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Thursday, December 1, 2022

Tax deduction guide for Canada

Are you deciding to start a business in Canada? If yes, you first need to sort out the Canadian tax rules. If you are familiar with legal tax matters, then it helps to save much money and unnecessary hassle. Tax matters are one of the primary things that keep you organized, and you can free up valuable funds for other investments. If we look at the record, self-employed people contribute a lot to the Canadian economy. There are more than 2.6 million who are registered as self-employed. But tax-related matters are complicated, and you need a good guide for better execution. 

What is meant by self-employed in Canada? Types of employment:

I know many Canadian citizens love going shopping and availing of customized services. Self-employment is one of the main things that lets you enjoy freedom while earning money. In Canada, there are various types of employment. So, let’s review each to understand the tax matters in depth: 


These are the people who operate a business on an individual level. Moreover, these people use a company based on client business relationships. But it’s important to understand that self-employment doesn’t work as a corporation or partnership. However, the business model is like a separate legal entity. Apart from this, as a self-employed person, it’s your responsibility to keep track of income and expenses. At the end of the business year, you can file taxes by reporting that information to the Canada Revenue Agency. 


In Canada, an employee is a person who works for a business entity, partnership, or company. However, against these services, the employee is eligible for a Canada pension plan and employment insurance. Besides, the employees pay the income tax and get a T4 slip at the end of the year to complete the annual tax return. The organizations use Canadian paystub generator and issue slips to the employees. 

A complete guide for self-employed individuals in Canada:

Earlier, we have discussed that as a self-employed individual, you must keep track of your income and expenses. Most importantly, the tax is applicable on profit and loss. For instance, if profit rises, employment tax will also go up and vice versa. However, you can use the T2125 form to report the amount on your tax return under professional or business income. Besides, it’s vital to mention that in Canada, the tax system is divided according to the income brackets. Here are a few frames that were mentioned by the Federal income tax department in 2021: 

Income range Applicable tax percentage
$50197 15%
Next $50197 20.5%
On the next $55233 26%
On the next $66083 29%
Over $221708 33%


Most importantly, it’s vital to mention that this range is tax-free if you earn around $13,808. The Canadian federal tax board considers it a personal amount. But each year, the CRA adjusts the tax brackets and necessary individual amounts. 

Note: If your income is less than $13,808 you still need to file taxes each year. In this way, you might be eligible for tax refunds, and many government benefits require applicants to be up to date on taxes. 

Definition of business for the Canadian government: 

Under Canadian tax law, any profession that considers trade, manufacturing, or undertaking is called business. However, the profit is the business income and must be declared according to federal and provincial government tax laws. But CRA determines the business according to their set criteria. Above all, remember that each province and territory in Canada has taxes that CRA collects. But Quebec City is an exception, and you can visit the main website to read more about the rules. 

Things you can claim as a self-employed individual in Canada:

There are many high-income skills, and now people prefer starting something independently instead of a 9-5 job. However, self-employment comes with working hours flexibility, but you need to file taxes. Moreover, you should know that you don’t pay tax on gross income. For instance, any business’s expense is considered deductibles, but they should be reasonable. Here are a few costs that are considered deductibles: 

Advertising Utilities Vehicle expenses
Rent payments Bank charges Supplies
Office supplies Meals and entertainment expenses for office Salaries and wages
Inventory Education expenses Official expenses
Professional fee Internet and other operating expenses Insurance premiums
Software and other development expenses


But personal expenses like vacations, recreational activities, and home expenses aren’t deductibles. Apart from this, some expenses fall in the gray area. So, in this situation, ask for professional help to determine nature. 

Things you need to apply for tax: 

Self-employed individuals are required to pay personal income tax and Canada pension plan premiums. Apart from this, you can contribute to employment insurance, but the payment of the compensation isn’t mandatory. Besides, here are the following things that you need while filling out the income tax: 

Personal information Name, social security number, DOB, and other standard information
Other information Tax slips, education slips, RRSP contributions, and medical expenses
Business related information Business name & address, NAICS code, business identification number, or partnership number
Financial information Expenses, income, invoices, receipts, profit & loss calculation, and other support documents


However, you must start preparing your tax return after preparing all the above documents. You can hire a professional or use a software/tax calculator for smooth working. Here are a few guidelines from CRA for self-employed individuals: 

The key line from 13499-14300 Report gross and net income, and don’t forget to put brackets in case of loss
Form T1139 It’s like a breakdown of how you gained net income/loss
Form T2125 Breakdown of business activities
Schedule 8 CCP Represent how much CPP premium you owe


However, after calculating the tax payable, you can start working on tax credit deductions. The tax credits in Canada include common ones like spouse or common-law partner amount, Canada caregiver amount, education & tuition amounts, donations, and gifts. Still, if things are technical, you can get professional help by paying a fee. 


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