The number of Canadians working as independent contractors has risen steadily over the past decade. Often referred to as freelancers, gig workers, or self-employed individuals, independent contractors offer services on a contractual basis rather than as permanent employees.
Our guide will examine key aspects of being an independent contractor in Canada. We will compare contractors to employees, outline the benefits and challenges, provide tips on taxes and regulations, and offer guidance for getting started as a successful contractor.
Whether you are weighing a career change or simply want to understand this workforce segment better, you will find invaluable insights here.
What is an Independent Contractor in Canada?
An independent contractor is a self-employed individual who provides services to a company or clients under contract rather than a traditional employment agreement. Independent contractors operate as a business entity and have control over when, where, and how they complete work assignments.
There are three main ways a contractor can structure their business in Canada:
- Sole Proprietorship – The contractor operates under their own personal name without formally incorporating a business. This is the simplest structure.
- Partnership – Two or more contractors jointly form and share ownership of an unincorporated business.
- Corporation – The contractor registers a separate legal entity and operates as an employee of that corporation. This option has additional tax planning benefits.
Regardless of business structure, the key distinguishing factor is that independent contractors have no formal employer-employee relationship. The client has limited control over the contractor’s work process and cannot dictate hours or location.
How Independent Contractors Differ From Employees in Canada
There are eight main notable differences between being an independent contractor versus a traditional full-time employee in Canada:
| Area | Employees | Independent Contractors |
| Control Over Work | – Must adhere to schedules, hours, policies per employer – Directed how to do tasks by manager | – Control work hours and location – Autonomy over work methods |
| Client Base | – Normally work for one employer exclusively | – Can provide services to multiple clients |
| Financial Risk and Reward | – Salary not tied directly to profits/losses – No risk of losses | – Profits tied directly to efficient project delivery – Risks losing money if expenses exceed fees |
| Equipment and Workspace | – Provided by the employer | – Must provide their own |
| Payment Structure | – Regular paycheck with deductions | – Paid upon invoicing after milestones/deliverables met |
| Benefits | – Entitled to statutory benefits | – Not provided statutory benefits |
| Tax Treatment | – Deducted and remitted by employer | – Must account for own taxes and contributions |
| Termination | – Requires adequate notice or severance pay | – Client can terminate per contract without penalties |
Benefits of Being an Independent Contractor in Canada
There are five attractive benefits that come with being an independent contractor, including:
- Flexible Schedule – As your own boss, you can set your own hours and take time off whenever needed. No requirements to work 9-5 or request permission to go on vacation.
- Project Variety – Contractors can diversify their workload across many clients and industries rather than being stuck in one role long-term.
- Income Potential – Successful contractors can earn significantly more than traditional employment since they keep project profits after covering expenses.
- Independence – Contractors have much more leeway in approaching and executing client projects with minimal oversight.
- Tax Deductions – Many contractor business expenses like equipment, office rent, and utilities can be deducted, reducing taxable income.
Drawbacks of Being an Independent Contractor
Alongside its many perks, contractor life also comes with some downsides to factor in:
- Unpredictable Income – Contractors face uncertainty and gaps between projects. Building a reputation and repeat client base is crucial for stability.
- No Benefits – Common employee benefits like health insurance, dental, and retirement contributions are not provided. Contractors must secure their own policies.
- Increased Tax Responsibilities – Handling income taxes, HST/GST remittances, and payroll contributions becomes your responsibility.
- Administrative Work – Managing your own accounting, bookkeeping, and taxes takes time and effort. Outsourcing help also costs money.
- No Termination Protection – A client can terminate services immediately per contract terms. There is no mandated severance or notice as with employees.
How Independent Contractors Pay Taxes in Canada
As self-employed individuals, independent contractors need to be very diligent in handling their tax obligations:
- Installment Payments – Most contractors pay taxes quarterly based on installment amounts calculated from estimated earnings rather than having tax deducted at source.
