Freelancers in Canada are considered self-employed individuals, which means they are responsible for reporting their own income and paying taxes on it.
Unlike regular employees, freelancers do not have taxes automatically deducted from their pay.
Understanding how to report income, deduct business expenses, and complete Form T2125 (Statement of Business or Professional Activities) is essential for avoiding penalties and ensuring you pay the correct amount.
How does the CRA define a freelancer?
According to the CRA, a freelancer is anyone who earns income by providing services or products on their own rather than as an employee.
This can include writers, designers, consultants, photographers, tradespeople, and more.
You are considered self-employed if you control your own work, use your own tools, and take financial risk for your business.
Do freelancers need to register a business?
You don’t always need to register a business name. If you use your personal name as your business name, registration may not be required.
However, if you use a different business name, you must register it with your provincial or territorial business registry.
If you expect to earn more than $30,000 in gross income in a 12-month period, you must also register for a Goods and Services Tax/Harmonized Sales Tax (GST/HST) account through CRA My Business Account.
What is Form T2125?
Form T2125 (Statement of Business or Professional Activities) is how freelancers report their income and expenses each year.
It’s filed along with your T1 Income Tax and Benefit Return.
The form allows you to list all your self-employment earnings and subtract eligible business expenses to determine your net income.
What business expenses can freelancers deduct?
Freelancers can deduct reasonable expenses directly related to earning income. The CRA allows you to claim costs such as:
- Home office expenses (if you work from home, you can claim a portion of rent, utilities, and internet).
- Supplies and equipment used for business purposes.
- Advertising and marketing costs.
- Vehicle expenses, if used for business travel.
- Professional fees, like legal or accounting services.
- Insurance and bank charges related to your business.
How do freelancers pay income tax?
Freelancers report their total income and expenses on Form T2125, which determines their net self-employment income. That amount is added to other income sources on their T1 return.
Because freelancers do not have tax withheld at source, many choose to make quarterly instalment payments through CRA My Account.
If you owe more than $3,000 in tax ($1,800 in Quebec) in consecutive years, you are required to make these instalments.
Do freelancers pay CPP and EI?
Yes, freelancers must pay both the employer and employee portions of the Canada Pension Plan (CPP) contributions.
The total rate is currently 11.9 % on net income up to the annual maximum. This is calculated automatically when you file your tax return.
Freelancers generally do not contribute to Employment Insurance (EI) unless they choose to register for the Employment Insurance Special Benefits for Self‑Employed People program.
What records should freelancers keep?
The CRA requires freelancers to keep detailed records for at least six years. This includes receipts, invoices, mileage logs, and bank statements showing all business-related transactions.
Keeping organized records helps support your claims if the CRA reviews your return.
What happens if a freelancer doesn’t file taxes?
If you fail to report freelance income, the CRA may charge interest and late-filing penalties.
Repeatedly underreporting income can lead to additional penalties or audits.
Even if you can’t afford to pay your full balance, you should still file on time to avoid these penalties and then arrange a payment plan through the CRA.