favour. We recommend that you consult a lawyer for advice when drafting this agreement.
It is also important that you conduct business affairs according to the terms of the contract. If you have a contract but don’t follow its terms, it won’t be of much assistance to you in establishing that you are an independent contractor.
- Registering a business name with the province or territorial government body.
- Setting up your own office (this could be a home office).
- Advertising your services.
- Getting a separate business mobile or landline phone number.
The tax advantages of self-employment in Canada
You’ve heard people talk about the tax advantages of being self-employed—and they’re right. Self-employed individuals often have more opportunities to deduct expenses for tax purposes than most employees.
However, always keep in mind that if you don’t have a lot of expenses, being able to deduct them will not make a significant impact. If you are self-employed, you’ll have to keep track of your income and expenses. For tax purposes, you will need to report your income and expenses using the accrual method of accounting. This means you must report all the income you’ve earned for your fiscal year, whether you’ve received a payment or not, and you’re required to deduct the expenses you’ve incurred even if you have not yet paid them.
Deducting expenses as a self-employed individual
Self-employed individuals can deduct any reasonable expenses they incur to earn their business income, unless the expense is specifically denied under Canadian tax laws.
Below are several types of expenses that independent contractors can deduct from their income, as well as specific tax rules that prohibit deducting all or a portion of certain expenses.
Keep in mind that this list is not exhaustive. If you incur a reasonable expense, it can usually be deducted. However, personal expenses are not deductible.
Planning tip: Because you have business income, you can deduct the cost of having your income tax return prepared.
If you only use an asset partially in the business, then you must prorate the expenditure between your business and personal use and deduct the business-use amount. Generally, office furniture, and mobile phones are considered Class 8 assets.
Under the current Accelerated Investment Incentive (AII) rules, which are in effect until the end of 2027, you are entitled to claim 20% of new Class 8 additions as CCA (i.e., the half-year rule is effectively suspended). The unclaimed balance will be deductible at 20% per year on a declining balance basis in future years. If you purchased a computer and applications software in 2025 for your business, the CCA rates would be 55% and 100% respectively for 2025.
However, it’s important to note that rules have been proposed to reinstate the AII for qualifying property acquired on or after January 1, 2025 and available for use before 2030. Rules have also been proposed to allow a first-year CCA rate of 100% for certain assets acquired on or after April 16, 2024 for use before 2027. These assets include Class 50 general-purpose electronic data processing equipment and systems software (i.e., computers), Class 44 patents or the rights to use patented information for a limited or unlimited period, and Class 46 data network infrastructure equipment and related systems software.
If the convention entitles you to food, beverages, or entertainment (not including coffee and doughnuts on breaks) and a reasonable portion of the convention fees has not been identified as pertaining to this benefit, you must deduct $50 per day for these expenses from the cost of the convention. The $50 per day is a meals and entertainment expense and is subject to restrictions on its deductibility (see below under Meals and entertainment).
Generally, you cannot deduct the cost of life insurance premiums. However, there is an exception for certain types of insurance if a financial institution requires the policy as collateral for a business loan. Your deduction is limited to the lesser of the annual premiums paid and the net cost of pure insurance (excluding the savings component of a whole life policy) under the policy for the year. As well, only the portion of this amount that can reasonably be considered to relate to the amount owing is deductible.
However, some entertainment expenses are not deductible. You cannot deduct any amount for the use of a golf course (such as membership or green fees), a yacht, a camp, or a lodge. The CRA allows the deduction of payments for the use of a golf club for a business meal or other business purposes (such as renting the facility for a client seminar), even if the recreational facilities were used on the same trip to the club. Remember that the deduction for a business meal is still restricted to 50%.
Planning tip: If you entertain at a golf course, ensure that your bill segregates the deductible business costs from non-deductible costs. This means that deductible expenses, such as meals and entertainment, or the cost of renting a room for a seminar, should be separate from the non-deductible costs (i.e., the cost of a round of golf).
If you rent office space for your business, you can deduct this expense for tax purposes. But what if your office is in your home? You can deduct the cost of maintaining a home office as long as you pass one of the following two tests:
- Your home office is your principal place of business. Basically, this means that you work more than 50% of the time from your home office. This can be a difficult test to meet if you have another office that you rent or if you work at client sites for a large portion of the time.
- Your home office is used exclusively for business purposes and on a regular and continuous basis for meeting clients, customers, or patients. This test is designed primarily for individuals such as doctors, chiropractors, or massage therapists—in other words, people who have an office away from their home where they usually work but they might also see clients or patients at home. These individuals can deduct home office expenses as long as they use the office space exclusively for business purposes and it is not part of their personal living space.
