If you are a Canadian small business, creative and/or freelancer, this is the advice you need to know on money and taxes. As a freelancer and creative myself, money can seem like a stressful and scary topic to broach, but in the last couple years as I’ve taken charge of my own finances, I’ve seen a huge shift in my mentality with how I approach numbers, and this newfound power means I have control over my money, not the other way around.
The advice here on money and taxes for Canadian small business owners and freelancers is a condensed transcript of a conversation I had live on Instagram in February 2021 with CPA Anisia Hurst. (Watch the video here)
Through my conversation with Anisia, she demystifies the basics of taxes for Canadian small business owners and freelancers, how there’s so much power in knowing your numbers, and that it can actually be fun.
Anisa Hurst is practising accountant in excess of 10 years, and co-owns a small creative business with her sister, Brianne Gabrielle Cakes.
Buckle up! While this is an approachable guide, it’s a meaty post with a lot of information!
*This transcript has been edited for clarity.
Table of Contents
- How much do I earn before I am a freelancer?
- When do I start charging tax?
- How much money should I put away per job?
- How do I know how much to remit for taxes?
- How much money should I set aside for myself after taxes (first year of business)?
- Do I need multiple bank accounts?
- What do I do as a sole proprietor?
- How do I stay organized?
- What can I write off for my business?
- Where do I start to file my taxes?
- Is there tax liability as a sole proprietor
- Can I claim clothing as an expense?
- What are common expenses that get thrown out?
- Key Takeaways
How much do I have to earn before I can call myself a freelancer?
Short answer: you made money, honey? Congrats, you’re a freelancer.
Anisia Hurst: In Canada, there’s not really a threshold in terms of income that you have to earn with regards to freelancing. You often hear people use the term freelancer, side hustle, or small business owner. All of those terms and all of those descriptions basically fall under the self-employed umbrella, which means that you’re earning income for yourself outside of an employer.
So if you’re getting paid, it doesn’t matter if it’s five bucks or five thousand dollars, you’re considered a freelancer. You’re considered to have a small business.
That being said, I will qualify that there are thresholds with regards to [charging] GST — in terms of income threshold you have to meet in order to cross over into no longer being what’s called a “small supplier”. So once you hit that income threshold, at that point you’d need to be registered for GST.
What is the threshold where small businesses have to start charging taxes?
Short answer: once you hit the threshold of $30,000 in revenue, you need to register for GST.
AH: The basic threshold is once you hit $30,000 in revenue, at that point you need to be registered for GST. If you haven’t hit the thirty thousand and you’re still below that, you don’t necessarily have to register for GST. You can optionally register, but it’s not a requirement. So once you cross the $30,000 threshold at that point you are required to charge.
How much money should I put away per job?
Short answer: For most small businesses and creatives, first put away 25-30% of income for taxes whether they come out as instalments or annually, and put them in a separate bank account you can’t touch. The money left over is for you to decide what to do with depending on your financial goals.
AH: I typically recommend you want to be setting aside 25-30% of your income. Let’s say you earn ten thousand dollars on a job. You want to be putting aside $2,500-$3,000 aside.
You definitely want to be putting that into a separate bank account for the purpose of tax instalments, because I find that if you have it separate from your everyday money, it’s a little bit easier to keep that [account] designated for that purpose. If you see it every day, it’s in your everyday account, you think it’s money that’s available to you to spend and come tax time in April, you don’t have the funds to pay your tax bill. So I always recommend twenty five to thirty percent, unless of course you’re in a much higher tax bracket and always put it into a separate account.
It’s a little bit different when you’re self-employed versus when you’re working through a corporation or like an incorporated entity. Essentially, once you pay your tax on a self-employed income, that money is yours to do as you please. So you can allocate that money to savings, to paying bills, whatever you want it to be. It really depends in terms of what you’re looking for, what your goals are, that sort of thing. But my first thing is always make sure that you set aside money for taxes because, you know, the taxman is always going to come knocking.
How do I know how much to remit for taxes?
