GST for freelance editors: should you use the quick method?

Most freelancers know that they have to register to collect GST if their earnings pass a certain threshold, but many people I talk to don’t know whether to opt for the quick method or the non-quick method of GST accounting.
If your business has relatively low expenses in relation to its income, the quick method will leave you with more money. (See the end of this article for a comparison of high- and low-expense businesses.) I calculate the crossover point as being at about 28 percent: if your business expenses come to less than about 28 percent of your gross income, consider using the quick method. Here is a sample scenario.

The quick method of GST accounting

If you use the quick method, you collect GST on your earnings and then pay a set percentage back to the CRA. You don’t have to keep track of how much GST you pay on your business expenses because you won’t claim those back. As the name implies, the bookkeeping is about as simple as possible, especially if all of your clients are in the same province as you.

Photo by Christa Gampp.
Some rights reserved.

If you use the non-quick method (I can’t find another name for it), you count up the GST that you collected, and you pay it all back to the CRA. Then you count up all the GST you spent over the year on your business expenses (business use of home, software, accounting and legal fees), and you claim that back. It’s not that much more complicated, but you have to track how much tax you pay on every business expense.

The quick method for freelance professionals

What you want to figure out is which remittance method will leave more money in your account. Here is a comparison of the two methods for a hypothetical freelancer. This freelancer lives in British Columbia, and all of their clients are also in British Columbia. They work from a home office and deduct business use of home as part of their expenses.

GST collected and paid for a hypothetical freelancer

Total income invoiced	$50,000
5% GST collected on income	$2,500
Total business expenses	$10,000
GST-eligible business expenses	$5,500
non-GST-eligible expenses:* monthly rent of $1,500; 25% business use of home	$4,500
Total GST paid for business expenses (5% on $4,500)	$262

*Non-GST-eligible expenses are expenses that are not taxed. This freelancer doesn’t pay GST on their residential rent.

GST remitted for our hypothetical freelancer

	Quick method	Non-quick method
GST to remit	3.6% remittance rate on $50,000: $1,800	everything collected: $2,500
GST paid on business expenses claimed against remittance	$0	$262
1% bonus available for those who use the quick method: 1% of GST-eligible income to a maximum of $300	$300	$0
Total remitted	$1,800	$2,238
Total kept	$1,000	$262

Our sample freelancer keeps $1,000 of the GST they collected. After you subtract the $262 of GST that they paid on their business expenses, they have gained $738 by using the quick method.

Other scenarios

Here are some factors that could change the above result:

• Not charging GST on all of your income. If a lot of your clients are outside Canada, you won’t collect GST on this income, which means the amount you keep by using the quick method is lower. In the above scenario, if all of our hypothetical freelancer’s income came from outside Canada, they would collect no GST and using the quick method would leave them with $0, while using the non-quick method would leave them with $262.
• Paying more GST on your expenses. This could happen if none of your business expenses are GST exempt, if a lot of your expenses are paid to a provider in another province with a higher tax rate, or if your total business expenses are simply higher. We could cook up a scenario here for a freelancer with important clients in the U.S. who subcontracts out a lot of work to a contractor in Ontario that would tip the balance to favour the non-quick method.

Appendix: comparing the methods for high-expense versus low-expense businesses

What type of business should definitely use the non-quick method? One with high expenses in relation to its gross earnings. For example, a business that buys something at wholesale prices and sells them at retail prices without too much of a margin on the transaction. Here’s a quick and dirty comparison using completely made-up numbers. Both businesses have the same net income of $50,000, but the high-expense business pays almost as much GST on its expenses as it collects on its sales, so if it used the quick method, it would lose $9,000 instead of keeping a GST credit of $2,500.

	Low-expense business	High-expense business
Gross income	$60,000	$250,000
Business expenses	$10,000	$200,000
Net income	$50,000	$50,000
5% GST collected on gross income	$3,000	$12,500
5% GST spent on expenses	$500	$10,000
Quick method: GST retained minus GST spent on expenses	$640	–$9,000
Non-quick method: GST retained (what you spent)	$500	$10,000
Non-quick method: GST remitted (what you collected minus what you spent)	$2,500	$2,500

CRA links for GST information

• Registering for a GST/HST account
• Quick method of accounting for GST/HST
• Electing to use the quick method

Change to GST for BC freelancers

Photo by Jorbasa. Some rights reserved.

On April 1, 2013, BC went from HST back to GST. How does this affect freelance editors?