There is an important difference in these tests to note.
Under the first test, as long as you work primarily out of your home office (50% of the time), you don’t have to use the space exclusively for business purposes to be able to deduct home office expenses. The office can be combined with personal living space. In such a case, you must prorate the expenses between business and personal use. For example, if you use it 60% of the time for business and 40% for something else, only 60% of the expenses relating to the maintenance of the home office will be deductible.
What expenses can you deduct?
You can deduct the business portion of the following amounts that relate to your home office:
- Rent (if you rent your home)
- Utilities
- Maintenance and repairs
- Insurance
- Property taxes
- Mortgage interest
For example, assume you own a three-bedroom townhouse and one of the bedrooms is your home office. You make monthly mortgage payments of $2,000, of which $1,000 is interest. You also pay $500 a month for utilities, property taxes, and insurance expenses. The office is 20% of the total square footage of the townhouse. Since this is a designated room, you don’t need to further prorate based on hours of business use. You will be able to deduct $300 a month for home office expenses, calculated as follows:
| Mortgage interest | $1,000 |
| Utilities, property taxes, and insurance | $500 |
| Total costs | $1,500 |
| Office portion at 20% | $300 |
| If your marginal rate of tax is 50%, then your monthly tax savings would be $150. | |
Note that you cannot create a business loss by claiming home office expenses. However, you can carry forward the undeducted amount indefinitely and deduct it from business income in the future.
Under Canadian tax rules, each family is entitled to designate a home in which they live as their principal residence on a year by year basis. The home designated can be the place where you regularly reside or a vacation property, such as a cottage. If a property has been designated as your principal residence for each year that you own it, you will not have to pay any tax on capital gains realized when it is sold.
If you convert a portion of your house to a home office, however, that part of your house will change from personal use to business use. If you apply the tax rules literally, you are deemed to have disposed of that portion of your house at its fair market value at that time. This gain will not be taxed if your home is designated as your principal residence—but any gain that accrues on the business portion of your residence after that time will be taxed when you ultimately sell the property.
Fortunately, the CRA takes a much more reasonable approach when there has been a change from personal use to business use for a portion of your home. Your entire house will continue to qualify as your principal residence as long as you meet the following conditions:
- the business portion (i.e., your home office) is reasonably small when compared with the size of the entire house;
- you do not make any structural changes, such as an addition, in creating your home office space; and
- you do not claim any CCA on the business portion of your home.
If you make significant changes to your home for business reasons, such as an addition, this portion of your home may not qualify for the principal residence exemption. You can claim CCA on this part of your house at the prescribed rate. In such cases, when your home is sold, you will have to pay tax on any capital gain realized on the business portion of the residence and on the recapture of any previously claimed CCA deductions on your property.
Further conditions may limit the amount of your deduction. If you did not have any employees throughout the year, your PHSP deduction is restricted by an annual dollar limit. The limit is a maximum of $1,500 for yourself, $1,500 for your spouse and household members 18 years of age or older at the start of the period when they were insured, and $750 for household members under the age of 18 at the start of the period. The maximum deduction is also limited by the number of days the person is insured.
If you have at least one qualified employee throughout the entire year, and at least 50% of the insurable persons in your business were qualified employees, your claim for PHSP premiums will be limited based on the lowest cost of equivalent coverage for each of your qualified employees.
Finally, any undeducted PHSP premiums may be included in the calculation of your medical expense tax credit. It should be noted that these premiums are not deductible for Quebec tax purposes.
Note, however, that this provision does not allow you to deduct amounts paid to someone to care for your children while you work. You can deduct child care costs up to certain limits, but only under the child care expense rules. These rules generally allow the lower-income spouse to deduct expenses incurred up to two-thirds of their earned income to a maximum amount. The maximum amount that is currently deductible is $8,000 per child under 7 at the end of the year, $5,000 for a child between 7 and 16 at the end of the year, and $11,000 for each child having a severe and prolonged physical or mental impairment.
Planning tip: You can hire a family member to assist you in your business, as long as their salary is reasonable for the services performed.
- Paper
- Office supplies
- Long distance telephone call charges
- Basic telephone charge for a phone, if you get a separate business line
- Postage and courier costs
- Business portion of mobile phone airtime
- Business portion of internet charges
You can claim car expenses that are incurred for business purposes. Your tax deduction for these expenses is usually the business portion of your total automobile expenses, which is calculated by prorating your total automobile expenses by your business kilometres divided by your total kilometres.
