SELF-EMPLOYMENT INCOME

Is the person eligible to have their tax return prepared by the tax clinic?

The CRA discourages tax clinics from preparing a tax return for persons with self employment income unless^[1]

• total income is under $1,000 and it is reported in a T4A box 48
• no expenses are claimed
• the individual is not registered for HST under the Excise Tax Act.

Some clinics, in their discretion, may prepare returns if self-employment income is not more than $3,500. Above this amount CPP contributions begin making the tax situation less simple.

Does the self-employed person have a T-slip reporting their income?

Self-employed individuals might receive a T-slip from the client or business they provided services to. Common slips include:

T4A – Box 48: Reports fees paid to self-employed individuals providing services to another business. Possible examples are an Uber Eats driver, PSW, housecleaner, bookkeeper, landscaper, childcare provider, or security guard. The fees in box 48 are not supposed to include any HST paid by the issuer.

T4A – Box 20: Reports commissions paid to a self-employed individual.

T5018 – Construction Sub-Contractors: Used for construction sub-contractors.

For service fees reported in Box 48, a T4A must be issued if total payments for the year are $500 or more.^[2] However, the CRA has publicly stated it is not assessing penalties for failing to report amounts in Box 48, so this requirement is often ignored and slips are frequently not issued.^[3]

UFile steps for reporting income if person has a T-slip:

1. As with any T-slip, add the T-slip to UFile by adding the box information.
2. Under Interview Setup, check off the box for Self-employed business income. In the Self-employment income section, click the plus sign next to T2125 – Business Income.  

1. In the Identification section, fill in the business name (use the client’s own name if the client hasn’t registered a business name). Enter dates for the beginning and end of the fiscal year.  This will usually be Jan 1st to Dec 31st. Choose a business classification by selecting the best one that applies, even if it’s not perfect.
2. In the Income, expenses section, do NOT add the T4A income amount as Gross sales, commissions or fees. Instead, scroll down and enter the income corresponding to the T-slip and box number.

UFile Steps if Self-Employment Income is not reported on a T-Slip:

If a person earns self-employment income that is not reported on a T-slip, the income is entered in UFile under the Income and Expenses section of the T2125 as Gross Sales, Commissions, or Fees. If HST was charged, it is included in the gross amount, and the total HST collected is entered in the GST/QST Included in Sales box further down the form.^[4]   

Deadline for filing and paying taxes:

If reporting self-employment income, the due date for filing a return is June 15th, not April 30th. However, if the person owes taxes they must be paid by April 30th. If, for example, a self-employed person files and pays taxes in early June, they will incur an interest charge for late payment of tax, but they won’t incur a penalty for late filing.

Gig Workers:

The gig economy covers short-term contracts, freelance work, or temporary jobs arranged through online platforms or mobile apps. Gig workers typically operate as independent contractors or freelancers. Examples include Uber Eats or Skip the Dishes drivers, rideshare drivers, and contractors providing services like web development, graphic design, or translation. Gig workers may or may not receive a T-slip.

A recent amendment to the Income Tax Act requires operators of digital platforms to report payments made to Canadians who provide goods or services through their platforms (e.g., Uber drivers, Airbnb hosts, Kijiji sellers). Reporting is due by January 31 following the tax year. As a result, the CRA has information about income earned in the gig economy, creating a stronger incentive for gig workers to report their income.

Occasional Earnings:

If income is not reported on a T-slip and is $3,500 or less, it may be acceptable to report it as “occasional earnings” under Other Employment Income, even if it appears to come from self-employment. (See the separate document on this topic for details.)

Income (or loss) from a hobby:

While reference is often made to “self-employment income” as a category of income, the Income Tax Act doesn’t actually have such a category and instead it uses the term “income from a business”.

Profits or losses generated by a hobby or personal activity are not considered business income. Profits or losses are from a busines if the activity of the taxpayer is undertaken in pursuit of profit, or in a sufficiently commercial manner.^[5]

Expenses:

A discussion of expenses is beyond the scope of this document. The CRA provides some limited guidance, including this webpage:  Business expenses - Canada.ca.