Freelance editors: Here’s what you need to know

Do I need to register for a PST number?

No. There’s no need to apply for a PST registration number because professional services other than legal services are exempt from PST.

What tax do I charge?

From April 1, 2013, editors charge GST only. Use your existing GST/HST number.

Place of supply

The place of supply rules stay the same as before: an editor who lives in BC charges a client the HST or GST rate of the province where the client is located (see the rules about place of supply). So I charge BC clients 5% GST, but when I work for a client in Ontario, I charge 13% HST. As before, when I work for a client outside the country, I charge no tax at all.

GST/HST rates by province (information taken from CRA)

This is how much GST/HST you charge a client in this province.

Province	Before April 1, 2013	After April 1, 2013
Alberta (GST)	5%	5%
British Columbia	12% (HST)	5% (GST)
Manitoba (GST)	5%	5%
New Brunswick (HST)	13%	13%
Newfoundland and Labrador (HST)	13%	13%
Northwest Territories (GST)	5%	5%
Nova Scotia (HST)	15%	15%
Nunavut (GST)	5%	5%
Ontario (HST)	13%	13%
Prince Edward Island	5% (GST)	14% (HST)
Saskatchewan (GST)	5%	5%
Yukon (GST)	5%	5%

Quick method remittance rate

If you use the quick method of GST/HST accounting (this is probably the right method for editors to use, unless they subcontract out a lot of work), your remittance rate is now 3.6% for BC clients. This is the remittance rate for a service provider based in a non-participating province (which BC is now) to a client in a non-participating province. (A “participating” province has HST; a “non-participating” province has GST.) Your remittance rates for income earned from clients in other provinces stays the same (except PEI, which instituted HST this April 1). Don’t forget that this new 3.6% remittance rate for BC clients only applies to your income from April 1 onward.

Quick method remittance rates for work done in BC (information taken from CRA)

This is how much GST/HST an editor in BC remits.

Client is in this province	Rate before April 1, 2013	Rate after April 1, 2013
BC (participation changed)	8.2% (part.)	3.6% (non-part.)
Ontario (participating)	9%	10.5%
Quebec (non-participating)	2.1%	3.6%
Nova Scotia (participating)	10.6%	12%
Prince Edward Island (participation changed)	2.1% (non-part.)	11.3% (part.)
Other participating province	9%	10.5%
Other non-participating province	2.1%	3.6%

Sources for my information

Changes to the Harmonized Sales Tax
BC Government: PST exemptions (see the sidebar “Non-Taxable Sales & Services”)
CRA: List of GST/HST rates by province
CRA: Place of supply rules for services

As always, this is backed up by a few calls to the CRA help line.

Other tax information

See also:

• Income tax for Canadian freelancers: Allowable deductions for freelancers and small business owners
• Income tax for Canadian freelancers: T2125 Declaration of business or professional activities

Income tax for Canadian freelancers: Track your deductions

Updated for the 2020 tax year
Maybe you started a full-fledged business, maybe you just did your first freelance assignment; either way you need to know how to declare your self-employment income. Even if you plan to get an accountant to do your taxes, knowing what you can deduct and keeping your information organized will make the process faster and easier. In part 2, I talk about filling out your Form T2125: Statement of Business or Professional Activities.

Preparing for tax time

Even if you plan to dump the whole job on an accountant, keeping organized records throughout the year will make a huge difference at tax (or audit) time. From the simplest to the most sophisticated, here are four methods you can use:

1. Get an accordion file. File expenses according to category (not date).
2. Buy a notebook or accounts book and write down expenses and income according to category.
3. Set up a spreadsheet to track income and expenditures.
4. Use accounting software.

What records should you keep?

• The CRA suggests that in addition to tracking your income and expenditures you back up your records with source documents: sales invoices, receipts, contracts, bank deposit slips, etc.
• Make a note on your bank statement to explain any large deposits that are not business income. Seven years later you may be asked why you didn’t declare that money as income.
• If your bank doesn’t guarantee it will maintain your electronic records for six years from the end of the last tax year to which they relate, then you need to print or save your bank records yourself.
• Credit card bills aren’t considered equivalent to receipts (but by all means, save them as extra documentation).
• Print e-receipts or save them as clearly labelled PDF files.
• Consider photocopying or photographing paper receipts, because some of them are printed with ink that fades quickly.