Automobile expenses must be properly documented, which includes maintaining a log to document the business kilometres you have driven. In determining your total automobile expenses, include the following:
- Fuel
- Maintenance and repairs, such as tune-ups and oil changes
- Insurance
- License and registration fees
- Interest incurred on a car loan and CCA if you own your vehicle
- Leasing costs if you lease your vehicle
There are also limits on the amount of CCA you can claim on your automobile. The rules are complex, but for passenger vehicles acquired on or after Jan. 1, 2025, generally you cannot deduct CCA on any purchase price greater than $38,000 plus applicable GST/HST/QST and provincial sales tax (PST) (Class 10).
If you purchase a zero-emission passenger vehicle in 2025, the purchase price limit for CCA is $61,000 plus applicable sales taxes (Class 54). If the cost of your car exceeds these limits, the maximum deductible amount will go into its own separate CCA class, known as Class 10.1, which is eligible for the CCA deductions at the same rate as Class 10 vehicles. However, there are differences in the amount deductible as CCA in the year of acquisition and the year of disposition between Class 10.1 vehicles and Class 10 vehicles.
If the cost of your automobile is less than the limits above, it is generally considered a Class 10 asset or a Class 54 asset if it is a zero-emission vehicle and there is no restriction on the cost you can depreciate. Each year, the CCA that you can claim will be prorated by the business use of your vehicle.
If you sell a Class 10 or Class 54 car during the year, you may have a gain or loss depending on whether the proceeds are greater or less than the remaining balance in the class. The rules are complicated so we suggest you discuss the consequences with your BDO advisor.
If you lease your car instead of buying it, you can deduct the lease payments up to certain limits. The formula for determining the deductible amount restricts you to deducting only the portion of the lease payments that relates to the first $38,000 (plus applicable sales tax) of the cost of the car, and is limited to $1,100 per month for leases that start in 2025.
In determining your business kilometres, it can be difficult to decide whether a particular trip is business or personal. For income tax purposes, travelling from your home to your place of business is not usually business travel. However, if your home is the base for your business, then travelling from your home for business purposes would be considered business travel. If your home is not your main work location, the CRA considers the following trips to be business travel:
- A trip from your home to a client’s place of business and back home.
- A trip from your home to a client’s place of business and then to your regular place of work.
- A trip from your regular place of work to a client’s place of business and then to your home.
If you have further questions about the automobile expenses you can deduct and the records you need to keep, read our guide, Tax Bulletin: How to track automobile expenses for tax deduction purposes.
How to select a business year-end
Choosing a business year-end for tax purposes is a critical decision. The selection of your first year-end is governed by the date you first commence business. The business year cannot exceed twelve months for a proprietorship or partnership.
Most self-employed individuals are now required to have a Dec. 31 year-end. However, self-employed individuals, as well as partnerships that only have individuals as partners, have the option of selecting an off-calendar year-end provided they use the “alternative method” when calculating income for tax purposes and file the relevant election form with the CRA.
Let’s look at how this might work.
- You, as a self-employed individual, started your business on Feb. 1, 2025. You choose to have an off-calendar year-end of Jan. 31, 2026.
- In 2025, you wouldn’t have an income inclusion because your fiscal period ended in 2026.
- In 2026, you would have to include income for the period Feb. 1, 2025 to Jan. 31, 2026, as well as an estimate of income for the period Feb. 1, 2026 to Dec. 31, 2026. The estimate is based on a proration of your income for the year ending Jan. 31, 2026. This would result in 23 months of your self-employment income being included in your 2026 tax return.
- In 2027, in addition to reporting your actual income for the fiscal year ending Jan. 31, 2027, you would also have to include a new estimate to Dec. 31, 2027. You will be able to deduct the previous year’s estimate of income to Dec. 31, 2026.
Note that you can elect to include some income from the Jan. 31, 2026 fiscal year in the 2025 taxation year to maximize your RRSP contribution or to even out your tax burden. Any amount included in 2025 would be deducted on your 2026 tax return.
Once you start using the calendar year-end method you can’t change to the alternative method. However, you can switch from the alternative method to the calendar year method at any time.
If you qualify for an off-calendar year-end, consider whether the timing of your year-end can defer or save income taxes, or if it can be used to coincide with a cyclical slow period in your business.
Handling business losses when self-employed
Though you don't go into business to lose money, tax relief is generally available if losses do arise. Court cases have set out a framework for determining whether losses can be deducted against other income for income tax purposes.
