Going Self-Employed: Tax Guide for Freelancers and Contractors in Canada

Sole proprietor vs. corporation: which structure is right?

Most freelancers and contractors start as sole proprietors — there is no registration required (beyond a business name registration if you use a name other than your own), and all income is reported directly on your personal T1 return via Form T2125.

Sole proprietorship

Simple to set up and maintain. All business income is personal income and taxed at your personal marginal rate. Business losses can offset other sources of personal income. There is no legal separation between you and the business — creditors can pursue your personal assets.

Corporation

A Canadian-Controlled Private Corporation (CCPC) pays corporate tax on business income — approximately 9–12.5% combined on the first $500,000 of active business income through the Small Business Deduction. Anything left inside the corporation after that low rate is available for reinvestment. Personal marginal rates only apply when you pay yourself salary or dividends.

The rule of thumb: incorporation becomes worth the cost and complexity when you are consistently earning more than $100,000 in net business income and do not need to spend it all personally. The benefit is tax deferral on retained earnings — you defer the gap between corporate and personal rates until you draw the money out.

Incorporate too early and you pay accounting fees for a benefit that does not yet exist. Most freelancers operate as sole proprietors for several years first.

GST/HST registration

If your total taxable supplies (essentially, revenue from your business) exceed $30,000 in any four consecutive calendar quarters, you are required to register for GST/HST. You must register before you cross that threshold in a single quarter, not after.

Why register early even if you are under $30,000

Once registered, you can claim Input Tax Credits (ITCs) — refunds of the GST/HST you paid on business purchases. Software subscriptions, equipment, professional services, and many other business costs include GST/HST. As a small registrant, you pay those taxes and then recover them through your GST/HST filing. Without registration, you absorb them as a cost.

If most of your clients are businesses (B2B), being registered also signals that you are operating seriously. Business clients expect to receive a GST/HST number on your invoices.

How to file

Most small businesses file annually (if annual taxable supplies are under $1.5 million), quarterly (under $6 million), or monthly (over $6 million). Annual filers can opt into the Quick Method, which simplifies calculation: you remit a flat percentage of gross revenue (varies by province and type of business) instead of tracking all ITCs individually. For many service businesses, the Quick Method results in keeping a portion of the GST/HST collected.

Quarterly tax instalments

When you are employed, your employer remits income tax to CRA with every paycheque. As a self-employed person, there is no one doing that for you. If your net tax owing will exceed $3,000 (or $1,800 in Quebec) after accounting for any withholding, CRA requires you to pay tax in quarterly instalments.

Instalment due dates

• March 15
• June 15
• September 15
• December 15

How much to pay

CRA will send you instalment reminders based on your prior year returns. You have three options for calculating the amount to pay:

• Prior year method: Pay the same total tax as you owed in the prior year, divided into four equal payments. Safest if income is similar.
• Current year method: Estimate what you will actually owe this year. Risky if you underestimate — you pay arrears interest on the shortfall.
• No-calculation method: Pay whatever CRA's instalment reminder says. Uses the lesser of the current and prior year amounts.

In your first year of self-employment, no instalments are due — the trigger is when your prior year's net tax owing exceeded $3,000. But do set aside 25–30% of every payment you receive. You will need that money in April.

Deductible business expenses

Self-employed individuals can deduct expenses incurred to earn business income. The general test is whether the expense was incurred for the purpose of producing income. Common deductible expenses include:

Home office (T2125 Part 7)

You can deduct expenses for the portion of your home used regularly and exclusively (or principally) for business. Calculate the business-use percentage based on the ratio of your workspace to total home square footage, or by the number of rooms used for business.

Deductible home expenses include: rent (or mortgage interest — not principal), property taxes, heat, utilities, home insurance, and maintenance. The home office deduction cannot create a business loss — it can only reduce net income to zero; excess amounts carry forward.

Vehicle (logbook required)

You can deduct the business-use portion of vehicle expenses: gas, insurance, oil changes, tires, parking, and capital cost allowance on the vehicle's purchase price. You must keep a logbook recording each business trip (date, destination, purpose, kilometres). The CRA logbook method requires a full 12-month log in your first year; in later years, a 3-month sample log may be sufficient if your use pattern has not changed significantly.