Allowable deductions

Business use of home

• Proportion of home used for business: This can be calculated as either the number of rooms used for business out of the total number of rooms in the house, or as a percentage of the floor space. If you use a room for both business and personal use, estimate the percentage of the time that the room is used for business purposes, but if it’s used for business only, you can consider it to be used for business 24 hours a day.
• Allowable expenses: Rent, insurance, utilities, strata fees, maintenance, interest on the mortgage.

Taxes for corporations are way beyond the scope of this article, but one quick warning: if you have an incorporated company and you rent part of your house to the corporation, the capital gains on your house become taxable.

Phone

• Cell phone fees are deductible, but you are required to calculate the percentage of phone use for business.
• I’m told (but haven’t checked with the CRA) that with land lines, the monthly fee is only deductible if you have a separate line registered under the name of the business. If the phone is registered to you personally, you can only deduct long-distance business calls. (I imagine this is because local calls are not itemized on the bill, so there is no record of personal versus business use.)
• Phone hardware is deductible.

Internet

You can claim a portion of your internet expenses. Again, calculate what proportion of your internet use is for work. If you claim internet or a computer as business expenses, your internet traffic and computer contents become examinable in an audit.

Business use of car

• Tracking: Keep a mileage log. The easiest thing to do is to take an odometer reading at the beginning and end of the year and record either all business trips or all pleasure trips (whichever you do fewer of).
• Allowable expenses: gas, repairs, maintenance, depreciation, interest on a loan, lease payments.
• Note that the car has to be insured for business use.

Entertainment

This is one is tricky and often disallowed. Here’s what I’ve been told.

• The expense has to be for the purpose of getting or keeping business.
• The expense is generally incurred by taking a client out for entertainment.
• Only clients are eligible, not partners.
• Only 50% of the expense is deductible.
• Keep a record of the names of the clients and why you took them out.

Staff meals are a different situation. If you hire someone and part of the contract is that you will provide food, that expense is 100% deductible.

Travel

You can claim travel you need to do for work, or to get to professional development events. Your travel expenses will be deducted all together, but keep detailed records of how the expenses break down.

• Allowable: getting there, travel while there, accommodation, meals.
• If the trip is part pleasure and part business, prorate the claim accordingly.
• Travel meals: probably have to be outside the city and are only 50% deductible.

Research and professional development

• Professional development covers things like courses, books, and magazines.
• For research, keep records and make sure you can show a clear connection between what you bought and how it contributed to your business.

Capital cost allowance

This applies to anything that you buy—used or new—that has a useful life at the end of the year. Usually this will apply to items that you spend more than about $300–$400 on.

• For capital costs, you don’t deduct what you paid for the item; you deduct the amount that it depreciated during the year. Look up the percentage to write off in the classes of depreciable property list.
• If the business buys something that gains value (antique furniture or real estate, for instance) you will have to declare a capital gain when you sell it.

Bad debt

Since you are using the accrual method of accounting, you report your income in the year you earned it, regardless of when you actually get paid. So it might happen that you report income that you never actually receive. Say you did a contract in late 2019, reported the income in that year, and never got paid. You can deduct that income the next year as a bad debt. You could also file a correction for the 2019 taxes, deducting that income, but it probably looks better to claim the amount as a bad debt the following year; at least that way there’s an explanation.

Back expenses

If you forget to claim an expense, you can amend your tax return for that year to include the expense, and you will be credited with the corresponding saved tax (without interest). You can do this going back a maximum of six years.

Deductions not related to your business

• Medical: If your eligible medical expenses (not provincial medical plan premiums) are more than 3% of your income or $2,352, whichever is less, you can deduct them. You can claim medical expenses for any 12-month period ending in 2019 and not claimed in 2018. You can also transfer them between spouses, so make sure the lower-income spouse claims them. To find out whether an expense qualifies, see the list of eligible medical expenses and the list of authorized practitioners by province.
• Charitable donations can be carried forward for five years. (See “Carry forward” on the CRA page for Line 349: Donations and gifts.)

CRA links

• CRA: Sole proprietorships
• CRA: What is a business?
• CRA: List of common business expenses
• CRA: Free tax help for small businesses
• CRA: Corporations

The CRA help number for businesses and self-employed people is 1-800-959-5525. See the CRA phone numbers page for their hours.

Other tax information

See also:

• Income tax for Canadian freelancers, part 2: T2125 Declaration of business or professional activities
• Change to GST for BC freelancers

Income tax for Canadian freelancers: T2125 Declaration of business or professional activities

Updated for the 2020 tax year

How do you declare freelance income?

