Let’s Talk About Taxes: Part One

If you live in Canada, your taxes are due at the end of this month. If you’re getting money back, this can be a great time of year. If you’re going to owe money, it’s a time to remember how lucky we are to have government-funded health insurance. The topic of taxes can be huge, and complicated, so I want to start this chat about taxes by going over some of the basics.

Tax may not be the most thrilling topic, but it’s so important to understand if you’re going to run a successful business. In the not-so-distant past, my taxes (along with my parents and siblings) were filed by an accountant. I never saw or understood them, and it was basically via magic that a tax return showed up in my mail. Even if you have an accountant, I think it’s valuable to educate yourself about how your finances work. We’ll start off simply:

Tax is a portion of income that is paid to the government. To be clear, there is a difference between personal income tax, and sales tax. Every person has to pay income tax, but you’re only required to pay sales tax if you are a business/freelance worker. HST is a sales tax that you charge your clients for goods and/or services provided. As a freelancer you are both a business and an individual.

For example, Jane Doe is a wedding photographer who invoices her clients for payment after each job. She is a freelance worker and will have to pay both sales tax and personal income tax. Specifically ‘Jane Doe Photography’ (the business) will have to charge and remit sales tax and Jane Doe (the individual) will have to pay personal income tax.

On the other hand, if Jane Doe (the individual) works at a gallery where she receives a regular paycheque that includes deductions then she is an employee of the gallery, and will only have to pay personal income tax.

Because as a freelance contractor you are your own business, you are sometimes required to charge your clients taxes on behalf of the government. In Ontario, we have a Harmonized Sales Tax (HST) of 13% that applies on most goods and services. When you register for an HST account, you’re agreeing to collect the tax from your customers and pay it through to the government.

In an upcoming post, we’ll talk about how HST works, where to find online resources to help you, and  if you need to charge sales tax at all.

Image source: Wikimedia