Short answer: Quarterly tax instalments if you paid more than $3,000 last year in taxes, if not, annually. Look at your previous year for the financial outlook of the next year to start calculating what you may owe in taxes.
AH: Typically you’re required to pay quarterly tax instalments if you’ve had on average tax payable in the past year greater than three thousand dollars. So let’s say you had a really fantastic year this year and you know you can pay all your taxes all at once. You didn’t have to make quarterly remittances. But come next year, because you had a fantastic year, you’re going to be required to be making those quarterly instalments. It’s always a good idea to start from the prior year and look at how you did in terms of your revenue, your income, your profit; you’re going to be taxed on that net figure. You need to look at: what’s your net income, what’s your taxable income? If you know that it’s going to be a similar year to what you did last year in terms of earnings and expenses, [the tax owing] will be consistent year over year.
Let’s say, for example, then, you know, based off of last year, I paid $10,000 in taxes, I’m probably going to owe pretty much something similar to that this year.
That being said, [knowing that last year I paid $10,000 in taxes — which is above the $3,000 threshold, I would] break that up into quarterly instalments. I know that I’m going to have to pay $2,500 dollars in quarterly instalments every quarter [going forwards]
How much should I be setting aside for myself after putting money away for my taxes (in the first year of business)?
Short answer: after you’ve set aside 25-30% of your money for taxes, you can do what you please with what’s left over.
AH: Ok, so let’s say you’re starting a business and you’re in the first year, at that point, the rule of thumb could be to put that 25-30% away, because at this point you don’t know what your taxes are going to be.
[Once] you have that first year under your belt, at that point you kind of have a basis or some sort of foundation in terms of what [you would owe for taxes in the future]. But in the initial year that you’re first starting out, you have no clue what that is going to be like, right? So it comes back to making sure that you’re putting aside a set amount from every job right off the top. It comes into your bank account and you’re going to take 25-30% straight off of that. Transfer that over into another savings account or some other account that’s out of sight, out of mind that you’re not even going to spend from that account.
Do I need multiple business accounts?
Short answer: yes, at minimum make sure to have a separate chequing, credit card, and money for taxes account for your business
AH: I think it’s definitely important to keep your business finances separate from your personal finances. That being said, everything should be separate. You should have a separate chequing account for your business. You should have a separate business credit card.
The other accounts I mentioned before, is a separate account for [any tax] instalment [payments]. That’s basically what we used through our own business that I own with my sister. We have the three separate accounts.
We have our chequing or savings, which basically goes to towards any sort of tax instalment that we have to deal with. And then we have a business credit card and we keep all of our finances separate so that we can stay organized and we know where everything is being allocated and what it should be allocated for. Those are the key accounts that I would probably recommend.
What should I do in my first year of business if I’m a sole proprietor?
Short answer: If you’re starting up a new business venture, keep all money earned in a separate account – do not let it mix in with your personal money. Even a separate account in your personal name will work better than nothing, though it is strongly recommended to open a business banking account to keep your finances separate.
AH: If you’re trying to slash everything through just one personal chequing account [it can get messy quick]. Let’s say it’s your first year, you don’t really know if this is going to become a thing: I think your accounting records have to be meticulous and nine times out of ten, they’re not from what I’ve seen with clients, from what I’ve seen in my own personal experience since your records, your personal tax records and your financial records are not going to be meticulous in that first year, I guarantee that.
I just always recommend to set up a separate account. Even if you don’t necessarily have a business account, you can still go to the bank and be like, I want to open up a new account still under my personal name, but then all of my business money flows through that account instead of my checking account.
What is the best way to stay organized?
- Keep business and personal finances separate
- Have an excel spreadsheet or book keeping/accounting software like quickbooks online to keep track of your income and expenses
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- Have a date with your money every week or month to look through your finances, statements, and records to get comfortable with looking at your money
AH: Keep your business finances separate from your personal finances where wherever possible. That’s the first thing that’s going to help you stay organized, because during personal tax time, when it’s time to separate those expenses and income, it’s probably easy to pick out the income because it’s easily identifiable. But when it comes to the expenses, it’s going to be a little bit trickier as to justifying, “was that a business expense?” “What about that one?”