If a person does not have a GST/HST account, expenses claimed on the T2125 can include HST.

Some general guidance for common expenses:

• Motor Vehicle Expenses: It is recommended to keep a logbook recording the odometer reading at the start and end of the year, and for each business-related trip: the date, destination, purpose, and distance traveled. Keep receipts or records for fuel, insurance, lease payments, and maintenance. Mobile apps can help track this information, and some tax software can integrate data from these apps directly. The CRA could send a review letter requesting the logbook. Here is an excerpt from an actual review letter:^[6]

• Cell Phone or Internet Charges: Retain receipts and records of payments, determine the percentage of use for business purposes, and be prepared to explain and justify the calculation.

Where it's unclear if an expense is allowed, general principles of analysis can be found in the Supreme Court of Canada’s Symes case.^[7]

Regarding GST/HST, the two questions self-employed persons need to consider:

1.        Do I need to register for the GST/HST program under the Excise Tax Act required?

2.        If I am registered, do I have to charge HST to the person or company I am supplying goods or services to?

These are separate questions. A person might be required to register, but they might not need to charge HST, in particular if the goods or services supplied are “zero-rated” in which case the HST rate is 0%.

Obligation to get an HST/GST registration under the Excise Tax Act:

In Ontario, the Harmonized Sales Tax (HST) is a 13% tax that combines the federal Goods and Services Tax (GST) and the Ontario provincial sales tax (PST). It applies to the supply of most goods and services and is governed by Part IX of the Excise Tax Act.

A self-employed person in Ontario must register for a GST/HST account if their gross business revenue (before expenses) reaches $30,000 or more over four consecutive calendar quarters (January–March, April–June, July–September, October–December) or if revenue exceeds $30,000 in a single quarter.

When registering, the CRA issues a 9-digit business number (BN) and a GST/HST program account number starting with RT. For example: 123456789RT0001.

If the $30,000 threshold is not met, the person is considered a small supplier and does not have to register or charge HST.  When calculating revenue, some types of supply are “exempt” and not counted, such as most health services, education services, child care, and music lessons.

A person must register and start charging HST in the month following the month they exceed $30,000 in gross earnings, even if their supply of goods or services is zero-rated and they will not be charging HST.

Examples (Fiscal year January 1 – December 31):

1. Hairdresser: Earns $35,000 in 2024. By mid-October, earnings reach $30,000. They must register by November 1, 2024, and start charging HST. A GST/HST return is due by March 31, 2025.
2. Construction Sub-contractor: Invoiced $35,000 between April 1, 2023, and March 31, 2024. Reaches $30,000 by mid-January 2024. They must register by February 1, 2024 and start charging HST. A return is due March 31, 2025.
3. Bookkeeper: Earns $35,000 between July 1 and September 30, 2024. Reaches $30,000 by August 15. They must register by August 15, 2024, and start charging HST. A return due March 31, 2025.

If a business later declines and annual sales fall below $30,000 then HST collection can stop in the following fiscal year.

An exception applies to providers of personal passenger service, like taxi and Uber drivers. For such providers, registration is required regardless of their revenue amount, and they must collect HST on all revenue.

Zero-rated services - delivering for Uber Eats, Door Dash, Skip the Dishes:

Certain goods and services are taxable at a rate of 0% HST, referred to as zero-rated supplies, meaning that HST is not charged or collected. These are listed in Schedule VI of the Excise Tax Act and include items such as:

• basic groceries,
• most prescription drugs,
• medical devices, and
• goods and services sold to non-residents of Canada.

