What can independent contractors deduct?

Allan Madan, CA
 Oct 16, 2010
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Are you an independent contractor? Learn what expenses are tax deductible and what tax savings you are eligible for during tax time.


what-can-independent-contractors-deduct1

Home office expenses

Deduct expenses related to your home office, such as:

  •   Utilities
  •   Mortgage interest
  •   Repairs
  •   Property taxes
  •   Insurance

The deductible portion of the above expenses is equal to the percentage that your home office space is of the total size of your home. For more information on home office deductions for independent contractors, see How to save taxes for self employed in Canada

Vehicle expenses 

Independent contractors can deduct the expenses related to their car, including:

  •   Gas
  •   Oil changes
  •   Repairs
  •   Toll charges
  •   Parking
  •   Insurance
  •   Tax depreciation (if you own) or lease payments (if you lease)

The car expenses listed above can only be deducted to the extent that they were incurred for business purposes. For example, if you drove 50% for business purposes, then 50% of your car expenses are deductible. Keep a log to track the KM’s you have driven for business purposes. For more information on whether it’s better to lease or buy a car for tax purposes, see leasing vs. buying automobile

Supplies and Tools

Supplies and tools purchased are also tax deductible.

The supplies and tools you have purchased for preforming your work are tax deductible. For example, a power drill, hammer, measuring table, stationary, a business phone, or whatever other supplies you need to buy in order to complete your job duties, depending on your line of work.

Computer and Software

Computer purchases can be deducted at a rate of 55% per year for independent contractors. Computers include desktop computers, laptops, notebook computers, tablet PC’s, as well as computer peripherals (e.g. scanner, printer, etc.).

Software is 100% tax deductible. However, only 50% of the amount can be claimed in the year that the software was purchased, and the remaining 50% can be deducted in the subsequent year.

Travel

Travel expenses can be deducted as long as those expenses were incurred for business purposes. For example, air fare and hotel accommodations to attend a business meeting can be deducted on an independent contractor’s income tax return. Trips to Disneyland with the family cannot.

Meals and Entertainment

As a general rule, independent contracts that spend on meals and entertainment can deduct 50% of those expenses. Money spent on personal meals and personal entertainment is non-deductible. However, meals and entertainment expenditures incurred for business purposes, such as meetings with clients, suppliers, and prospects, are 50% deductible. Keep your receipts as proof.

General Rule

The general rule is that any expense incurred for the purpose of earning income from business, as long as that expense is reasonable, is deductible.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 62

  1. Can I deduct tuition expenses? Reason being is I want to claim the ITC on the tuition itself (i.e. get 100% of the HST back) rather than just claim on income tax.

    1. If you’re an independent contractor you should be using Wave Accounting. It’s able to generate all of the financial reports required by your accountant and has the necessary tax codes such as HST. It is also much easier to use then Quickbooks or simply accounting for someone who may not have an extensive accounting background.

  2. I was just wondering is there a separate tax filing form for independent contractors or do I just declare my income on my T1 general. Its my first year working independently.

    1. Hi Ben,

      There is no separate form you will have to file because you are a independent contractor. You will simply complete Form T2125 stating your business income and attach it to your T1 general form.

      Thanks

      Allan

  3. So can I also claim car expenses related to traveling to clients houses. For some clients I am driving 3/4 hours both ways. Is it based on km? how does it work?

    1. Yes you can claim car expense related to your travel. The CRA allows you to deduct 54 cents a km for the first 5,000 related to business travel and 48 cents after that. For more information check out automobile allowance on the CRA website.

  4. I started my business as an independent contractor in Aug and was not aware that I needed to keep a log of my km for my truck. I use it 80% of the time for my business, can I still claim it even if I do not have the log to show the CRA?

