Quick answer: Self-employment income in Canada is reported on Form T2125 filed with your personal T1 and taxed at marginal federal + provincial rates. Sole proprietors pay both halves of CPP on net business income (combined 11.90% on CPP1 up to $74,600, 8.00% on CPP2 from $74,600 to $85,000 in 2026 — max $9,292.90). You must register for GST/HST once worldwide taxable revenues exceed $30,000 in any single calendar quarter or rolling four quarters.
What this means: There’s no small business deduction for sole proprietors — the 9% CCPC rate applies only to corporations. A sole proprietor with $90,000 of net business income in Ontario typically pays roughly $20K-$22K in combined federal + provincial income tax, plus the full $9,292.90 in CPP if income hits the YAMPE, plus GST/HST collected from clients if registered.
What to do next: Compare CCPC tax to the same income unincorporated. Small business tax calculator →
What counts as self-employment income
CRA treats income as self-employment when you are not an employee — you control your own work, supply your own tools, take on financial risk, and have the chance of profit and loss. The classic four-factor test for the employee-vs-contractor distinction comes from the 671122 Ontario Ltd v Sagaz Industries Canada Inc jurisprudence and is administered by CRA in Guide RC4110 Employee or Self-Employed?.
Common types of self-employment income reported on Form T2125:
- Business income — freelance work, consulting, sole proprietorships, sales of goods.
- Professional income — income from a profession (medicine, law, accounting, engineering) reported in Part 3B of T2125 with optional work-in-progress election.
- Commission income — sales commissions paid as a self-employed agent (not as employee), reported in Part 3 of T2125.
- Ride-share, delivery, content creation — gig income reported as business income on T2125.
Investment income (interest, dividends, capital gains), rental income, and farming/fishing income are reported on separate schedules — not T2125.
The three tax layers a sole proprietor pays
| Layer | Base | 2026 rate | Form |
|---|---|---|---|
| Federal income tax | Net business income, stacked on top of other income | 14% to 33% graduated | T2125 + T1 |
| Provincial / territorial income tax | Same base as federal | Varies; combined top federal + provincial roughly 44% to 54% | Provincial Form 428 |
| CPP1 (self-employed, both halves) | Net self-employment earnings minus $3,500 exemption, up to $74,600 | 11.90% | Schedule 8 |
| CPP2 (self-employed, both halves) | Net self-employment earnings between $74,600 and $85,000 | 8.00% | Schedule 8 |
| GST/HST | Taxable supplies once $30,000 threshold crossed | 5%-15% by province | GST34 |
| EI (optional opt-in) | Net self-employment earnings | 1.63% outside Quebec (1.30% Quebec) | Schedule 13 |
CPP and CPP2 for self-employed in 2026
| Item | 2026 value |
|---|---|
| Basic exemption | $3,500 |
| YMPE (first earnings ceiling) | $74,600 |
| YAMPE (second earnings ceiling) | $85,000 |
| Self-employed CPP1 rate (employee + employer) | 11.90% |
| Maximum self-employed CPP1 | $8,460.90 |
| Self-employed CPP2 rate (employee + employer) | 8.00% |
| Maximum self-employed CPP2 | $832.00 |
| Combined maximum CPP + CPP2 (self-employed) | $9,292.90 |
Half of CPP and CPP2 contributions are deductible on line 22200 of the T1 (the employer portion). The other half is a non-refundable credit on line 30800 (CPP1) and line 22215 (CPP2 employee portion). See CPP contribution rates 2026: YMPE, YAMPE, CPP1, CPP2 for the full mechanics.
GST/HST registration: the $30,000 threshold
You must register for GST/HST when your worldwide taxable revenues (from all your businesses combined) exceed $30,000 in any of these tests:
- Any single calendar quarter on its own.
- Any rolling four-quarter window (sum of the last four calendar quarters).
Until you cross the threshold you are a “small supplier” and do not have to charge or remit GST/HST — though you also cannot claim input tax credits (ITCs) for tax paid on business inputs. Many sole proprietors register voluntarily to claim ITCs even when below the threshold.
Once registered, you charge GST/HST at the rate of the place of supply (where the customer is, not where you are). Rates in 2026: 5% GST in AB, BC, MB, NT, NU, QC (plus 9.975% Quebec QST), SK, YT; 13% HST in ON; 15% HST in NB, NL, NS, PE. See GST/HST $30,000 threshold for freelancers for the registration mechanics.
Deductible business expenses for sole proprietors
Deduct ordinary and necessary business expenses that were incurred to earn the business income. Common categories:
- Home office (T2125 Part 7): business-use percentage of utilities, home insurance, property tax, mortgage interest (not principal), rent, internet. Calculated by area (sq ft) and time (hours used for business).
- Vehicle (T2125 Part 11): business-use percentage of fuel, insurance, maintenance, parking, lease payments, capital cost allowance (CCA Class 10 or 10.1). Keep a logbook of business kilometres.
- Capital cost allowance (CCA): deduct depreciation on equipment, computers, vehicles, furniture. Each asset class has its own rate (Class 50 computers 55%, Class 8 furniture 20%, Class 10 vehicles 30%).
- Professional fees: accounting, legal, software subscriptions, professional memberships, business insurance.
- Phone, internet, supplies: business-use share. A second phone line used 100% for business is fully deductible.
