How do I calculate my income as a Canadian freelancer, contractor, or business owner?

Calculating your income as a Canadian freelancer, contractor, or business owner involves understanding your revenue sources, keeping accurate records, and complying with tax obligations set by the Canada Revenue Agency (CRA). Here’s a straightforward guide to help you navigate this process.

Understanding Your Income Sources

As a self-employed individual, your income is derived from various activities, including:

Freelance Services: Income from providing services or completing projects for clients.

Contract Work: Earnings from short-term contracts or gigs, often facilitated through online platforms.

Business Operations: Revenue generated from running a business, which could include selling products or services.

It’s crucial to note that all income must be reported for tax purposes, regardless of its source. This includes any income earned from outside Canada if you are a resident¹ ⁴.

Record-Keeping

Maintaining thorough records is essential for calculating income and preparing for taxes. Here are key practices:

Track All Income: Document every payment received, including invoices and receipts. This is vital for substantiating your income claims.

Expense Documentation: Keep records of all business-related expenses, such as materials, software licenses, and marketing costs. These can be deducted from your income to reduce your taxable amount⁴.

Retention of Documents: The CRA recommends keeping all supporting documents for at least six years. This includes invoices, bank statements, and receipts to validate your income and expenses in case of an audit¹.

Calculating Your Income

To calculate your income for tax purposes, follow these steps:

Total Your Earnings: Sum up all income received from your freelance work, contracts, and business activities over the tax year.

Deduct Eligible Expenses: Subtract any eligible business expenses from your total income. This can include costs related to your workspace, supplies, and other necessary expenditures⁴.

Report Your Income: Use Form T2125, Statement of Business or Professional Activities, to report your income and expenses when filing your taxes. This form helps you calculate your net income, which is your total income minus your expenses⁴.

Tax Obligations

As a self-employed individual, you have specific tax obligations:

Income Tax: You must pay income tax on your net earnings. The rate varies based on your total income bracket.

GST/HST Registration: If your total revenue exceeds $30,000 in a calendar year, you are required to register for and collect GST/HST on your sales. Even if your income is below this threshold, you may choose to register voluntarily to claim input tax credits on your business expenses³ ⁴.

Instalment Payments: If you earn income without tax withheld, you may need to make tax instalments throughout the year to avoid a large tax bill at the end of the year¹.

Conclusion

Calculating your income as a Canadian freelancer, contractor, or business owner involves careful tracking of your earnings and expenses, understanding your tax obligations, and maintaining proper records. By following these guidelines, you can ensure compliance with CRA regulations and make informed decisions about your finances. For more detailed information, consider visiting the CRA's official resources on self-employment and business income¹ ³ ⁴.