How to set up as an independent contractor in Canada

Ready to take control of your career by learning how to become an independent contractor? Canada is an ideal location to begin your self-employed journey.

That's not just because of the friendly people, breathtaking scenery, and (of course) world-class maple syrup, either. The Great White North is a bona fide entrepreneurial hub that supports and empowers independent contractors. And its largest city, Toronto, is one of the world’s top destinations for remote work.

Before you get started, though, you’ll need to understand how to:

• Register your business in Canada

• Avoid misclassification as an employee

• Create compliant contracts that protect you

• Invoice and collect payments from around the world

This guide breaks down how to become a freelancer in Canada, including tax obligations and other liabilities to be aware of.

But first, it’s important to clarify how Canada defines independent contractors.

What is an independent contractor in Canada

Independent contractors are workers who provide paid services to another party. However, they’re classified differently from employees and aren’t entitled to the same benefits.

To help determine if a worker is a contractor or an employee, the Canada Revenue Agency (CRA) applies multiple threshold tests, including:

• Whether the worker is allowed to subcontract work

• Who carries the exposure to financial risk

• Who provides the tools and equipment for the job

• Who sets the price and controls the work

• The exclusivity of the arrangement

• The level of integration within the company (i.e., does the worker have an internal company email address? Do they attend internal company meetings and events?)

Benefits of becoming an independent contractor

Self-employment is on the rise, with 64 million professionals performing freelance work in the US alone. Here are some of the best reasons to take this career path:

More flexibility

As your own boss, you have total control over how you work. You can choose the timelines, processes, and systems that make the most sense for your lifestyle.

This arrangement is especially beneficial for parents, as it allows them to work around their kids’ schedules. It’s also ideal for digital nomads, who can continue working as they take various excursions, even opting for shorter-term contracts to take longer travel breaks.

In addition to flexible work hours, you have the freedom to accept or decline projects based on their alignment with your interests and goals.

Tax benefits

As an independent contractor, you can leverage tax deductions that aren’t available to regular employees. For instance, your home office, internet and phone, advertising, and health insurance premiums can all be written off as business expenses.

These deductions offset your owed income tax at the end of the year, allowing you to hang on to more of your earnings.

Diverse experience

Regularly changing jobs helps expand your work experience. You get the chance to challenge yourself, learn new skills, and grow your network. This adds to your resume and makes you more appealing to future clients.

Plus, having multiple clients allows you to broaden your revenue stream and gives you a good buffer during slower periods.

Higher earning potential

Working as an independent contractor gives you the chance to earn more than an employee would in the same role. Unlike employers, your clients aren’t required to offer you benefits or cover your equipment costs. This means you can quote higher rates for your work and stay competitive.

You’re also responsible for self-employment taxes as a sole proprietor, which further justifies your right to bump up your fees accordingly.

Is self-employment right for you?

While self-employment offers plenty of benefits, it isn’t for everyone. Before moving forward with learning how to become a freelancer, there are other key factors to consider.

In general, self-employment is ideal for passionate people seeking more freedom and variety in their work. While this work is most commonly associated with creative fields, there’s also been significant growth in other areas, like taxi driving and animal training.

Since you won’t have a boss, it’s up to you to keep up with your assignments and deadlines. This means you need to be self-disciplined and have good time management skills.

Keep in mind that there also won’t be co-workers nearby, which can make it easier or harder — depending on your working style — to stay focused.

When you choose to work as an independent contractor, you’re responsible for much more than your daily projects. For instance, administrative work, such as creating invoices and contracts, will fall on you. You’ll also typically need to market yourself to secure new clients. These tasks can take a significant amount of time and effort, so it’s important to be prepared.

Finally, you should be financially ready for freelancing. You might need to purchase your own tools and equipment, for example. And since you’re not entitled to health insurance like full-time employees are, you will need to purchase your own. This is usually more expensive than employer group rates.

In addition, your clients won’t withhold taxes. So, you’ll need to set aside money to pay the taxes you owe every year and submit quarterly taxes to the relevant tax authority.

Choose your business structure

To work as an independent contractor in Canada, you’ll need to choose a legal structure for your business. Some of the most popular models include:

Sole proprietorship

This simple structure is ideal for independent, individual contractors. You have full control of the enterprise, although there is no legal separation between you (the owner) and the business.

A sole proprietorship is the easiest and most affordable option. The downside is you’re personally responsible for all its debts and liabilities.

Partnership

If you want to go into business with another person, a partnership might be right for you. Again, there’s no legal separation between the individual and the business. You and your partner(s) are personally responsible for any debts and liabilities.

