Running your own business as a sole proprietor in Canada means dealing with more than one type of tax. Income tax. GST/HST. Potentially provincial taxes. It's manageable once you understand the structure — but it's easy to underestimate what you owe if you're not tracking things carefully from the start.
This is a plain-language overview of what Canadian sole proprietors and freelancers need to know. It's not tax advice — for your specific situation, talk to an accountant.
Income tax as a sole proprietor
As a sole proprietor, your business income is your personal income. You report it on your personal T1 return using Form T2125 (Statement of Business or Professional Activities). There's no separate corporate tax return.
Your net business income — revenue minus allowable business expenses — is added to any other income you have (employment income, investment income, etc.) and taxed at your marginal rate. Federal and provincial rates combined can range from roughly 20% to over 50%, depending on your total income and province.
No tax is withheld at source
Unlike employment income, nobody deducts tax from your invoices. You receive gross amounts and are responsible for setting aside money to cover your tax bill. Many sole proprietors are caught off guard by a large balance owing at tax time if they haven't planned for this.
A rough starting point: set aside 25–30% of your net business income throughout the year. The right percentage depends on your province, total income, and deductions — but it's better to over-save than under.
Quarterly income tax instalments
If your net tax owing was more than $3,000 in either of the two previous tax years (or $1,800 in Quebec), the CRA requires you to pay income tax in quarterly instalments rather than all at once at tax time.
Instalment due dates:
- March 15
- June 15
- September 15
- December 15
The CRA will send you an instalment reminder, but you're responsible for paying whether or not you receive one. Missing instalments results in instalment interest.
GST/HST: the separate obligation
GST/HST is not income tax. It's a tax you collect from your clients on behalf of the government and then remit. The money you collect in GST/HST is never yours — it passes through you to the CRA.
You're required to register once your taxable revenue exceeds $30,000 in any rolling 12-month period. Once registered, you charge GST/HST on your invoices, deduct input tax credits for the GST/HST you paid on business expenses, and remit the net amount on your filing schedule.
This is a separate return from your income tax return and has separate deadlines.
Deductible business expenses
Business expenses reduce your taxable income. Common deductible expenses for sole proprietors include:
- Home office expenses (if you work from home — calculated by square footage or a simplified method)
- Software subscriptions and tools used for the business
- Professional development and education directly related to your work
- Business-use portion of your phone and internet
- Accounting and legal fees
- Advertising and marketing costs
- Capital Cost Allowance (CCA) on equipment like computers
- Business travel (mileage if using your own vehicle, or actual travel costs)
Personal expenses are not deductible. When an expense is partly personal and partly business (like your phone), you can only deduct the business portion.
Record-keeping requirements
The CRA requires you to keep business records for at least 6 years from the end of the last tax year they relate to. This includes:
- All invoices you issued
- All receipts for business expenses
- Bank and credit card statements
- Contracts with clients
- GST/HST returns and supporting calculations
Digital records are acceptable — you don't need paper. But you do need to be able to produce them if the CRA asks.
Canada Pension Plan contributions
As a self-employed person, you pay both the employee and employer portions of CPP contributions on your net business income — effectively double what an employee pays. For 2024, the combined rate is 11.9% on earnings between the basic exemption ($3,500) and the Year's Maximum Pensionable Earnings (~$68,500). This is reported on your T1 return using Schedule 8.
Getting organized
The most common mistake sole proprietors make is not tracking income and expenses in real time. Trying to reconstruct a year's worth of transactions in April is stressful and error-prone. A simple spreadsheet or bookkeeping app updated weekly goes a long way.
For the GST/HST side specifically, HST Hero helps you track revenue against the $30,000 threshold, monitor your running HST balance, and estimate your next remittance — so you're never caught off guard by what you owe.