First, consideration must be given to whether the business has been undertaken in pursuit of profit, or whether it is a personal endeavour. If the nature of an activity is clearly commercial, your pursuit of profit is established.
It will then be necessary to determine whether the source of the income is from a business or property. However, if there is a personal element to the activity, you will need to provide evidence to support your intention to carry on the activity for profit. The CRA may argue that you don't have a reasonable expectation of profit if your business has a personal element. A good example might be a hobby-type business. In such cases, in order to deduct business losses, you will need evidence that:
- you have a genuine commercial operation;
- your profit expectations are reasonable;
- you have done your homework in preparing to go into the venture; and
- you have appropriate training or have hired staff that have the appropriate training to run your business.
Always be prepared to demonstrate that your venture is undertaken in a sufficiently commercial manner, particularly if you are experiencing losses.
GST/HST and QST rules for self-employment
s an independent contractor, you will have to deal with the GST/HST. Although there are some differences, the Quebec Sales Tax (QST) essentially functions in a manner similar to the GST/HST.
GST/HST and QST rates for 2025
- New Brunswick, Newfoundland and Labrador, and Prince Edward Island: 15% HST
- Nova Scotia: 15% HST from January – March 31, 2025, and 14% from April 1, 2025 onwards
- Ontario: 13% HST
- Quebec: 9.975% QST and 5% GST; 14.975% combined GST/QST rate
- Other provinces and territories: 5% GST
As an independent contractor, you will generally be in the business of supplying goods and services to your customers or clients. Therefore, you will likely have to collect the GST/HST on your revenue and remit it to the government.
The GST/HST does not have to be collected on all goods and services (known as “supplies” under the rules). Certain supplies are exempt or zero-rated; if you’re in the business of making these types of supplies you do not have to collect and remit the GST/HST. Your BDO advisor can help you determine the GST/HST implications for your particular business.
If you are in the business of making taxable or zero-rated supplies, you will have to register for the GST/HST with the CRA. However, the news isn’t all bad. If you have to collect and remit the GST/HST on your revenue, you can claim input tax credits (ITCs) for the GST/HST paid on your expenses, including capital asset purchases. You must file GST/HST returns with the CRA to remit the GST/HST you have collected, less any ITCs you are entitled to.
The QST works essentially the same way, but the registration and filing of QST returns are administered by Revenu Québec. The QST paid on business purchases is referred to as input tax refunds (ITRs) and can be refunded to QST-registered businesses.
There are special GST/HST rules for small businesses, including the following:
However, as a small supplier engaged in a commercial activity in Canada, you can choose to register voluntarily. If you don't register, you will not be able to recover the GST/HST you pay on your expenses. If your clients are already registered for the GST/HST they likely won’t object to being charged this tax because, as registrants themselves, they can recover any GST/HST paid as an ITC.
Note that associates, or associated persons for GST/HST purposes, may include individuals, corporations, partnerships, and trusts. Two persons are generally considered associated when one controls the other. Talk to your BDO advisor to determine if you or your corporation is associated with any other entities for the purposes of the small supplier determination.
Once you exceed the $30,000 threshold in the preceding four calendar quarters, you must register for the GST/HST, starting with the first day of the second month after the threshold is exceeded. You are given a one-month grace period.
However, a business may lose its small supplier status if the $30,000 threshold is exceeded in any one calendar quarter. In this case, you must account for tax on every taxable supply made immediately after the threshold is exceeded, including the transaction that caused the threshold to be exceeded.
If you do register for the GST/HST, consider using the quick method, which is a simplified way to calculate the GST/HST that you have to remit.
- the nature of your business;
- the amount of eligible sales;
- the province in which the sale is made; and
- the province in which the permanent establishment that the sale is made through, is located. A permanent establishment is a fixed place of business that includes, but is not limited to, a place of management, a branch, or an office.
You are generally eligible for the quick method if your annual worldwide taxable supplies (including zero-rated sales) and those of your associates is $400,000 or less, including the GST/HST. Note that this threshold does not include other transactions which might require collecting GST/HST, such as the sale of real property or capital assets (e.g., equipment that you use in your business).
If you are in the business of providing legal, accounting, financial consulting, or actuarial services, you cannot use the quick method.
As a wholesaler or retailer, to qualify to use the quick method your purchases of goods for resale or use (other than basic groceries) must equal at least 40% of your total annual taxable supplies (including GST/HST).
The disadvantage of using the quick method is that you cannot claim specific ITCs on your operating expenses (such as utilities, rent, or telephone expenses), meals and entertainment expenses, or inventory purchases. The reduced percentage of GST/HST that you remit is intended to compensate you for giving up the right to these credits. You may, however, claim ITCs for all capital purchases, such as real property or equipment.