So the first thing: to keep yourself organized, separate your bank accounts into business versus personal. OK, the second thing I would recommend is use some sort of software and it can be as basic as Excel and and keeping track of all your expenses in an excel log or something like that, or if you’re ready to upgrade, maybe even quickbooks or something like that, some sort of accounting software. And you can use that to track your income and your expenses. You want to keep track of the date, you want to keep a description of the item and obviously how much it cost, or how much you earned. So I think both things are super important.
The other thing that I would probably say that is really important to keeping you organized and even building your confidence is just scheduling a money date with your finances.
It could be something that you’re doing every Friday or every Saturday or whatever day you pick a day every week, and you basically make that your money date, where you spend an hour looking at your finances, you go through your bank statements, you go through your credit card statements, and you basically go through all of your records and get yourself comfortable and start looking and tracking at the income and expenses.
I’m personally a huge fan of this: get accustomed to looking at your bank account daily. Every morning I wake up, I open my banking app and I look at my bank account and I do it for [all the accounts]. It makes you feel so much more comfortable knowing and seeing your numbers. Once you get comfortable with that, it makes your whole money date a little bit easier and more comfortable. And then you get into the whole idea of being a lot more comfortable and organized.
If you’re doing your bookkeeping, maybe not on a weekly basis, but maybe every few weeks or every month, depending on what works for you, you’re making a point in your scheduling that time to look at your money and do your bookkeeping so that when tax season rolls around, it’s not like a crazy scramble. And it’s just like, oh, I just had like an hour or two to put some things together, boom. I send it off to my accountant and off we go.
What can or can’t I write off for my business?
Short answer: Look at the T2125 form from the CRA, it will give you the majority of answers to what expenses you can claim as a starting point. From there, your accountant can help you go through other any other deductibles.
AH: Look at the the statement of business activities, which is the form that you actually have to file as part of your personal tax return. When you report in self employment income, it’s called a T2125 . And essentially it lists out line by line all the different types of expenses that you can claim.
So I feel like that’s a really good place to start. Looking at the T2125, on the CRA website, take a look at it and go through line by line and get an idea. It’ll kind of give you a little bit of of knowledge and understanding in terms of what you can count right off what expenses are are taxable, what’s not deductible. And then at that point, you know, you can start to do your research if you’re like, OK, well, I see that I can do meals and entertainment.
I’m like, if you start with the T2125 and I always encourage clients to do this, I’m [tell them to] fill it out as best they can and they often do, but they’ll send me back and they’ll be like “I had this expense, I had this expense. I didn’t know what to do with it. What do you think?”
And that that’s OK. Yeah. At that point, like you’ve got most of the legwork you’ve done, you have an idea in terms of what deductible for the purpose of your business. So I think it’s just a really good starting point to leap off.
Where do you begin when it comes to start filing my taxes?
- Have your personal info ready and any updates that happened in your life (a marriage, children born, etcetera)
- Have your last year’s notice of assessment – it will provide you with info on what deductions or credits you may be eligible for this year
- Figure out all of your income sources for the year (T4, T5, CERB or gov’t payments, investments)
- Check the deadlines for filing
- Look to your expenses and see what deductions are available
- Ask your accountant for anything else they may need from you
AH: Start gathering the basics. Make sure that you’ve got your date of birth, social insurance number. If you’re filing with a partner or you have children or anything like that where you have children or got married during the year, those are the sorts of things that you want to be collecting at this point.
I would recommend that you start pulling your notice of assessment from last year. That’ll give you an idea in terms of what kind of deductions and credits that you claimed, because chances are you’re probably eligible for similar deductions and credits again this year. But just skimming through it, you might also see, oh, OK. Well, I had I had a child this year I’m entitled to child care deductions, you know, so it’ll it’ll start to ring a few bells in that regard though, I definitely recommend starting the information gathering stage. And then get your notice of assessment and start looking through that once you’ve got that, I think the next step is obviously to figure out your income sources.
Did you work for an employer that had just one T4, or did you work for an employer that had T4s? Were you self-employed? Like what we were just talking about? Start figuring out where your income is coming from.