Meals and entertainment (50%)

Business meals and entertainment (client dinners, event tickets for client purposes) are deductible at 50% of the actual cost. Keep receipts and note the business purpose and attendees on each receipt.

Phone and internet

Deduct the portion that is business use. A dedicated business phone line is 100% deductible. For a shared personal/business phone, estimate the business-use percentage and document your methodology.

Professional development and subscriptions

Courses, books, professional memberships, software subscriptions, and tools directly related to your work are deductible. A general interest in your field is not sufficient — the expense must relate to income-producing activities.

Professional fees

Accounting fees, legal fees related to business contracts, and bookkeeping costs are deductible business expenses.

Form T2125: Statement of Business or Professional Activities

T2125 is the form where self-employed sole proprietors report business income and expenses. It is filed as part of your T1 personal return. Key sections:

• Part 1: Identification — your business name, fiscal year end (usually December 31 for sole proprietors), and main product or service.
• Part 2: Gross business income — all revenue earned in the year, before any deductions.
• Part 3: Cost of goods sold — for businesses selling products, the cost of inventory.
• Part 4: Business expenses — line by line: advertising, meals/entertainment (enter the full amount, T2125 automatically applies 50%), insurance, interest, office expenses, supplies, phone, utilities, wages, and more.
• Part 7: Business-use-of-home expenses — the home office calculation.
• Part 9: Capital cost allowance (CCA) — depreciation on equipment, computers, and vehicles you own for business use.

Net business income from T2125 flows to line 13500 of your T1. It is included in your total income and taxed at your marginal rate, combined with any other income sources.

CPP contributions for the self-employed

Employees pay half of CPP contributions; their employer pays the other half. Self-employed individuals pay both halves. In 2026, the combined self-employed CPP contribution rate is 11.9% on net self-employment income between $3,500 (the Year's Basic Exemption) and the Year's Maximum Pensionable Earnings ($68,500 in 2026).

The maximum combined CPP contribution for self-employed individuals in 2026 is approximately $7,736.

The tax treatment of self-employed CPP

Self-employed CPP contributions get a split tax treatment:

• The employer half is deductible on line 22200 — it reduces your net income (and thus your income tax).
• The employee half is claimed as a non-refundable tax credit on line 31000 — it reduces your federal tax owing at a 15% rate.

This treatment partially offsets the double burden of paying both halves.

EI: self-employed do not have to contribute, but can opt in

Self-employed individuals are not automatically covered by Employment Insurance and are not required to pay premiums. However, you can opt into EI voluntarily through Service Canada's self-employment EI program.

If you opt in and pay premiums for at least 12 months before a claim, you may be eligible for special EI benefits, which include maternity (15 weeks), parental (35 or 61 weeks), compassionate care, and illness benefits. You cannot opt in and immediately claim — there is a minimum waiting period.

Premiums are deducted from income at the employee rate (1.64% of insurable earnings in 2026, up to a maximum). If you opt in and later choose to leave the program, you can only opt out if you have never made a claim, and you must wait a set number of years to re-enroll.

Retirement planning without a pension

No employer pension plan means you are entirely responsible for funding your retirement. Your primary tools are:

• RRSP: Contribution room accumulates at 18% of prior year earned income (including net self-employment income from T2125). Contributions are deductible against all income. Maximize contributions in higher-income years when the marginal deduction value is highest.
• TFSA: Tax-free growth and withdrawals. No contribution deduction, but zero tax on everything that comes out. Important in retirement because withdrawals do not trigger OAS clawback or affect income-tested benefits.
• Individual Pension Plan (IPP): A defined benefit pension plan for business owners who are incorporated and age 40+. Allows larger deductions than RRSP for older, higher-income owners.
• CPP: Your self-employed CPP contributions do build toward a CPP retirement pension. If you have been self-employed for many years at higher income, your CPP entitlement at 65 can be substantial.

Frequently asked questions