The QST also provides for the use of a quick method for small business. The rules are generally the same as the GST/HST, however the remittance rates are different and eligibility to use the method is limited to QST registrants with annual worldwide sales of $418,952 (GST/QST included) or less.
If you want to use the quick method, you must elect to do so on Form GST74, Election and Revocation of an Election to Use the Quick Method of Accounting. The QST form is FP-2074-V, Election or Revocation of Election Respecting the Quick Method of Accounting.
If you file monthly or quarterly returns, you must file your election form by the due date of the return for the reporting period in which you begin using the quick method. If you file annually, you must file the election form by the first day of your second fiscal quarter. Once you elect to use this method, you must continue to use it for at least one year (so long as you still qualify during that year).
Planning tip: If your business is labour intensive, the quick method may be beneficial. Your GST/HST and/or QST taxable expenses will likely be small compared to your revenue. Therefore, the advantage of only having to remit a portion of the GST/HST you collect will likely outweigh the cost of not claiming specific ITCs or ITRs.
Recordkeeping requirements for self-employment
Keep all records of your income and your expenses. If your records are organized, not only will this save you time (and accounting fees) when you prepare your tax return, it will also help ensure you are prepared should the CRA decide to review your return.
Receipts are crucial for all of your expenses. Keep these best practices in mind.
- Document the purpose of an expense on your receipt and keep it in an organized filing system, such as by type of expense (e.g., meals and entertainment, car and insurance expenses, etc.).
- If you're claiming a deduction for meals and entertainment expenses, write on the receipt who you took to lunch and why.
- Make sure you only claim your business expenses. The CRA will likely review your expense claims and compare them to the norms of your particular industry to see if they are reasonable.
For example, if your meals and entertainment expense is 5% of your revenue, but the norm for your industry is only 2%, you will need to explain why yours are higher. If your expenses are abnormally high, expect your tax return to get flagged and audited. For all your business expenses, it is important to ensure they are reasonable and legitimate, and that you have records of both the invoice and proof of payment. - Document your automobile expenses thoroughly. It’s extremely important to keep a logbook of your driving to support the number of kilometres you drive for business purposes. Your BDO advisor can provide you with details of what should be tracked and you can also read our guide, Tax Bulletin: How to track automobile expenses for tax deduction purposes.
- For income tax purposes, you must keep your receipts for six years from the end of the last taxation year to which they relate. Destroying them before this time will require permission from the CRA.
Some receipts may also need to be kept for longer, such as those for assets that were purchased more than six years ago, but are still being used in the business. If your tax return was filed late, this also needs to be factored into the six-year period.
Other tax and legal considerations
Consider whether any of the following apply to your business:
Most of the provinces have a basic sales tax on goods and in some cases, services. If you provide goods or services, consider whether you have PST obligations as well. Quebec has the QST system, which applies to most transactions, much like the federal GST. HST applies in Ontario, Prince Edward Island, Newfoundland and Labrador, Nova Scotia, and New Brunswick. PST applies in British Columbia, Manitoba, and Saskatchewan.
You may have to obtain a business license, depending on your municipality’s requirements.
If you hire employees, rather than independent contractors, you will be responsible for remitting employee amounts withheld, such as EI, CPP, QPP, income taxes (federal and provincial), and provincial payroll taxes (in the Northwest Territories, Nunavut and Quebec as a source deduction). You are also responsible for reporting them on the appropriate slips.
As an employer, you may also be subject to payroll taxes in certain provinces (Manitoba, Ontario, Quebec, Newfoundland and Labrador, and British Columbia). To make your employer remittances you will need to obtain a Business Number (BN) from the CRA.
To obtain a BN you will need to have determined your fiscal period. You will also need a Quebec identification number if you have employees in that province, because you will have to report separately for Quebec purposes.
How BDO can help
Whether you’re still considering becoming an independent contractor, or are already self-employed and need assistance with tax, legal, and reporting requirements, a BDO advisor can help. Contact our team for more information.
| Type of indicator | Indicators of employee status | Indicators of independent contractor status |
|---|---|---|
| Control |
|
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| Tools and equipment |
|
|
| Subcontracting work or hiring assistants |
|
|
| Financial risk |
|
|
| Responsibility for investment and management |
|
|
| Opportunity for profit |
|
|
Source: Canada Revenue Agency publication Employee or Self-employed? RC4110(E) Rev.21
The information in this publication is current as of July 11, 2025.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.