Understanding How Canadian Personal Taxes Work

A Guide with Case Studies for T4, T4A, and Self-Employed Individuals

Taxes in Canada can be confusing, especially when your income comes from different sources like employment (T4), independent contracts (T4A), or your own business (self-employment). Whether you’re a salaried worker, a gig economy hustler, or a full-time entrepreneur, the way you report and pay taxes varies significantly.

In this reading, we’ll break down:

• How personal taxes work in Canada

• The role of income sources (T4, T4A, Self-Employment)

• Deductions, credits, and filing requirements

• Case studies for three different types of individuals

• A detailed comparison of how taxes apply to each

📌 How Canadian Personal Income Tax Works

Canada has a progressive tax system, meaning the more you earn, the more tax you payas a percentage of your income federal government province or territorywhere you reside.

2024 Federal Tax Brackets:

2024 Provincial Tax Brackets (Ontario)

Each province/territoryhas its own tax brackets added on top of the federal rates.

🔍 Key Tax Forms:

T4: Issued by an employer showing employment income and deductions

T4A: Shows income from pensions, self-employment, commissions, or other sources

T2125: Statement of Business or Professional Activities (for self-employed individuals)

✨ Common Tax Deductions & Credits:

• CPP and EI contributions (mandatory for T4)

• RRSP contributions

• Childcare expenses

• Union dues or professional fees

• Medical expenses

• Canada Workers Benefit (CWB)

• Home office expenses (for self-employed or remote workers)

• GST/HST rebates (self-employed)

👤 Case Study 1: Sarah – Full-Time Employee with T4 Income

Profile:

• Age: 32

• Location: Mississauga, ON

• Occupation: HR Specialist

• Annual Salary: $70,000

• Income Source: Only T4

• Deductions: CPP, EI, RRSP ($5,000), union dues

How Her Taxes Work:

• Her employer withholds tax, CPP, and EI automatically from her paycheque.

• At year-end, she gets a T4 from her employer.

• Sarah files a simple personal tax return (T1 General).

• She claims her RRSP contributions and union dues.

• She also qualifies for the Basic Personal Amount (federal ~$15,000 and Ontario ~$11,865 in 2025).

Tax Summary (Approximate):

Key Takeaways:

• Simple and straightforward tax situation

• Employer handles withholdings and remittances

• RRSP helps reduce taxable income

• Likely to get a refund or break even

👤 Case Study 2: Daniel – T4 + T4A Income

Profile:

• Age: 40

• Location: Calgary, AB

• Occupation: IT Analyst + Freelance App Developer

• Annual T4 Income: $85,000 (from full-time job)

• Annual T4A Income: $25,000 (from side gigs)

• Total Income: $110,000

• Deductions: CPP/EI on T4, expenses from freelance work, RRSP ($7,000), home office, internet

How His Taxes Work:

• Daniel receives both aT4 and a T4A.

• TheT4A does NOT have any tax withheld, so he isresponsible for paying the taxon that income.

• He completes aT2125 (Statement of Business Activities)for his T4A income to deduct business-related expenses.

• He is required to payboth employer and employee portions of CPPon the net self-employment income.

Tax Summary (Approximate):

Key Takeaways:

• More complex filingwith both T4 and self-employment income

• Needs to budget for taxes not withheld on T4A

• Candeduct legitimate business expensesto reduce net income

• Pays extra CPPas both “employer” and “employee” for side hustle

• May want tomake quarterly tax instalments

👤 Case Study 3: Nina – Fully Self-Employed (No T4 or T4A)

Profile:

• Age: 36

• Location: Halifax, NS

• Occupation: Freelance Copywriter & Course Creator

• Annual Gross Income: $80,000

• Income Source: Self-employed (direct clients, course sales, no T4A issued)

• Business Expenses: $15,000

• Net Income: $65,000

• Deductions: Home office, internet, RRSP ($5,000)

How Her Taxes Work:

• Nina doesn’t receive any tax slips. Shetracks her income and expensesindependently.

• FilesT2125to report self-employment income.

• Must payboth parts of CPP (~10.9%)on net income.

• No EI unless voluntarily enrolled.

• Musttrack and remit GST/HSTif she crosses the $30,000 threshold.

• May be eligible forCanada Workers Benefit (CWB)or business-use-of-home deduction.

Tax Summary (Approximate):

Key Takeaways:

• Most tax and legal responsibilities fall on her

• Needs goodbookkeeping and cash flow management

• Responsible forCPP contributions, GST/HST, and year-end tax bill

• Can claima wide range of business-related deductions

• Strong candidate foreventual incorporationif income increases

💡 Comparing All Three Individuals

✅ Tips for Each Type of Taxpayer

For T4 Earners:

• Maximize your RRSP and claim all available credits.

• Use online tools likeSimpleTax or TurboTaxto file.

• Considerincreasing source deductionsif you often owe taxes.

For T4 + T4A Earners:

• Set aside 25–30% of T4A income for taxes.

• Track all business-related expenses (home office, phone, subscriptions).

• File yourT2125 accurately.

• Consult an accountant aboutquarterly instalmentsif income is consistent.

For Self-Employed Individuals:

• Open a separatebusiness bank accountand use cloud-based bookkeeping (like QuickBooks or Wave).

• Keep all receipts and invoices.

• Set aside 30–35% of income for taxes and CPP.

• Register forGST/HSTonce you cross the $30K threshold.

• Consider incorporation once your net income exceeds $80K–$100K/year consistently.

✍️ Conclusion

Understanding how Canadian personal taxes work is critical no matter what kind of income you earn. While salaried employees have a simpler process, individuals who receive T4A or are fully self-employed carry more responsibility—but also enjoy more opportunities for tax deductions and planning.

As the gig economy grows and more people operate side hustles or full-time businesses, being proactive about taxes is not just good practice—it’s essential.

Whether you’re like Sarah, Daniel, or Nina, make sure you:

• Understand your income types

• Track your deductions

• Pay attention to CPP/EI obligations

• File accurately and on time

• Work with a tax professional if needed