    1. Hi Luc,

      Yes, you can still claim the business use portion of expenses relating to your truck. In order to prove that you used the truck 80% of the time for business purposes, you will need to create a car log. It’s fine if you are creating the car log now, so long as you are truthful about the KM’s driven for business purposes. As you did not update your car log throughout the year, I suggest that you create the car log by making reference to your daily planner / appointment book.

      Going forward, it’s a best practice to update your car log daily. Note that the car log does not have to be filed with your tax return. You are only required to disclose it to the CRA, should the CRA ask to see it.

      Thanks,

      Allan Madan, CPA, CA
      Tel: 905-268-0150

  5. Hi! I’m independent contractor in construction area.
    Can I deduct the cost of food use a daily flat rate of $17.50?
    Thanks

    1. Hi Anna,

      No, you cannot deduct a flat rate for meals. Meals and entertainment expenses incurred for the purposes of earning income from business qualify for a deduction. Personal meals do not qualify as meals and entertainment expenditures for tax purposes. Most business owners incur meals and entertainment expenses in respect of: A) food and beverages consumed at a restaurant with a client (or person of business interest), B) money spent on tickets to an entertainment venue when taking a client (or person of business interest).

      Note: Only half of qualifying meals and entertainment expenses can be claimed as a tax deduction.

      Allan Madan, CPA, CA
      Tel: 905-268-0150

  6. hi am workingas a independant contractor for the first time in 2013 and for two months of that i was working 150 kms from home and driving back and forth each day. what mileage and meals can i claim for this and do i need a business number to file as a independant contractor as i am just working as a sub contractor

    1. Hi Chris,

      Personal meals incurred while traveling are not tax deductible. I understand that you have to eat, especially since you commute such long distances, but that doesn’t change the answer. If you have an incorporated company (which has the contract with your customer), then you can pay a tax-free vehicle allowance from the corporation to you, if you meet certain conditions. The tax free allowance is calculated as 54 cents for the first 5,000 kilometers driven for business purposes, and 48 cents for each additional kilometer.

      Thanks,

      Allan Madan, CPA, CA
      Tel: 905-268-0150

  7. Hi Allan,

    I’m a small business owner that has a television/monitor in my home office. Although I used this for business primarily
    (demonstrations, presentations, etc.), I sometimes use it for entertainment. Can I claim this as a business expense?

    Regards,
    Sam

    1. Hello Sam,

      Thanks for your question! Firstly, you want to estimate how much of the time the television is used for business use and how much it is used for personal use.Only the amount that it is used for business qualifies for a deduction. Let’s say your television costs $1500. If you use that television 65% for business, $975 of that costs (65%) qualifies for a deduction. As a television is an Class 8 Asset, you can claim 10% ($97.5) of that television the first year after the television is bought and 20% from the remaining total until that $975 reaches zero.

      Regards,
      Allan Madan and Team

  8. Hi Allan, I’m a self-employed barber in a barber shop. How should I file and what should I claim?

    1. Hello. I’m assuming that you are not incorporated. If this is true, file a schedule C. You are required to report all income earned. You are also entitled to deduct all of the expenses that you paid for. In a barber shop these include supplies, small tools, and rent.

  9. I am a full-time employee by day, and a self-employed contractor by night. At my own business, I earn less than $30,000. What are my tax implications?

    1. Gregoire, When you hold a full-time job, your employer automatically deducts income tax from your earnings. At the beginning of the year, you receive a T4 slip in the mail. This lets you know how much money you earned during the year and how much tax you paid. When you’re an independent contractor, you are the only one who knows how much money you made that year. It is your responsibility to report the accurate amount to the government and pay income tax on it.
      Since you earn less than $30,000, you don’t have to pay the government HST. If you do, however, you have to act as the middleman between the government and your customers. You can tack on HST for your product or service when you sell it to a customer. You can visit the CRA’s website to register a business number bit.ly/1vSBGA7.
      Make sure you read the above article in order to determine what you can deduct. No matter how much you earn, there should be at least some things you can deduct. The important thing to note here is honesty. Regards, Allan Madan and Team

  10. Hello Allan, I am a recent graduate of a childcare program at UofT. I would like to open a daycare in my home, in order to start a business. I’m thinking of running my daycare from 7:00 AM to 5:00PM, five days a week. I will be using approximately 30% of my house for my business. Are there any complications when it comes to filing my taxes?