Did you have government assistance? Many people applied for and received CERB last year. That income is taxable. There is a form for any government assistance.
[March is the time where you should start seeing your T4s, T5s, investment income slips start to come in]
Once you figure out what your income sources are, then you want to look at your expenses. Do I have any deductions available? Do I have any expenses that I can claim to offset my business income?
And I think those are the key areas that I would start, you know, that’s going to get you on the right track. At that point, once you have all of that information and you present it to your accountant, they’ll go through it and they’ll be like, oh, you missed this or you missed this or what about this?
What liabilities are there when I am a sole proprietor and haven’t separated my money into a business bank account?
Short answer: Not much liability from a tax perspective, but more of a liability from a legal perspective
AH: I think there’s not really much in terms of liability from a tax perspective, in the sense that, you know, you’re earning the income personally, you’re going to be taxed personally.
I think the liability comes in is from obviously a legal perspective and from that sort of perspective where, you know, you’re looking at insurance or you’re looking at, you know, can I be sued? Well, obviously, as a proprietor, without that corporate veil, you are your business. You’re one in the same. There’s basically no legal protection at all.
In terms of like being able to separate your bank account and and whether there’s any risk or liability there as a proprietor and whether you have it in a personal account versus a checking account for tax purposes, you’re considered one and the same.
Can I claim clothing like shoes or outfits for work use?
Short answer: clothing is not deductible for tax purposes unless it’s strictly a work uniform with logo that cannot be worn anywhere else.
AH: In its simplest form is clothing, shoes, any sort of work outfits or anything like that that you’re purchasing for yourself are not deductible for tax purposes. You could maybe get some leeway with if it’s a uniform, for example, that it has printed on X Y Z logo, [you couldn’t wear the uniform anywhere else]. Let’s say you’re in Aritiza, for example, and you see cute dress and you want like a cardigan, and you purchased that for because obviously you need to look professional when you’re shooting a wedding and you purchase that and you’re like, OK, this is like my work outfit. Well, how do you justify that? You haven’t worn that somewhere else for personal purposes. And that’s the argument that a lot of taxpayers get into theory and it honestly is not justifiable.
People have actually taken this to tax court and they lost it every single time. That being said, if you’re looking at things like building a photographer’s closet, that sort of thing, it’s not the intent is that it’s not for yourself. I think it’s more of a case that you could claim those sorts of items as business expenses in the sense of building a client wardrobe and offering [it to your client], then you can perhaps make that more of a reasonable claim and claim that as a business expense. But anything for yourself personally is a no go.
What are common business expenses, that get thrown out?
Short answer: clothing, vehicle expenses, meals and entertainment without justification
AH: I see a lot of people trying to claim clothing.
Another one that I see is vehicle expenses or personal use of a vehicle that there’s a lot of interest with around that. The other top thing I see is probably meals and entertainment. People try to flash through every single purchase that they make at a restaurant a business expense, but they can’t actually justify it and say who they were actually meeting. What was the purpose of that meeting or anything like that. So we see a lot of those types of items being being thrown out.
- If you’ve made money on a product or service you’ve created, you’re a freelancer
- Once you hit $30,000 in revenue you need to register for GST
- Put away 25-30% of your income for taxes, and if you owe more than $3000 in taxes, you will be required to remit quarterly in the upcoming year.
- Once you set aside 25-30% of your income for taxes, the rest of the money is yours to distribute how you see fit.
- Have a separate business account for all your banking, and if you are not going to set up a separate business account in your first year, set up a separate account under your personal name
- Using an Excel spreadsheet or accounting software like QuickBooks will help you stay on top of your finances,
- Have a money date every week or months to look through all financial statements records and get comfortable with looking at your numbers
- Review the T2125 form provided by the CRA to see what you can and cannot write off for your business
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I hope this information makes your next tax season easier and it’s a less scary approach to brewing your money in your business as well as personal life. I truly believe there is power in knowing your numbers as it will allow you to start figuring out what your next move can be, whether it’s in business or life.
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