Cash Flow for Contractors: How to Set Aside HST + Tax in Ontario Without Stress

If you're a contractor in Ontario, the biggest cash-flow trap is simple: you invoice a client, get paid, and spend the money—then tax time arrives and you owe HST + income tax you didn't set aside.

This post gives you a practical system so that doesn't happen.

The problem: cash flow vs. tax liability

When you invoice $1,000:

• You get $1,000 in your bank account (feels like income)
• But you may owe $130 in HST (if registered) + ~$250–$400 in income tax
• That's $380–$530 you don't actually have if you've already spent it

The fix is simple math + discipline.

The contractor cash-flow formula (Ontario)

Here's the system:

Step 1: Know your numbers

Before you can set anything aside, you need to know:

• Are you HST-registered? (Yes or No)
• What's your effective tax rate? (rough estimate: 25–35% for sole proprietors, depends on income)

If you're not sure, use 30% as a safe estimate for now.

Step 2: Calculate what to set aside per invoice

If you're NOT HST-registered:

• Invoice amount: $1,000
• Set aside for tax: $1,000 × 30% = $300
• Keep for yourself: $700

If you ARE HST-registered (Ontario = 13% HST):

• Invoice amount: $1,130 (includes $130 HST)
• Set aside for HST: $130
• Set aside for income tax: ($1,130 − $130) × 30% = $300
• Keep for yourself: $700

(The math is slightly different because HST is collected on behalf of CRA, not your income.)

Step 3: Create a separate account (or envelope)

Open a separate savings account (or use an envelope if you prefer cash) and move the “set aside” amount immediately after you get paid.

Don't wait. Don't “plan to do it later.” Move it now.

Step 4: Track it monthly

At the end of each month, add up:

• Total invoiced
• Total HST set aside (if registered)
• Total income tax set aside

This should match your “set aside” account balance (roughly).

Real example: a $5,000 month

Scenario: You're HST-registered, invoice $5,000 in work

If you do this every month, by tax time you have the money ready.

What if you're not HST-registered?

Same logic, simpler math:

Common mistakes contractors make

• Spending the HST: HST is not your money—it's CRA's. Spend it and you'll owe it later.
• Using a rough estimate for tax rate: If you're unsure, ask your accountant or use 35% (safer).
• Not tracking: You set aside money but don't track it, so you don't know if you're on pace.
• Mixing personal and business: If you're pulling from the set-aside account for personal expenses, the system breaks.

What about quarterly HST payments?

If you're HST-registered, you may file quarterly (or monthly, depending on your setup). Here's the key:

• HST you collect (from clients) goes to CRA
• HST you pay (on business expenses) you can claim back (ITCs)
• Your net HST (collected − paid) is what you owe or get back

So the set-aside system above assumes you're tracking expenses too. If you're not, you could owe more or less than expected.

FAQ