The CRA apparently takes the position that food delivery services provided to platforms like Uber Eats, Door Dash and Skip the Dishes are zero-rated services, but this is unclear.^[8]

Digital Economy Workers and HST:

Some people earn money selling physical or digital items through an internet platform, where the platform brings together the supplier and customer. Examples are Etsy, eBay, and Kijiji. If the individual seller is registered under the Excise Tax Act they may be required to include HST in their price, collect it, and remit it to the CRA. If the seller is not registered, the platform itself may be required to charge HST and remit to the CRA.^[9]

Cash v. Accrual Accounting:

When a self-employed person provides a service and issues an invoice in one year but does not receive payment until the next year, income is reported in the year the invoice was issued, not the year payment was received. This follows the accrual method of accounting.

The Income Tax Act does not explicitly require self-employed individuals to use either the cash or accrual method, but the CRA generally requires the accrual method for most self-employment income. According to CRA Guide T4002:^[10]

 "Farmers, fishers and self-employed commission agents can use the cash method or the accrual method to report income. All other self-employment income must be reported using the accrual method."

There is no evidence that CRA considers gig delivery drivers to be “self-employed commission agents” for purposes of the cash-method exception.

A common situation arises when a person reports revenue in the correct tax year under the accrual method but receives a T4A slip for that revenue in the following year. In this case, the T4A amount should not be entered into UFile or the T2125, because the income was already reported in the previous year. UFile cannot simultaneously report the T4A and zero out the revenue for accrual purposes, so the correct approach is to ignore the T4A entirely.

Despite the discrepancy between the T1 return and the T4A slip, a CRA review is unlikely to be triggered since the CRA is aware this situation occurs frequently.

CPP contributions:

CPP contributions are required on net self-employment income over $3,500. If contributions are owed, the individual must file a tax return, even if no federal or provincial tax is payable. The amount payable is 11.9% on net income between $2,500 and $71,300.

Self-employment income from another province:

If a client earns self-employment income in a province other than Ontario, that income is taxed by the province where it was earned. In this case, Form T2203 must be completed. In UFile, this can be done under the T2125 section, in the sub-section “Allocating income to multiple jurisdictions”. UFile will automatically generate a T2203 if income is reported outside Ontario.

Ombudsman Recommendation:

In its  2023 Annual Report, the Office of the Ombudsperson recommended that the CRA clearly define the eligibility criteria for the CVITP so that self-employed individuals with modest income and simple expenses can access free tax clinics. This recommendation was largely prompted by the growth of the gig economy and the fact that much of this work is done by newcomers. Despite this recommendation, CVITP guidelines for clinics have not significantly changed.

CPP Contributions versus Canada Workers Benefit:

A client who earns a moderate amount of business income—such as an amount above $3,500 but below the basic personal amount—may wonder what happens if they report it. There are two key consequences: (1) they will owe CPP contributions, and (2) they may be eligible for the Canada Workers Benefit (CWB). Reporting the business income could result in a net refund, as well as increasing the client’s future CPP retirement entitlement.

For example, a client with $15,000 of net business income in 2025 and no other income would owe $1,368 in CPP contributions but would receive $1,633 in CWB (assuming no advance CWB was paid). The result would be a refund of $265.

Assume a person is not disabled and earns only self-employment income. As income increases above $3,500 the person is required to pay CPP contributions. On the other hand, if the person earns $3,000 or more they become entitled to the Canada Workers Benefit. At lower incomes, the CWB exceeds CPP contributions, but at some point CPP contributions exceed the CWB. That crossover point is about $17,200.

The table below illustrates an example of a person earning $15,000 in revenue and incurring differing amounts of businees expenses:

Record Keeping:

It can be helpful for some self-employed persons, especially if they have expenses, to open a second personal bank account and get a second credit card, and to use these for only business revenue and expenses.

It’s also good practice to use Excel or GoogleSheets to record revenue and expenses.

References:

• Guide T4002, Self Employed Business, Professional, Commission, Farming and Fishing Income
• RC4022 General Information for GST/HST Registrants
• Excise Tax Act (HST registration, collection, etc)
• Webpage about expenses: Business expenses - Canada.ca
• Amendments to CRA re: reporting rules for digital platform operators.
• Liaison Office website
• Driversnote website - tax guides for Uber Eats and others