- Meals and entertainment with clients: 50% deductible (statutory cap under ITA s. 67.1). Restaurant meals while travelling for business are also 50%.
- Travel: 100% of transportation, lodging, and 50% of meals on legitimate business trips.
- Advertising: business cards, ads, website hosting, paid social ads.
- Bad debts: written off when you have demonstrably tried to collect.
Personal expenses are not deductible. Mixed-use expenses must be prorated. Keep receipts for at least 6 years from the end of the tax year in case of a CRA review.
Worked example: $90,000 net self-employed in Ontario (2026)
Daria runs a freelance consulting practice in Ontario with $90,000 of net business income on T2125 (revenue minus deductible expenses).
- CPP1: ($74,600 − $3,500) × 11.90% = $71,100 × 11.90% = $8,460.90.
- CPP2: ($85,000 − $74,600) × 8.00% = $10,400 × 8.00% = $832.00.
- Total CPP for the year: $9,292.90.
- CPP deduction (employer half) on line 22200: half of $8,460.90 + half of $832 = $4,230.45 + $416 = $4,646.45.
- Taxable income for federal/Ontario tax: $90,000 − $4,646.45 = $85,353.55.
- Federal tax (2026 brackets, 14% / 20.5% / 26% / 29% / 33%): 14% × $58,523 + 20.5% × ($85,353.55 − $58,523) = $8,193.22 + $5,500.32 = $13,693.54.
- Less BPA credit (2026 $16,452 × 14%): $13,693.54 − $2,303 = $11,391 net federal tax.
- Ontario tax (5.05% / 9.15% brackets in 2026): roughly $5,500-$5,800 after Ontario BPA.
- Combined federal + Ontario income tax: roughly $16,900-$17,200.
- Total tax + CPP burden: roughly $26,200-$26,500 against $90,000 net business income (28-29% effective).
Add GST/HST if registered — collected from clients and remitted, so it’s neutral in cash terms but adds compliance time.
2026 self-employed filing deadlines
| Filing | Deadline |
|---|---|
| T1 personal return (when you have self-employment income) | June 15, 2027 |
| Tax balance owing for 2026 | April 30, 2027 (interest accrues from this date even though the return is due June 15) |
| GST/HST annual return (most freelancers) | June 15, 2027 (balance owing due April 30, 2027) |
| GST/HST quarterly returns (some registrants) | One month after the quarter-end |
| Tax instalments for 2027 | March 15, June 15, September 15, December 15 (if 2025 or 2026 had net tax owing over $3,000, $1,800 in Quebec) |
When to consider incorporating
Incorporating creates a separate legal entity that pays corporate tax (combined federal + provincial small business rate roughly 9-12% on the first $500,000 of active business income in most provinces) and gives the owner the choice of paying themselves salary, dividends, or a mix.
Incorporation typically pays off when:
- Net business income substantially exceeds personal spending needs (so income can be retained in the corporation at the lower rate).
- Liability protection matters (corporation shields personal assets from business creditors).
- The owner expects to eventually sell the business and use the lifetime capital gains exemption on qualified small business corporation shares.
- Family income-splitting is feasible without running into the tax on split income (TOSI) rules.
For many sole proprietors earning roughly equal to personal spending requirements, the bookkeeping, T2 corporate return, and accountant cost ($2,000-$5,000+ per year) outweighs the tax savings. See salary vs dividends for small business owners for the post-incorporation pay decision.
Common mistakes
- Missing the GST/HST $30,000 threshold. Once crossed in a single calendar quarter or rolling four-quarter window, you must register within 30 days. CRA backdates registration to the date the threshold was crossed if you miss it.
- Treating CPP as optional. Sole proprietors must contribute CPP on net self-employment earnings above $3,500; it is not optional like EI.
- Confusing the small business deduction (SBD) with sole proprietors. The 9% federal SBD rate is for CCPCs only. Sole proprietors pay personal marginal rates on all business income.
- Forgetting the 50% meals limit. Restaurant meals with clients or while travelling are only 50% deductible. Audited regularly.
- Not tracking home-office and vehicle business-use percentage. CRA disallows undocumented claims. Keep a logbook (vehicle) and a calculation of business-use square footage and hours (home office).
- Missing the April 30 balance-owing deadline. The June 15 deadline is only for filing the return. Interest starts accruing on unpaid tax from May 1 even though no return is yet filed.
- Not making tax instalments. If you owed more than $3,000 in two of the last three years, you must pay quarterly instalments. CRA charges interest on missed instalments.
Frequently asked questions
What income goes on Form T2125?
Business, professional, and commission income from self-employment activities. Investment, rental, and farming/fishing income use separate schedules.
What is the 2026 maximum CPP for a self-employed Canadian?
$9,292.90 (CPP1 $8,460.90 + CPP2 $832) at or above $85,000 of net self-employment earnings.
When must I register for GST/HST?
When worldwide taxable revenues exceed $30,000 in any single calendar quarter or in any rolling four-quarter window. Voluntary registration is allowed below the threshold.
When is my self-employed T1 due?
June 15, 2027 for the 2026 tax year. But any tax balance owing must be paid by April 30, 2027 or interest accrues.
Can I deduct my home office?
Yes — business-use percentage of utilities, insurance, property tax (or rent), and mortgage interest. Calculated by square footage and hours used. Cannot create a loss (carry forward instead).