    1. Hello,

      People who run a daycare in their home must track expenses differently. As your home is a place of business and the place where you live, expenses must be pro-rated. These are expenses that are shared between your home and place of business, like utilities and rent.

      If one or more rooms exclusively in your house is used for childcare, then you can base your claim on the square footage of those room relative to the size of your house. If the children are allowed in the whole house, then you have to factor in the amount of time they are there. To determine your business share, take the number of hours per day the children are in your home and divide by 24 hours. Then you multiply that by the number by the number of days there are children in your house. Finally, you multiply that by the percentage of space used in your home for business.

      In your case, you would take 10/24 (hours) X 240/365 (days) X 30/100 (square footage. This would give you 8.21 percent of your total expenses that relate to your business. One hundred percent of expenses such as toys, supplies, and recipe books can be claimed as business expenses. Large furniture or outdoor playground equipment can be depreciated over a number of year. If you provide meals for the children, make sure you ring the food purchases separately and keep the receipts.

      Unless you are incorporated, you will report your business income and expenses on a T2125 Form as part of your personal tax return. If you expect to earn more than $30,000, you need to register your business and collect HST. You should provide receipts for all your services to all your clients so they can claim childcare expenses on their tax returns.

      Regards, Allan Madan and Team

  11. Hello Allan,
    I have a small investment business in Mississauga. One of my employees requires extra financial training, and I would like to pay for it. How would I go about doing this without triggering tax for my employee?

    1. Hello, and thanks for your question.

      In most cases, training costs are non-taxable to the employee and tax deductible to the employer. However, the key here lies in the nature of the training. To qualify, the training has to be directly related to the maintenance and operation of your business. General business courses (i.e. stress management, first-aid, etc.) are also deductible. If the employee is being educated a subject of personal interest or the topic is otherwise unrelated to your business, then the training amount becomes taxable.
      Given your situation, I think that your employee’s training cost should not trigger any tax because it is related to your business.

      Regards,
      Allan Madan and Team

  12. Hi Allan, I am considering becoming a contractor after being full time for 17 years. I have been approached by a staffing company which claims that even though I would be paid less than what my employer used to pay me, in the end I would be at an advantage sine I was deducted at my full time job (according to him) an average of 40% income tax.

    Is this true?

    Also, I would be paid HST, but this would be money that would all be going back to the government anyway, correct?

    1. Yes you are correct that you will not have to deduct income tax off all your paychecks. however at year end you will most likely have taxes owing which you will have to pay then. Also if your taxes owing exceed $3,000 you may be required to pay quarterly installments to the CRA..

      You would be collecting HST on behalf of the government but have to remit it to them on your personal return.

      thanks

  13. Hi Madan, Thanks so much for helping to prepare T2 returns and providing valuable tips. It’s really very helpful.

    1. I have a question regarding CCA. I bought a laptop in December 2010 for $500 and using the same for my company which was incorporated in October 2013 (IT consulting Company), this is my first year of filing T2. Can I show this laptop as my asset and calculate CCA for this. What would be my CCA, amortization, and final asset value in the balance sheet.

    2. In my case, I am taking whatever I earned as salary after deducting expenses and paying HST. So I don’t have any money left to pay income tax for my business. I see that you have shown income tax amount in the sample excel, in my case, it does not apply, is that correct or do I need to still pay any tax.
    Your reply will be highly helpful for me.

    Thanks

    1. Hi Ryan,

      1) you should sell the laptop to your company, and prepare a sales invoice. HST does not need to be charged. The sale price will be equal to the fair market value of the laptop at the time of the sale (October 2013). The company will record this as an asset, and also record a payable to you for the sales amount.