I covered allowable deductions for freelancers and small business owners in part 1. Here’s some help with filling in the T2125: Statement of business or professional activities.

Do you run a business? Are you self-employed?

If you are carrying on an activity that you intend to make a profit with, then you have a business. The simplest form of business is a sole proprietorship. This means you are not incorporated or in a partnership with anyone. You can run a sole proprietorship business without registering the business, registering a business name, or getting a business license.

The T2125 form: Statement of business or professional activities

If you’re earning money as a sole proprietorship, you simply fill in the T2125 form in addition to your basic personal income tax form. Whatever electronic income tax filing system you use can probably handle this just fine. The T2125 is available electronically; if you do your taxes on paper, you can print out a copy and deliver it along with your general income tax package.

• Where to get it: the General income tax and benefit package for 2020 doesn’t seem to be available yet (January 7, 2021), but should be soon.
• The 2020 version of the T2125 is available, but the last update is from January of last year. It doesn’t seem to be specific to the year.
• How many do you need? Similar business activities can go on the same form, but very different activities (writing and pottery) would have to go on two separate forms. I recommend phoning the CRA if you’re not sure whether two activities can go on the same form.

Sections of the form

Part 1: Identification

• Was this your last year of business? If you closed down the business during this tax year, say “yes” here. This lets the CRA know that they shouldn’t expect any more tax reports for this business.
• Main product or service and Industry code: The industry code lets the CRA know what kinds of deductions they can expect to see on the rest of the form. Editors should use the NAICS code or industry code 561410: Document Preparation Services. This code includes “editing service,” “proofreading service,” and “desktop publishing service.”

Part 2: Internet business activities

If you use your website to promoting your business, I wouldn’t consider this to apply.

Part 3: Business Income or Professional Income?

Freelance editors should choose “professional income.” (In general, “business income” applies to selling physical goods and “professional income” applies to selling your expertise.) Fill out 3B and C and ignore 3A and D.

Part 4

This is where you fill in the deductions that you’ve been tracking throughout the year.

• Rent: this refers to the rent on a purely commercial property. The rent for your living space should go into the “Calculation of business-use-of-home expenses” section in Part 7.
• Property taxes: same thing here. Put your home property taxes under business use of home.
• Other expenses: this is where many of your deductions will go: professional development, subcontractors, etc.

Other tax information

See also:

• Part 1: Allowable deductions for freelancers and small business owners
• Change to GST for BC freelancers

Editing for companies in the US: ITIN and exemption from withholding

If you’re a Canadian editor who works for US clients, a client may ask you to for an ITIN. But do you really need one?

Does the client have to withhold taxes? US and non–US source income

Does your client have to withhold tax when they pay you? Only if some of the money you earned is US source income. For the purposes of editing, my understanding is that for nonresident aliens (non–US citizens who live outside the US), US source income is any work that you do while physically in the US. All the work that you do while outside the US is non–US source income.

As long as you’re not a US citizen and you live outside the US, your client should not withhold any of your non–US source income. You might even want to note clearly on every invoice that it is non–US source income.

Form W8-BEN: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)

If you have no US source income, your client may still want some documentation for their decision not to withhold income tax on your pay. In this case, you should fill out a W-8BEN. It’s simple: no ITIN required.

Form 8233: Exemption from Withholding

If you do some work while you are physically in the US, it may qualify as US source income, and you might need to fill out an exemption from withholding. Without this form, your client is required to withhold 30 percent of your pay, and you’ll have to file an income tax return to get it back. The form you need is IRS form 8233 “Exemption from Withholding,” in which you explain why the Canada-US tax treaty makes you exempt from withholding.

How to apply for an ITIN in Canada

If you need to fill out an 8233 or if you need to file an income tax return in the US, you’ll need an ITIN (individual taxpayer identification number). There are companies who offer to help you with the application, but it may be just as easy (and so much cheaper) to do it yourself. The application for an ITIN is IRS form W-7.

The difficult part is getting your identification certified. There are some Canadian notaries who are able to certify the document, but even then the document has to go the US consulate for verification. If there’s a US consulate within travelling distance, the easiest thing to do is to make an appointment with them for notarial services. Bring your completed W-7 form and your passport or other identification, and they’ll make a copy of your ID, attach it to the form, and get it certified by the consul. All you have to do is send it in with the form 8233 or the tax return (ITIN applications can only be submitted with one of these forms).