SELF-EMPLOYMENT INCOME

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

A tax clinic may refuse to prepare a return if the individual has self-employment income over $3,500 or claims employment expenses. However, if the self-employment income is only slightly above $3,500, is fully reported on a T-slip, and there are no employment expenses, the clinic might allow an exception.

The $3,500 amount is significant because it is the threshold at which CPP contributions begin—calculated on total employment and self-employment income exceeding $3,500.

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

Self-employed individuals may or may not receive a T-slip from the client or business they provided services to, depending on the nature of the work. Common slips include:

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

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

T4A-NR – For non-residents: Reports fees, commissions, or other amounts paid to self-employed non-residents for services provided in Canada.

T4As must be issued unless the total annual fees are under $500.^[1] 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 the slips are frequently not issued.^[2]

UFile steps 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.
3. In the Income, expenses section, add expenses if applicable.

Self-Employment Income not reported on T-Slips

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.^[3]   

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 will have more information about income earned in the gig economy, creating a stronger incentive for gig workers to accurately 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 we often refer to “self-employment,” the Income Tax Act uses the term “income from a business.” Profits or losses generated by a hobby or personal activity are not considered business income if the activity is not commercial in nature and is not undertaken with a reasonable expectation of profit. Such income is not reportable.^[4]

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 should 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. 
• 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 your calculation.

Where its unclear if an expense is allowed, general principles of analysis can be found in the Supreme Court of Canada’s Symes case.^[5]

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

1.        Is registration for the GST/HST program under the Excise Tax Act required?

2.        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 the supply may be “zero-rated” in which case the person would charge 0% HST, i.e. no charge.

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.  Some types of “exempt” supplies, such as most health services, education services, child care, and music lessons, are excluded when calculating gross earnings.

A person must register and start charging HST in the month following the month they exceed $30,000 in gross earnings, unless their supply of goods or services is zero-rated.

Examples (Fiscal year January 1 – December 31):

1. Hairdresser: Earns $35,000 in 2024. By mid-October, earnings reach $30,000. Must register by November 1, 2024, and start charging HST. GST/HST return 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. Must register by February 1, 2024 and start charging HST. Return due March 31, 2025.
3. Bookkeeper: Earns $35,000 between July 1 and September 30, 2024. Reaches $30,000 by August 15. Must register by August 15, 2024, and start charging HST. Return due March 31, 2025.

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

An exception applied 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 who are not registered under the Act.

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.^[6]

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 must be reported in the year the invoice was issued, not when payment is 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 (page 14):

 "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."^[7]

An Uber Eats driver is an example of a commission agent—someone earning income by selling goods or services for another business in exchange for a commission.

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.

While this may seem like a discrepancy between the return and the T4A slip, a CRA review is unlikely, as 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.

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.

CPP Contributions versus Canada Workers Benefit:

A client who earns a small amount of business income—such as an amount below the basic personal amount—may wonder what happens if they report it. There are two key effects: they may owe CPP contributions, and they may become eligible for the Canada Workers Benefit (CWB). Depending on the level of income, reporting the business income can actually produce a net refund, and it will also increase the client’s future CPP retirement entitlement.

For example, a client with $15,000 of net business income in 2024 and no other income would owe $1,368 in CPP contributions but would receive $1,590 in CWB. The result would be a refund of $222.

Can it be beneficial, and is it acceptable, not to claim all expenses?

Claiming fewer expenses affects net business income, which in turn impacts CPP contributions and benefits such as the Canada Workers Benefit. In some cases, it may be beneficial not to claim all business expenses, particularly if doing so could increase a client’s refund.

For example, if a client’s gross income is $15,000 and actual expenses are $10,000, claiming less than the full $10,000 in expenses could result in a larger refund, as illustrated in the following table (based on 2023 tax rates and calculations).

Based on the table above, the optimal strategy would be to claim only $5,000 in expenses, resulting in a refund of $755. If all $10,000 of expenses were claimed, the refund would drop to $361. CVITP volunteers use UFile, where determining the optimal expense amount requires some additional calculations. In contrast, TurboTax makes this easier, as it updates the refund automatically whenever changes are made to the return.

Can a person choose not to claim all their expenses in their calculation of business income? Opinions differ on this issue. The Income Tax Act provides the framework:

• Section 3 defines income to include business income.
• Section 9 states that a taxpayer’s business income is the profit from that business.
• Section 18(1)(a) allows a deduction only for expenses “incurred by the taxpayer for the purpose of gaining or producing income from the business.”

Some argue that since the law requires reporting profit, taxpayers should not deliberately underreport expenses just to increase a refund.

Help from CRA Liaison Office:

If a CVITP clinic cannot assist a client, a CRA liaison officer may provide support. Confidential in-person or virtual appointments can be arranged to help with self-employment tax matters. However, the scope of personalized assistance the officer can provide is not clearly defined.

References:

• Guide T4002, Self Employed Business, Professional, Commission, Farming and Fishing Income
• RC4022 General Information for GST/HST Registrants
• 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