      The laptop can be depreciated at a rate of 55% per year. The half year rule will not apply since you owned the laptop for at least 12 months prior to selling it to your company. Please ensure that you also report this sale on Schedule 11 (Shareholder Transactions) of the T2 Return.

      2) ?Unless you absolutely need the money for personal use, it’s best to leave as much money inside the incorporation as possible. Only take out from the company what you need for personal expenses. This will minimize your personal taxes.

      Thanks,

      Allan Madan

  14. Hi Allan!

    I am currently working as an independent contract at a real estate office. I will be taking the real estate course to get my license during and after work. Would I be able to claim for the course fee?

    Thanks in advance 🙂

    1. Hi Sara,

      Thanks for the question. Course fees paid for acquiring a real estate license are non-deductible expenses. However, you can claim a tuition tax credit for the course fees paid.

  15. Hi Madan,
    I had a small query. To give you a background, I have got a job offer of 45$ an hour. However this would be on contract for three months, and then after three months this would turn into a full time role.

    So for the initial three months, the new company wants me to get incorporated or either accept proprietorship. As per them, if I accept proprietorship and their vendor processes the taxes for me, the taxes would be around 5$ an hour. I wanted to know an estimate for taxable income through Incorporation if I claim business expense only for commuting.

    Also I would like to know your service charges if I decide to Incorporate and then process my taxes through your company.

    1. Hi Aarti,

      You are given the choices of being an employee or self-employed.
      As an employee, your use of the vehicle to travel will be prorated to the number of kilometres used for business purpose. By business purpose, we mean travelling to and from a client’s location to conduct work. This portion would be deductible on your tax return.
      Similarly, if your work requires you to travel to conduct work away from your usual place of work, you can deduct the travelling expenses like food, beverage and lodging expenses. These are deductible if you had to pay for those expenses yourself and did not receive an allowance for those expenses. An allowance given by the company can be non-taxable if it is reasonable. That is, it is a very close estimate of actual expense you can expect to pay on your own. On your tax return, you can deduct half of (whichever is lower) either actual travelling expense amount or the amount that is deemed to be reasonable.
      The reasonable amount by CRA for 2013 and 2014 are calculated as follows:
      54¢ per kilometre for the first 5,000 kilometres driven; and
      48¢ per kilometre driven after that.
      If you were to, on the other hand, incorporate a business, you would be considered self-employed. Hence, you will be given the opportunity to pay for your travel expenses. But be careful that the amount paid is considered reasonable by the CRA. The CRA uses a different rate every year to estimate this amount. If you were to pay an amount above the reasonable amount, you would be taxed on the full amount as a taxable benefit.

      Best Regards

    1. Hi Cheryl,

      Hello Cheryl,

      Yes, you do charge HST on your invoices as an independent contractor. Administrative services are considered a taxable supply for HST purposes in Canada. Also, businesses that collect more than $30,000 in revenue are required to collect HST as they aren’t considered a small supplier anymore. A small supplier is a person whose revenue from worldwide taxable sales was equal to or less than $30,000. To determine this you look at the previous four consecutive calendar quarters to calculate if your income exceeded the $30,000 threshold. If the total for the four previous quarters exceeds the $30,000 threshold, you are required to collect HST and remit it to CRA.

      Regards,

  16. I was accepted in September for a 9 week Certified yoga teacher training course in Thailand.
    This training is only offered twice yearly and is not available in Canada, but was offered in the states but moved to Thailand this year.
    I’m semi retired but work part time, collect part pension, and now will teach yoga as a supplementary income.
    I am an independent contractor as a Certified Teacher, my first class is in March.As a teacher we don’t pay for to the yoga classes we take, so I have $200-$280 to claim as a taxable benefit.
    Can I claim the tuition and flights?

