Self-employment tax.

What's different about self-employment tax

As a self-employed Canadian you pay both halves of CPP (11.9% on net business income from $3,500–$74,600 in 2026, plus both halves of CPP2 at 8% from $74,600 to $85,000). You also need to remit any GST/HST you collected (less Input Tax Credits) and make quarterly instalments once your tax owing crosses ~$3,000.

The three deadlines that catch people out

Self-employment does not have one tax date, it has three sets of them, and they are the most common source of avoidable interest charges.

• Filing: June 15. Self-employed individuals and their spouses get the later filing deadline.
• Payment: April 30. The balance owing is still due on the ordinary date. Interest begins accruing on May 1 even though your return is not late: a genuinely confusing pair of rules, and the reason a June filer can still owe interest.
• Instalments: quarterly, on the 15th of March, June, September and December. Once the CRA expects instalments, missing them attracts instalment interest and, if the shortfall is large enough, a separate penalty on top.

The CRA gives you three ways to compute instalments, and choosing correctly is worth real money. The no-calculation option is the amount on the reminder the CRA mails you, based on your history: pay that and you are protected from instalment interest even if you end up owing more. The prior-year option uses last year’s tax. The current-year option uses your own estimate for this year, which is the one to use if your income has dropped, though you carry the risk of under-estimating.

Practical rule: if income is rising or flat, pay the CRA’s reminder figure and stop thinking about it. If income has genuinely fallen, estimate the current year yourself rather than lending the CRA money you will get back a year later.

What you can actually deduct

Business income is reported on form T2125, Statement of Business or Professional Activities, and the deductions available there are the main reason self-employment can be tax-efficient despite the double CPP. The ones that matter most, and the conditions attached:

Business use of home

You may claim the portion of rent or mortgage interest, property tax, utilities, insurance and maintenance that relates to the space you work in. The proportion is worked out on area or number of rooms, and if the space is not used exclusively for business you prorate again by the hours it is.

Two features people miss. The claim cannot create or increase a business loss: it can reduce your business income to zero but no further. And the amount you were blocked from claiming is not lost: it carries forward to be used against business income in a later year. So a first year with little revenue does not waste the deduction, it banks it.

One caution worth knowing: claiming capital cost allowance on the home itself, as opposed to the running costs, can jeopardise the principal residence exemption on part of the property. This is the standard reason accountants advise against it.

Motor vehicle

Deductible in proportion to business kilometres over total kilometres driven in the year, applied to fuel, insurance, maintenance, licence and interest or lease costs. What makes or breaks the claim on audit is the logbook. A full-year log is the gold standard; the CRA also accepts a simplified approach where you keep one complete twelve-month log as a base year and then a representative three-month sample in later years, provided the pattern of use has not materially changed.

Driving between your home and a regular place of business is personal, not business, which surprises people. Travel between client sites during a working day is business.

The rest, briefly

• Meals and entertainment: deductible at 50%, and only where there is a genuine business purpose.
• Equipment: a laptop or vehicle is capital, not an expense, so it is deducted over time through capital cost allowance rather than all at once. In the year you buy, the half-year rule generally limits you to half the normal CCA rate.
• Professional fees, subscriptions, software, insurance, advertising, bank charges: deductible where incurred to earn business income.
• A salary to yourself: not deductible. A sole proprietor cannot employ themselves; money you take out is a draw, not an expense, and it changes nothing about your tax. This is one of the sharpest differences from a corporation, where a salary to the owner is a deductible expense to the company.

EI: the asymmetry nobody warns you about

You pay both halves of CPP but you generally pay no EI premiums at all on self-employed business income, and correspondingly you cannot claim regular EI benefits if the work dries up. There is no unemployment safety net behind a sole proprietorship by default.

There is a voluntary route into EI special benefits (maternity, parental, sickness, and caregiving) through a registration with the Canada Employment Insurance Commission. Two features shape the decision: you must be registered for a waiting period before you can claim, so it cannot be joined once you already need it, and once you have claimed you continue paying premiums on self-employed income for as long as you are self-employed. It is a real option for anyone planning a family, and a poor one as a general safety net, because it never covers ordinary loss of work.

Two things self-employment gives you that employment does not

RRSP room still builds. Net business income counts as earned income for RRSP purposes, so a self-employed person accumulates contribution room the same way an employee does. That matters because an RRSP deduction is one of the few levers that reduces both the tax and, indirectly, the sting of a large balance owing. See the RRSP calculator and the RRSP tax savings calculator.

Timing is partly yours. An employee’s income arrives when payroll says so. A business owner has some control over when work is invoiced and when equipment is bought, which means some control over which tax year income and deductions land in. Used well across a year-end, that is worth more than most single deductions.

When it stops making sense to be a sole proprietor

The usual trigger for incorporating is not a revenue figure, it is a gap between what the business earns and what you need to take out. A Canadian-controlled private corporation pays a low rate on active business income eligible for the small business deduction, so profit you leave inside the company is taxed far more lightly than the same profit earned personally, that deferral is the main benefit, and it only exists if you genuinely do not need the money now.

Against that, incorporation brings a corporate return, higher accounting fees, payroll obligations if you pay yourself a salary, and rules that have closed most of the old family income-splitting routes. Two other considerations often decide it: limited liability, and the lifetime capital gains exemption on qualifying small business corporation shares, which is only available if you have shares to sell, something a sole proprietorship does not have. Do the comparison with an accountant on your actual numbers rather than on a rule of thumb, because the answer turns on how much profit stays in the company.

Related: the sales tax page covers which province’s GST/HST rate belongs on an out-of-province invoice, and the salary to hourly calculator works out the contract rate you would need to match a salaried job.