- Annual Filings – A personal tax return reporting business income and expenses must be filed each year. Net pre-tax contractor income gets added to other sources of individual income.
- HST/GST Registration – Contractors earning over $30,000 in the last 4 consecutive quarters must register and charge GST/HST. This also enables them to claim input tax credits as refunds on expenses.
- Eligible Deductions – Equipment, internet, phone, home office expenses, accounting fees and other costs can be deducted against business income to reduce taxes owing. Detailed records are essential.
- Incorporation – Forming a corporation essentially makes you an employee of your business. This can open tax planning opportunities through income splitting with family members. Many contractors choose to incorporate once their businesses scale up.
How to Become an Independent Contractor in Canada
Follow below eight key steps if you are looking to transition into working as an independent contractor:
Step 1. Identify Service Offerings
Consider your expertise and assess industry demand to identify competitive services you can offer clients. Can you provide unique value?
Research industry trends and demand for different offerings. Then, make a clear list of the specific services you will promote yourself for, such as copywriting, web development, consulting, etc. Ensure you can charge competitive yet profitable rates based on your capabilities.
Step 2. Choose a Business Structure
Review the differences between sole proprietorship, partnership, and incorporation to select the proper structure for your goals.
The sole proprietorship has minimal costs but higher liability exposure, while a corporation provides liability protection but costs more to establish.
Step 3. Register Your Business
Pick and register your business name nationally and in your province. This includes steps like verifying name availability, filing registration forms, and opening dedicated business bank accounts.
Doing this makes your business legitimate in the eyes of clients. Open a business bank account and get suitable insurance coverage as well.
Step 4. Obtain Necessary Licenses
Research if your field requires specific certifications or licenses and complete any exams or qualifications needed to operate legally.
Step 5. Build Your Brand
Create marketing materials and an online presence that establishes your brand, reputation, and credentials in your niche. Consistent branding across your online and offline presence helps build recognition.
Step 6. Find Clients
Leverage your network and online platforms to connect with potential clients. Outreach directly to potential clients. Join relevant communities to connect with those looking to hire contractors in your field.
Step 7. Set Rates and Sign Contracts
Determine competitive yet profitable rates. Before commencing work, outline all project details and terms in written contracts. Contracts protect both you and the client by setting clear expectations.
Step 8. Handle Finances Properly
Keep diligent records. Consider retaining an accountant to assist with taxes, filings, and financial advice. Stay organized!
The Bottom Line
Working as an independent contractor lets you take control of your career and offers terrific flexibility. However, it also comes with additional responsibilities and financial considerations.
Ultimately, being a successful contractor requires strong self-motivation, organization, business acumen, and the ability to deliver exceptional results for clients. If you have the drive and mindset to put in the work, the freedom and rewards of contractor life may be worth it!
FAQs about Independent Contractors in Canada
What are the tax requirements for independent contractors in Canada?
Contractors must track income and expenses, remit income tax and CPP contributions quarterly, register for GST/HST if over $30K revenue, file annual personal tax returns, and claim eligible business deductions.
Why should I become an independent contractor?
The flexibility over schedule and location, income potential, project variety, creative freedom, and tax deductions are some of the main advantages over traditional employment.
Do independent contractors get benefits?
No, contractors do not receive statutory benefits like health insurance, vacation pay, sick leave etc. They must secure their own independent benefits coverage.
Can I work as both an employee and contractor?
It depends on your employment agreement with your full-time job. Many restrict "moonlighting" with competitor companies but allow side contractor work in unrelated industries.
Is contract work stable?
Building a loyal client base and pipeline of recurring business is important for income stability as a contractor. Expect some unpredictability initially until your reputation grows.
What expenses can I deduct as a contractor in Canada?
Equipment, office supplies, utilities, accounting fees, insurance, portion of phone/internet costs, mileage, and home office space can typically be deducted against contractor income.