    1. Hi Summer,

      The CRA may consider your training expense as capital in nature. That is, the CRA may view the training course as expenses that you incur to start your business (example. obtain knowledge of the profession, etc). This is separate from say, taking an annual professional development course to update your knowledge. In the first case, the CRA will not allow your training and travel costs as full deduction on your tax return. Rather, you must claim it as Eligible Capital Property and depreciate the cost incurred over a period of time. In the second case, you can deduct the full training expense as deduction against your other sources of income on your annual personal return.

      For more information, please see: http://www.cra-arc.gc.ca/E/pub/tp/it313r2/it313r2-e.html

  17. I just started working for Canada Post, delivering mail using my vehicle. I am a contractor worker and just received my T1204. I only work 1-2 days a week. What can I claim as expenses for this? Mileage? Gas? Insurance? Depreciation on my car? My cell phone?

    1. Hi Lisa,

      Hi Lisa,

      A T1204 is a slip that is provided to a contractor and the CRA for informational purposes only; this form identifies the total contract payments that a government organization made to the contractor for services during the calendar year. This amount is not limited to payments for services rendered, as it can include payments for products, expenses, or reimbursements.

      Form T2125 allows you to declare your self employed income, whereby you can claim eligible expenses, such as mileage, gas, insurance and depreciation on your vehicle, in return for contract payments regarding this self-employment income.

      Best Regards,

  18. Hi Allan,
    My spouse is considering a contractor position that would require car usage of ca. 100km/day. She would use our private car. My concern is that I’m the primary owner of this car, so I’m wondering if she can still deduct expenses on a car?

    Thank you.

    1. Hi Cezary,

      Yes, based on the assumption that she is self-employed, she can claim the car expense on her personal tax return on schedule T2125. The annual car expense (gas, insurance, repairs, maintenance, etc.) should be prorated based on the number of km driven for business purposes. This can be done by multiplying the total car expense amount by the percentage of km driven for business purpose (km driven for business purpose divided by the total km driven during the year).

  19. Hi,
    An IT Professional earning an annual income around CAD 45,000. What are the taxes that are applicable and what we have to do to avoid issues with the government? Thank you very much.

    1. Hi Rod,

      Generally speaking, any expense incurred for the purpose of earning income from a business is tax deductible. For a list of specific expenses that you can deduct / write-off see the CRA’s website http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/bsnssxpnss/menu-eng.html

      Your estimated income tax payable is $7,000. CPP payable on self employment earnings is approximately $4,000. Thus, the total tax burden that you will be facing is $11,000. Note that these tax estimates do not account for business expenses that you may have incurred, so they are on the higher side.

      You can avoid paying CPP and reduce income taxes by incorporating your business. Please let me know if you would like to discuss further.

      1. Hi Allan,
        Wow, this is a lot of taxes!!! I think I can deduct only my car expenses. So, how can I reduce my CPP and taxes. Do I have to pay GST/HST?
        Thank you for your answers.

        1. Hi Rod,

          Independent contractors can deduct car expenses to the extent that they are required to travel to meet with their clients and run business errands. To determine the percentage of car costs that are deductible, divide the business related KM’s driven by the total number of kilometres driven in the year.

          CPP premiums for independent contractors is partly based on the net income from the business. The lower the net income, the lower the CPP premiums payable. Therefore, maximize tax deductions in order to reduce CPP premiums.

          GST/HST must be charged on sales, if the total sales exceed $30,000 in the 4 previous quarters.

          Best Regards

  20. Hi Allan,

    Your web site and Youtube channel are amazing and very informative and helpful!
    My business is incorporated and I provide consulting services. It’s my first year and I try to do my own bookkeeping and taxes. I got confused with accounting for expenses I claimed from my contracting company.
    On the top of whatever I charge them I claim expenses using Claim Form FS1-B1 (my business is in BC). The contracting company reimburses me for the base rate+any applicable charges, but GST. My question is what would be a journal entry? What accounts would be affected? And, since I was reimbursed for this expenses, would they be considered expenses for me business? Can I still claim GST from the government?
    Thank you a lot!

