8 Tax-Filing Tips for Sole Proprietors in Canada (2026 Tax Year Guide)

Tip: Zensurance strongly recommends that sole proprietors, small business owners, and self-employed professionals consult an accountant, tax lawyer, or tax expert to help file their taxes.

What Is a Sole Proprietor?

A sole proprietorship is the simplest business structure in Canada. It’s owned by one individual and is not a separate legal entity from the owner.

While it’s inexpensive and easy to set up, sole proprietors are personally responsible for all business debts, legal issues, and tax obligations. That personal responsibility extends to your assets, making proper tax planning and liability insurance especially important.

8 Tax-Filing Tips for Sole Proprietors and Self-Employed Individuals in Canada

Here are eight things sole proprietors and self-employed professionals in Canada need to know to correctly file their annual tax returns:

 1. Understand What You Need to File

Sole proprietors are required to report business income and expenses on their personal tax returns.

Even if your business earned little income, operated at a loss, or was inactive, you must still file using Form T2125 (Statement of Business or Professional Activities) as part of your T1 personal return.

You also need to file a T1 return, including if you:

• Disposed of a capital property or had a taxable capital gain
• Need to make Canada Pension Plan (CPP) contributions
• Want to access Employment Insurance (EI) special benefits
• Received a request from the Canada Revenue Agency (CRA) to file
• Are claiming a refund, GST/HST credit, Canada Child Benefit, or provincial credits

It’s recommended that you speak to an accountant or tax-filing advisor to ensure that you file the correct type of return.

2. File Your Return on Time

Even if your business didn’t turn a profit in 2025, you still need to file on time. Late filing can result in penalties and interest that quickly increase the amount you owe.

If you owe but don’t have the funds to pay the balance in full, the CRA offers payment arrangements to make it easier.

The CRA now delivers most correspondence electronically through the My Business Account portal. Notices, statements, and requests are no longer mailed by default, so it’s important to regularly check your account and keep your contact information up to date.

3. Set Money Aside Throughout the Year

If you operate a sole proprietorship – especially alongside a salaried job – you may be surprised by how much you owe at tax time. Unlike employment income, taxes and CPP contributions aren’t automatically deducted from your business income.

Being a sole proprietor means you are responsible for figuring out your taxes and other payments owed. If you wait until tax time and don’t set money aside over the year, you may find yourself owing a large sum of money you cannot easily pay. It’s helpful to also budget for RRSP contributions, as these can offset the taxes you will owe.

A common rule of thumb is to set aside 25% to 30% of your net income for taxes, depending on your province and income level.

Finally, you are also required to register for a GST/HST number once your business makes $30,000 or more in 12 months. This means that if your business revenue exceeds this threshold, you need to start collecting and remitting GST/HST. Therefore, you need to set aside those payments, too.

 4. Be Prepared to Pay in Installments

According to the CRA, you have to pay in installments for 2025 if:

• Your net tax for 2025 will be more than the threshold amount for your province or territory (between $1,800 to $3,000, depending on where you live).
• Your net tax owing in either 2024 or 2025 was above the threshold for your province or territory.

The CRA will email reminders when you need to pay income tax and GST/HST installments, but these are easy to miss, especially if they have an old address or email on file for you, so make sure you keep on top of it.

 5. Don’t Delay Paying If You Owe Money

If you are not required to pay in installments, the deadline for payment is April 30, 2026. 

If you’re required to pay in installments, missed or late payments can result in ongoing interest charges.

If you’re unsure how much you owe, it’s better to estimate and pay early than wait. Any overpayment will be refunded once your return is processed.

 6. Keep Track of Payments and Business Expenses

If you wait until tax time to start looking through that shoebox full of receipts, you’ll be in for a long night. It will be easy to miss a lot of things. Keeping records up to date throughout the year can save hours of stress and help ensure you don’t miss deductions.

Consider having a separate bank account and credit card for your business. Being diligent about using these only for business expenses and deposits will help keep things straight when sorting them later.

 Using accounting software or a simple spreadsheet can also make it easier to track income, expenses, and tax payments throughout the year.

 7. Know What Business Expenses You Can Deduct

One of the biggest advantages of being self-employed is the ability to deduct or “write off” legitimate business expenses, which can significantly lower your taxable income. If you work out of your home, “business use of home” expenses mean you can claim a portion of:

• Your mortgage or rent
• Home repairs
• Home utilities like heat, water, etc.
• Phone, internet
• Your home insurance and taxes

Other things you can claim as a sole proprietor include:

• Motor vehicle expenses (keep a logbook of mileage)
• Business parking, transit, travel, hotel rooms
• Food and entertainment (if business-related)
• Product inventory, office supplies, and other tools
• Marketing, professional memberships, websites
• Business advisories such as accountants, lawyers, courses, coaches
• Office space rental and utilities
• Liability insurance

 8. Know When and Where to Get Help

If you need direction on which specific forms you’ll need to submit for your business, the CRA has a list here.

Running a business alone can be challenging – especially when it comes to taxes. An accountant or tax professional can help you file correctly, minimize taxes owed, and respond confidently to audits or CRA requests. Their fees are also a deductible business expense.

Frequently Asked Questions About Taxes for Sole Proprietors in Canada

Do sole proprietors file business and personal taxes separately?

No. Sole proprietors file one personal T1 income tax return that includes both personal and business income. Your business income and expenses are reported using Form T2125 (Statement of Business or Professional Activities) and are included as part of your personal return.

What is the tax filing deadline for sole proprietors in Canada?

Most sole proprietors must file their tax return by June 15, 2026. However, any taxes owed must be paid by April 30, 2026, to avoid interest charges. Interest on unpaid balances begins accruing on May 1, 2026.

Can sole proprietors deduct business expenses from their taxes?

Yes. Sole proprietors can deduct reasonable business expenses related to earning income, including home office costs, vehicle expenses, professional fees, insurance, supplies, and marketing, provided you keep proper records and receipts.

Do sole proprietors have to pay Canada Pension Plan (CPP) contributions?

Yes. Sole proprietors between the ages of 18 and 70 and whose net income is more than $3,500 are responsible for paying both the employee and employer portions of CPP contributions on their net business income. These contributions are calculated when you file your tax return.

Protect Your Personal and Business Finances With Liability Insurance

As a sole proprietor, there’s no legal separation between you and your business, so protecting your personal finances is essential.

A comprehensive business insurance policy can help protect your income, assets, and reputation.

Complete our online application in under five minutes for a free quote. 

Our friendly, knowledgeable brokers will quickly find the low-cost coverage you need and customize it to suit your requirements and budget.

– Updated February 23, 2026.

This document is provided for informational purposes only. It does not, and it is not intended to, provide legal, technical or other professional advice, nor does it amend, or otherwise affect, the provisions or coverages of any insurance policy or bond issued by any carrier that is procured by, or with the assistance of Zensurance, nor is it a representation that coverage does or does not exist for any particular claim or loss under any such policy or bond. Availability of coverage referenced in this document can depend on underwriting qualifications and relevant laws and regulations. Zensurance disclaims all warranties whatsoever.

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