Merging skill sets can lead to more business opportunities and growth. However, some view shared liability and limited autonomy as a disadvantage.

Corporation

A corporation is a formal, legal entity that’s separate from you, the individual. All income and losses are attributed to the company as opposed to you personally. In Canada, you can incorporate your business through either the federal or provincial/territorial authorities.

The advantages of a corporation are increased legitimacy and liability protection. At the same time, getting started is more time-consuming, and there are stricter rules.

There are pros and cons to each structure, but most independent contractors choose the sole proprietorship model, as it is fairly simple to set up and operate.

Choose your business name

Once you’ve decided on a business structure, it’s time to pick a name for your business. This name should directly align with your business objectives and help you effectively promote yourself. And, since it’ll likely be associated with you for a long time, it’s important to choose wisely.

Opting for your personal name or something different will depend on your specific circumstances. Your own name can suffice if it’s easily spellable and pronounceable. That said, you should only take this route if you plan to run your business solo long-term.

Consider an alternative name if your own is more complicated or if you’re looking to grow your team in the future. This approach is also smarter if you’re selling products.

When it comes to business name best practices, keep things simple and web-friendly. If the name is too long or complicated, it can be more challenging for potential clients to find you.

At the same time, your business name should be unique and memorable enough to set you apart. Do some research on your competitors to ensure that none of them are named something similar to the name you’re going for. Also, steer clear of names that could be mixed up with other companies in your area.

Register your business

If you choose sole proprietorship, you’ll need to register your business with your local provincial/territorial government, as opposed to the federal government. Each province/territory has its own registration requirements, so it’s a good idea to consult with your local authority.

In some cases, you may also need a federal business number. If you are in British Columbia, Manitoba, Nova Scotia, Ontario, or Saskatchewan, you’ll automatically receive this number when you complete your business registration. Otherwise, you’ll need to acquire one through the CRA. For more information on registering a sole proprietorship in Canada, visit the Canadian government website.

For corporations, this process is a little more complex. You’ll need to file Articles of Incorporation, register in the area where you plan to conduct business, and get the necessary licenses and permits.

Determine your independent contractor tax obligations

After navigating how to become an independent contractor in Canada, it’s important to understand your tax obligations.

As an independent contractor, you’re responsible for calculating and paying your own taxes and social contributions. Like most countries, Canada has a progressive income tax rate that indicates how much you owe.

If you are a sole proprietor, you pay personal income tax on your business profits. Specifically, you must:

• Report your business income on the T2125 form

• Fill out Form 428 to calculate your provincial/territorial tax (if you are in Quebec, you must complete a separate provincial tax return)

Both of these forms are included in the general T1 personal income tax return.

If you generate business profits of over $3,500, you must also contribute to the Canada Pension Plan (CPP) (or Quebec Pension Plan (QPP), if you are based there). As a self-employed worker, you’ll be liable for the full contribution of 11.4% on your business profits, although the maximum annual contribution is capped at $7,508.90.

The Canadian tax year runs from January to December, and the filing deadline for self-employed workers is June 15. However, if you owe more than $3,000 in net taxes (or $1,800 in Quebec), you’ll need to pay quarterly, with the first installment due in March. You can learn more about paying your tax in installments on the CRA website.

On the plus side, you can claim tax deductions for multiple business expenses, including office supplies and equipment, business-related mileage and travel, and professional and legal fees.

VAT information for independent contractors in Canada

In Canada, VAT is known as the Goods and Services Tax and Harmonized Sales Tax (GST/HST). If you earn less than $30,000 over four consecutive business quarters, then the CRA considers you a “small supplier,” and you don’t need to charge GST/HST.

If this changes and you earn more than $30,000 across four quarters, you’ll need to register for — and start charging — GST/HST. The CRA has created a handy guide that clearly lays out if and when you need to pay GST/HST.

Liability considerations for independent contractors in Canada

As a sole proprietor, you’re personally liable for finance and tax debts, which means your private assets can be forcibly used to settle your business debts. Many independent contractors purchase liability insurance to minimize this risk.

It’s also important to cover yourself when drafting and signing agreements with clients. Our legal experts can provide you with fully compliant contract templates, for both Canadian and international clients.

Accounting requirements for independent contractors in Canada

As a sole proprietor, you don’t need to prepare public financial statements. However, you should still use a basic bookkeeping tool (or even an Excel spreadsheet) to record and track your transactions and expenses. This will also make it easier for you to fill out the T2125 form on your tax return.