    1. Hi Val,

      You should offset the reimbursement received with the related expense incurred. This way, the net reimbursable expenses will zero-out. If you are a GST registrant, you can claim ITC’s on GST paid on business expenses.

  21. Great video. Thanks for the tips.

    I’ve just switched over from being a full time permanent employee to an Independent Contractor in the Digital Marketing field. I’m wondering if attending an industry conference & training workshop would be tax deductible or even claim it all as a business expense? One of these is in my own home town and another different one is in another city. (requires transportation and hotel).

    Thanks!

    1. Hi Dan,

      Convention / Conferences are a tax deductible business expense so long as these conditions are met:
      • The conference is held by a business or professional organization
      • The conference is related to your business
      • The conference is located in the same area / region where the organizers are
      Your business can deduct the costs of travel and conference fees for up to 2 conferences each year. Meals and entertainment expenses incurred during the conference are only 50% deductible. Please let me know if you have any more questions.

  22. Hi Allan, I work as an independent contractor but use out private car which is under my husband’s name. In this case , will the car expenses will be tax deductable or should I transfer his car on my name ? As an independent contractor when would be best to incorporate, if earning above 100k? Please help.Thanks.

    1. Hi Joe,

      Thanks for your question. You can deduct the operating costs of the vehicle (repairs, gas, parking, toll charges) so long as you pay for them and have kept the receipts. You cannot claim lease costs or capital cost allowance, because its your spouse’s car.

      In your case, it will make sense to incorporate if you do not require all of your income to pay for your personal and business bills. In other words, when you are making more money that you need, it’s a good time to incorporate for tax savings purposes.

  23. I am have an Incorporated business based in BC and am working as a Aircraft Enginneer, I am currently based in the USA. I receive a per diem rom the agency I am working through as was just wondering do I declare the per diem as earnings or is this non taxable

    1. Hi Geoffrey,

      Thanks for your question. The per diem allowance must be included in the income of your corporation if it is paid to your corporation.

  24. Hi Allan,

    Firstly, your article and answers to questions are super helpful! Quick question – what do you do when you make LESS than $30,000/yr as an independent contractor? Do you still have to claim taxes on this?

    Thanks!

    1. Thank you Sara,

      If you make less than $30,000 per year, you don’t have to charge sales taxes (i.e. GST or HST) to your customers, but you still have to report the sales made as income on your tax return.

  25. Hi

    I’ve been working overseas as a consultant (mostly India, Dubai) during most of the 2015 tax year (2 weeks off in Jan and 6 weeks off in September- during which time I was back in TO- and went back to my previous employer for 3 weeks and have thus paid little taxes). I have not registered myself as a business, collected no GST… or anything else. Reading through the thread I realize I cannot claim for personal meals, but my rent while working abroad- is 100% of my rent paid overseas deductible?

  26. Hi Allan,
    I was hired by a sales company as an independent contractor. My pay is direct deposited into my account without taxes taken off. How do I go about getting the right amount of taxes off my pay?

    1. Hi Taylor,

      If you are an independent contractor, it is your responsibility to pay for income taxes. The income tax owing must be paid by April 30 of the following year with your personal tax return.

  27. I recently started working as an independent contractor as a therapist. I am wondering how I go about saving/contributing to my CPP. Is this something I should be setting aside for taxes purposes?

    Thank you kindly!

  28. Hi! My wife has a full time job but also works as an independent contractor several evening per week. She conducts business at an office (a portion of her client’s payments goes to the office owner for overhead) as well as at home (making/receiving calls, logging notes). Although she does not see clients at our home office, she does conduct business there. Are we able to claim the office space as an expense? What are the limitations since she has a full time job as well? Thanks.

    1. Hi Darryl,

      She can write-off her home-office expenses so long as her home office is her primary / principal office. That means she has to spend the majority of her working time at her home office compared to the outside office.

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