Contractors in Canada need to set aside money from every invoice to cover income tax, CPP contributions, and GST/HST remittance because no employer is withholding taxes on their behalf. The best approach is to calculate your expected tax rate, set aside a percentage of each payment received, and use a Self-Employed Tax Estimator to forecast your annual bill before tax season arrives. When you're an employee, your employer deducts tax from your paycheck automatically. As a contractor, you're responsible for paying the CRA in installments throughout the year or in one lump sum when you file. This means: - You must estimate your income before the year ends - You need to set aside enough cash to cover your tax bill in June - Late or missed payments can trigger penalties and interest - GST/HST registration adds another layer of cash flow planning Many contractors underestimate their tax liability and face financial stress when April or June rolls around. Planning ahead prevents this. Your tax rate depends on your province, total net income, and deductions. Use the Canadian Income Tax Calculator to estimate what you'll owe based on your projected annual earnings.
Most contractors should set aside 30-40% of gross income, depending on their province, expected deductions, and CPP obligations. Use a tax calculator to get your specific rate based on projected annual income, then adjust monthly as your earnings vary.
This CRA rule may apply to you: if you owe more than $3,000 in federal tax for the current year, the CRA may require quarterly installment payments (January, April, July, October). Check your CRA My Account or contact them to confirm your instalment obligations.
You can deduct home office costs, vehicle expenses, software subscriptions, professional fees, equipment, supplies, client meals (50%), and memberships. Keep all receipts organized by category and track them throughout the year, not just at tax time.
Yes, this CRA rule may apply to you: contractors can contribute to an RRSP and claim the deduction on their tax return to lower taxable income. Your RRSP room is based on your previous year's earned income, and contributions reduce both federal and provincial tax.
Income tax and CPP are paid to the CRA based on your net profit. GST/HST is collected from clients and remitted separately (you claim back what you paid on business expenses). Keep these in separate accounts to avoid confusion and cash flow problems.