It isn’t mandatory to open a separate business bank account, but it’s generally recommended to simplify your business income and expense accounting.

Tax management is notoriously complex work. Remote helps you quickly and efficiently deal with tax management by compiling data about your income based on your invoices and payments received.

Independent contractors vs employees in Canada

When setting up as an independent contractor, it’s important to be correctly classified. There are several key differences between independent contractors and employees in Canada.

Control

If you’re hired as an employee, you work exclusively for one company and operate under their control. This means there’s a predetermined schedule, workplace, and hours. You report to a manager and aren’t usually allowed to subcontract your tasks.

As an independent contractor, you have the freedom to work for as many companies as you want. You also have control over when and where you get things done. There are no subordinates or supervisors, and you can typically hire a subcontractor to work on your behalf.

Compensation

Employees are enrolled in the company’s payroll system and receive consistent paychecks with standard deductions. Their employer is responsible for withholding and submitting taxes on their behalf.

Compensation is much less structured for independent contractors. You simply enter into an agreement that outlines terms for payment. Clients don’t withhold your taxes. This means it’s up to you to track and report your own income and pay your owed taxes every year.

Benefits

As an employee in Canada, you’re entitled to benefit plans that include health insurance, paid time off (PTO), overtime, and holiday pay. You also have more protections against termination.

If you’re an independent contractor, you don’t have access to these benefits. Employers are only required to fulfill what’s stated in the contract. This means you need to purchase your own health insurance. However, you can write off monthly premiums when filing taxes.

Equipment

Employers give employees the equipment they need to do their jobs, such as laptops or phones.

If you’re brought on as an independent contractor, you’re expected to purchase your own equipment and won’t be reimbursed. You also need to manage your repair, maintenance, and insurance costs.

The dangers of contractor misclassification in Canada

As we’ve mentioned, contractors are classified differently to employees. The protections and benefits employees enjoy don’t typically apply to contractors.

As a result, companies may deliberately misclassify you to circumvent their legal obligations, while at other times, it may happen accidentally. Whether it’s intentional or not, misclassification can result in penalties and fines for both you and your client.

As an independent contractor, you can work with your clients to ensure this doesn’t happen. Discuss your role and responsibilities with them, and review the working arrangement regularly. If you’re still not sure how you should be classified, contact the CRA to request a ruling.

If your working relationship changes over time and you become more integrated into a client’s company, you can ask to be converted into an employee.

Open a dialogue with your client and carefully discuss the risks and benefits of moving to an employer-employee relationship. In particular, be clear about how it can benefit both parties — not just you.

You can even suggest the help of a third-party solution, such as Remote, to ease the transition. Our global employment services help both parties stay compliant by taking care of key HR functions (like payroll management and benefits administration) in line with Canadian law.

Use our Contractor Compliance Checklist to avoid misclassification

Work through this checklist to help determine if a new hire should have a contractor or employee relationship.

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How do I get paid as an independent contractor in Canada?

As an independent contractor, it’s down to you to handle your invoices and payment collection. Unfortunately, this means billing each client individually and collecting payment through their preferred payment method — which can be inefficient and time-consuming.

Some of the most common ways to collect payments include:

• Bank transfers

• Direct deposits

• Paper checks

• Money orders

• Virtual wallets

• Digital transfer services like PayPal and Wise

These methods all have their own pros and cons. For instance, bank and digital transfers can be pretty quick, but often come with hefty service fees.

Navigating self-employment with international clients

If you have clients in countries besides Canada, the payment collection process gets more complicated.

Navigating all of your clients’ different invoicing, approvals, and payments systems is often time-consuming. And manual methods of invoicing and collecting payments can increase the risk of fees, errors, and delays.

Remote gives you access to a highly secure, streamlined dashboard that makes invoice management and international payments cost-effective and efficient. You can use the platform to get paid quickly in Canadian dollars hassle-free, without any hidden fees.

When you draft agreements and contracts for your clients, you run the risk of non-compliance with local labor laws — especially when working with international clients. Remote offers localized contracts tailored to Canadian laws, ensuring that you stay compliant.

Simplify the independent contractor process with Remote

Learning how to become an independent contractor in Canada requires due diligence.

By using a stable, trusted platform like Remote, you can manage these obligations quickly and efficiently, allowing you to focus on your business goals.

• Avoid intermediary fees and delays with international client payments

• Draft compliant contracts for Canadian and foreign clients

• Enhance your invoice management and avoid manual processes

• Comply with local labor laws regarding work practices

Our platform makes it quick, simple, and seamless to get started as an independent contractor. Learn more about how Remote can save you time and resources today.