5 Dumb Tax Mistakes That Are Costing Canadian Freelancers Thousands

While freelancing in Canada offers incredible flexibility, there is certainly a learning curve. You get to set your own hours and choose who you work with, but this means you become solely responsible for your taxes with the Canada Revenue Agency (CRA).

Without having a HR department to help you, it’s easy to fall into some costly bad habits. Missing out on large write offs and getting hit with unnecessary penalties can all happen due to simple mistakes. Here are the 5 dumbest tax mistakes Canadian freelancers make and how you can fix them to keep thousands of dollars in your pocket.

Many people feel that as long as they are not making a large amount of money from their business they don’t need to worry about sales tax. This is because of the small supplier exemption offered by the CRA.

If you are making more than $30,000 in gross taxable sales in one calendar quarter or over four consecutive quarters you are no longer considered to be a small supplier. You will need to register for a GST/HST account within 30 days of reaching this threshold.

The Cost: If you surpass the threshold and don’t register you will eventually get caught out by the CRA. When you do you will have to pay back the GST/HST you would have owed from the date you should have registered. This will come out of your pocket as you wouldn’t have charged your clients for this. You will also be charged a large amount of interest and not filing penalties.

The Fix: Keep track of your rolling 12 month revenue. Once you see your business growing to reach this $30k threshold register for your GST/HST number.

While using your personal debit card to purchase a new laptop or deposit e-transfer funds into your personal day-to-day bank account may seem harmless at the beginning, mixing your personal and business funds will lead to financial disaster.

The Cost: During tax season, you’ll be going through all of your bank and credit card statements for 12 months trying to figure out whether you spent $150 at a local restaurant on a client lunch or with friends. You’ll miss out on legitimate business expenses and end up paying more income tax. If the CRA audits you, you’ll also have to explain all of your transactions due to the messy commingled account and may not be able to claim valid deductions.

The Fix: Open a new bank account and credit card for your freelance business. All of your earnings should go into this account and any business expenses should be paid for using this account. This will create a clean paper trail, saving you hours of stress and ensuring your deductions are protected.

While it’s always satisfying to write off expenses to reduce your tax payable, claiming too much on mixed-use assets is one of the quickest ways to raise the CRA’s suspicions. Mixed-use assets are assets that you use for both your business and personal life such as your cell phone, internet, vehicle and/or home office.

Cost: If you’re claiming 100% of your personal cell phone or vehicle as a business expense you will raise a big red flag. The CRA know that you use your phone for personal calls and your vehicle for shopping. They can audit you, ask for proof of how much you used it for, and disallow the expense completely. This means that you’ll have to pay back the taxes with interest.

Fix: Be honest and accurate. If you’re using your internet for 60% of your time for client related work and 40% for watching movies then only claim 60%. Log your vehicle mileage accurately. Record the date, where you went and what it was for.

As an employee, you only pay 50% of the CPP. As a self-employed freelancer, you’re both the employer and employee.

The Cost: You’ll be paying full CPP as a self-employed person. This is on any net self-employment income over $3,500. Many freelancers forget to account for this in their taxes. As you’re only accounting for federal and provincial tax brackets, when you go to do your T1 you’ll be shocked to see a huge CPP charge added to your balance owing.

The Fix: When you receive payment for an invoice from a client, immediately put 25-30% of the gross into a high interest savings account. This will ensure you always have enough money to pay your income tax and CPP (as you’re paying double).

5. Disregarding Micro-Deductions and Digital Receipts

We are all great at remembering large amounts like a $2000 computer upgrade but often we overlook the smaller, monthly expenses.

Cost: Digital subscriptions, software licences (Adobe Creative Cloud, Microsoft 365, QuickBooks), web hosting, domain renewal fees, bank fees and professional association fees can really add up quickly. If a freelancer has $150 a month on various software tools and is ignoring $1,800 in write-offs, they could be losing thousands in tax savings over a few years by not including these micro-deductions.

Solution: Use automation to make sure you’re capturing your receipts. By using a digital tool such as Dext or QuickBooks Online, you can easily take photos of your receipts and record digital invoices as soon as they arrive in your inbox. Remember that the CRA requires you to keep these records for 6 years from the end of the relevant tax year.

Canadian freelancers can manage their tax season by organizing your finances, tracking your income and saving for CPP. It is important to treat tax season as a key part of your business. You should visit the best tax accountant in Toronto and discuss your doubts. 

Q1. When do I need to file my taxes?

A1: You have until June 15th to file your tax return, however you must pay any outstanding tax to the CRA by April 30th to avoid paying interest.

Q2. Can I claim rent/mortgage?

A2: You can claim a percentage of your rent, utilities and home internet costs based on the size of your home office. You cannot claim any of your mortgage payments. Visit Aura Finance for more doubts. 

Q3. What if I earn less than $30k?

A3: You won’t need to register for or pay GST/HST, however you will still need to declare all of your income and pay regular personal income tax.

4. Do I need to keep paper receipts?

A4: No. The CRA accepts clear digital copies or scans of your receipts as long as they have the date, name of the shop, what you bought, and the amount of tax you paid. You must keep them for 6 years.