Self-employed / IT contractor in Canada: a tax setup from scratch

TL;DR: Many newcomers in Canada work as an IT contractor / freelancer (1099-equivalent, T4A, or invoicing). That makes you self-employed — a different tax world than a T4 employee. The key points: you pay both halves of CPP (11.9%), you must register for GST/HST when revenue > $30K, you have to make quarterly tax instalments (CRA doesn't withhold for you), BUT you can deduct business expenses (home office, equipment, software, part of your auto). A sole proprietorship is simpler to start with; incorporate once you steadily retain $100K+. This guide is the complete setup.

Self-employed ≠ employee: the key difference

As a T4 employee: your employer withholds income tax + CPP + EI from every paycheque, you receive net pay, and in April you owe almost nothing extra.

As a self-employed person (contractor/freelancer): you receive the gross (the full amount), and YOU are responsible for:

• Income tax (nothing is withheld)
• Both halves of CPP (11.9% — the employee + employer parts)
• GST/HST collection + remittance (if registered)
• Quarterly instalments (CRA wants the tax during the year, not just in April)

The biggest shock: your first tax bill. If you earned $120K self-employed and didn't set anything aside — you could owe $35-45K in April. So: set aside 30% of each invoice in a separate savings account.

⚠️ EMD compliance disclaimer: Educational content, not tax/accounting advice. Self-employed tax has many nuances; engage a CPA. I do not provide accounting services.

Sole proprietor vs incorporate

Sole proprietor (the default, simplest)

• Business income goes on your personal T1 (form T2125)
• No separate legal entity
• Simple, cheap, no corporate filing
• BUT: all income is taxed at your personal rate (up to 47%), no tax deferral, unlimited personal liability

Incorporate (CCPC)

• A separate legal entity
• SBD 11% corporate tax + tax deferral on retained earnings
• Income splitting potential, LCGE on exit, asset protection
• BUT: $1.5-3K setup + $1.5-3K/year accounting

The rule: stay a sole proprietor while income < $100K or you spend all of your income. Incorporate once you steadily earn substantially more than your living needs (you can retain $50-100K+/year). Details — CCPC incorporation step by step.

GST/HST — the $30K threshold

Mandatory registration once revenue exceeds $30,000 in any 4-quarter rolling window (not a calendar year — rolling!).

After registering:

• Charge GST/HST on invoices (5% GST in AB, 13% HST in ON, 12% in BC)
• Collect from clients, remit to CRA (quarterly/annually)
• Claim Input Tax Credits (ITC): the GST you paid on business expenses is deducted from the GST you collected

A nuance for IT contractors with US/foreign clients: exporting services (a client outside Canada) is often zero-rated (0% GST) — you don't charge it, but you still claim ITC on expenses. This can produce a GST refund. Important for people who work remotely for US/EU companies — discuss it with a CPA.

Strategically: even under $30K you can voluntarily register to claim ITC (if you have a lot of business expenses with GST). Worth it if your expenses are significant.

Quarterly tax instalments

CRA requires instalments if your net tax owing > $3,000 in the current year + one of the 2 prior years.

• Payments: March 15, June 15, September 15, December 15
• CRA sends instalment reminders (amounts based on the prior year)
• If you don't pay instalments → interest + possible penalties

Strategy: set aside 25-30% of each invoice right away. Make your instalments out of that. Don't wait until April with an empty account.

Business write-offs (legal deductions)

Self-employed people can deduct reasonable business expenses:

Home office

If you work from home: deduct a portion of rent/mortgage interest, utilities, internet, property tax — proportional to your workspace (e.g. an office = 15% of the floor area → 15% of those expenses). Form T2125.

Equipment + software

• Laptop, monitor, phone — capital cost allowance (CCA, depreciated) or expensed right away if < $500
• Software subscriptions (GitHub, AWS, Adobe, etc.) — fully deductible
• Internet + phone (the business portion)

Professional + other

• Accounting/legal fees
• Professional development (courses related to the business)
• Business insurance
• Auto (the business portion — log your km, deduct fuel/insurance/maintenance proportionally)
• Meals with clients (50% deductible)

Critical: keep receipts + records. CRA can audit. Personal expenses are NOT deductible — don't mix them.

CPP self-employed

As a self-employed person you pay both halves: 11.9% on earnings up to the YMPE $73,200 (2026) = up to ~$8,700/year. Plus CPP2 on earnings $73,200-$83,200.

This is often an unpleasant surprise. Build it into your 30% reserve. The upside: it builds your future CPP benefit.

(Incorporation lets you partly avoid CPP through dividend-only compensation — one of the reasons to incorporate at higher income.)

EI — opt-in for the self-employed

By default, self-employed people don't pay EI and aren't eligible for regular EI. But you can voluntarily opt in for special benefits (maternity/parental/sickness) through a separate registration. Worth it if you're planning a child — discuss the timing with a CPA.

Banking + records setup

1. A separate business chequing account (even as a sole proprietor) — don't mix it with personal
2. A separate "tax reserve" savings account — 30% of each invoice goes there
3. Accounting software: Wave (free), QuickBooks Self-Employed, FreshBooks — track income/expenses/GST
4. A mileage log if you claim your auto
5. Receipt storage (digital — Hubdoc, Dext, or just photos in a folder)

Investing for the self-employed

With no employer pension — you build your own retirement:

• RRSP: self-employed earned income generates RRSP room (18%). Max it.
• TFSA: $7K/year, tax-free
• If you incorporate: retained earnings investing + potentially an IPP later
• Eligible Investor: self-employed people with $75K+ income often qualify → exempt market through me (self-check)

Common mistakes

1. Not setting aside for taxes → a disaster in April. Reserve 30% of each invoice.
2. Missing GST registration (revenue > $30K) → penalties + back-GST
3. Not making instalments → interest charges
4. Mixing personal + business → audit risk + denied deductions
5. Not knowing about zero-rated exports (US/foreign clients) → overpaying GST
6. Incorporating too early (income < $100K) → costs > benefit
7. Ignoring CPP both-halves in your planning → a cash flow surprise

Action plan

1. A business bank account + tax-reserve savings (the 30% rule)
2. Accounting software (Wave is free to start)
3. GST registration when revenue > $30K (or voluntarily if you have a lot of ITC)
4. Quarterly instalments from the reserve
5. Track all deductions (home office, equipment, software)
6. RRSP + TFSA maxing (self-employed RRSP room from earned income)
7. A CPA in year 1 (setup + your first T1 with T2125)
8. Consider incorporation once you steadily retain $50-100K+/year

For IT professionals with RSU/equity on top of contracting — Finances for IT professionals. Entrepreneurs with a CCPC — the guide for entrepreneurs.