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First Year Self-Employed in Canada: What to Register, File and Pay

Updated

In your first year as a self-employed person nobody withholds tax from what you earn. You report the business on your own return, pay income tax and CPP contributions on the profit, and may have to register for the GST/HST. This page goes through the first year in order: when the business starts, registering, reporting, what you pay, the filing and payment dates, instalments and records. It is part of the self-employment taxes hub; the T2125 guide covers the form line by line and the self-employed tax calculator estimates the bill.

When your business starts for tax purposes

Guide T4002 says you must start reporting your income and can start deducting your expenses when your business starts. The CRA looks at each case on its own merits, and generally treats a business as started once you begin “some significant activity that is a regular part of the business or that is necessary to get the business going”, such as buying enough goods for resale or the equipment to start. Researching whether to go into business doesn’t count, so the cost of that research can’t be deducted.

The same guide sets the year-end and the reporting method:

  • Farmers, fishers and self-employed commission agents can use the cash method or the accrual method.
  • All other self-employment income must be reported using the accrual method.
  • Under the accrual method, you report income in the fiscal period you earn it, no matter when you receive it, and deduct expenses in the fiscal period you incur them, whether or not you pay them in that period.
  • Self-employed individuals generally have to use a December 31 year-end; an eligible individual may be able to use another method that allows a fiscal period ending on another date, reconciled on Form T1139.
  • A fiscal period can't be longer than 12 months, but it can be shorter, such as when a business starts or stops.

A business that starts partway through the year therefore has a first fiscal period shorter than a full year.

Registering for the GST/HST

You have to register for the GST/HST once you make taxable sales in Canada and are no longer a small supplier: that happens when your taxable sales go over $30,000 in a single calendar quarter (register from that sale) or over the last 4 consecutive calendar quarters (by the end of the month after that quarter); below that you can register voluntarily. What counts toward that total is set out in the GST/HST guide for freelancers. Commercial ride-sharing has its own rule: A self-employed driver who provides commercial ride-sharing is treated as a taxi business for GST/HST: they must register and charge GST/HST on fares from their first ride, even below the $30,000 small-supplier threshold. Delivering food or groceries is not ride-sharing, so the usual small-supplier rule applies to it. The GST/HST guide for freelancers covers registering, charging the right rate for each province and claiming input tax credits, and the business structures guide compares operating as a sole proprietor with other structures.

Reporting the business: Form T2125

You report self-employment income and expenses on Form T2125, Statement of Business or Professional Activities, filed with your personal return. The net income from the form goes on line 13500 of your return for business income (line 13700 for professional income). A separate T2125 is needed for each business you run. The T2125 guide walks through each part.

As a rule you can deduct any reasonable current expense you incur to earn the income, and only the business part of an expense that is partly personal. The self-employed deductions guide lists the common ones, including the limit on meals and entertainment. Three areas have their own conditions:

  • Home workspace. A self-employed person can deduct business-use-of-home expenses only if the workspace is their principal place of business, or they use it only to earn business income and on a regular and ongoing basis to meet clients, customers or patients. Only the business part of costs such as heat, electricity, insurance, property taxes, mortgage interest and capital cost allowance is deductible, worked out on a reasonable basis such as the workspace's share of the home's area. The deduction can't be more than the business's net income before it, so it can't create or increase a business loss; any amount not deducted carries forward to the next fiscal period. See business-use-of-home expenses.
  • Vehicle. When a vehicle is used for both business and personal driving, only the business share of its costs (such as fuel, insurance, licence, maintenance, loan interest, leasing and capital cost allowance) is deductible, worked out from a record of total and business kilometres; the expenses have to be reasonable and backed by receipts, business parking and supplementary business insurance are deductible in full, and passenger vehicles have limits on capital cost allowance, interest and leasing costs. The vehicle expenses guide covers the logbook.
  • Equipment. Computers, furniture, vehicles and other capital property are deducted over several years as capital cost allowance (CCA), not all at once; the T2125 guide shows how.

What you pay: income tax, CPP and optional EI

Income tax. Net self-employment income is added to your other income and taxed at the federal and provincial rates, reduced by the basic personal amount and your other credits.

CPP. You contribute to the CPP if you are over 18, work in Canada outside Quebec and earn more than $3,500 a year; contributions stop when you turn 70, and from 65 someone already receiving a CPP or QPP retirement pension can choose to stop. Self-employed people pay both the employee and the employer share of CPP contributions on their net business income (11.90% above the basic exemption up to the first earnings ceiling, plus 8% CPP2 between the first and second ceilings), worked out on Schedule 8 and paid with the income tax return. A non-refundable tax credit is claimed on half of the base contributions, and the other half, the first additional contributions and all CPP2 contributions are deducted from income. For 2026 the first ceiling is $74,600 and the second $85,000, after a basic exemption of $3,500; the self-employed tax calculator works through the numbers. Self-employed residents of Quebec contribute to the QPP instead, through their Revenu Québec return.

EI (optional). Self-employed people pay EI premiums only if they sign up. The EI program for self-employed people pays 6 types of special benefits (maternity, parental, sickness, compassionate care and the two family caregiver benefits), not regular benefits. You must have had an agreement with the Canada Employment Insurance Commission for at least 12 months before you can claim, and once you sign up you pay premiums through your yearly tax returns, starting with the return for the year you register. You can withdraw from the program at any time unless you have received special benefits as a self-employed person; after that, premiums continue for as long as you remain self-employed. Withdrawing within 60 days of entering the agreement means no premiums at all, and a later withdrawal means premiums until December 31 of the year you withdraw.

How much to set aside

The table below is computed from this site’s tax and CPP data for a single Ontario resident whose only income is the net self-employment income shown, claiming only the basic credits (the basic personal amount and the CPP credit, with the Ontario surtax, tax reduction and Health Premium included) for 2026. It covers income tax and CPP, not GST/HST you collect for the government.

Net self-employment incomeIncome tax (federal + Ontario)CPP and CPP2 (both shares)TotalShare of net income
$40,000$4,221$4,344$8,56521.4%
$60,000$7,879$6,724$14,60324.3%
$80,000$13,234$8,893$22,12727.7%
$100,000$19,045$9,293$28,33828.3%

Another province, other income such as a salary, RRSP contributions and other credits all change these figures. Moving the set-aside amount into a separate account as invoices are paid is one way to have it ready for the payment date and any instalments.

Filing deadline and payment date

Being self-employed moves the filing deadline but not the payment date. From the CRA’s filing due dates page and Guide T4002:

  • If you or your spouse or common-law partner are self-employed, your return is due by June 15 of the year after the tax year.
  • If it is your spouse or common-law partner who is self-employed, the later date applies to you if you lived with them at any time in the year.
  • The later date doesn't apply if your business expenditures are mainly the cost or the capital cost of tax shelter investments.
  • In that case the return is due by April 30 of the year after the tax year.
  • Any balance owing is still due by April 30 of the year after the tax year.
  • Paying the balance by April 30 avoids interest and penalties, even though the return can be filed later.
  • Interest. The CRA charges compound daily interest on an unpaid balance starting the day after the payment due date, at a rate that follows the CRA’s prescribed interest rates.
  • Weekends and holidays. When a due date falls on a Saturday, Sunday or a public holiday the CRA recognizes, a return is on time if the CRA receives it, or it is postmarked, by the next business day, and a payment is on time if received on the first business day after the due date.
  • Late-filing penalty. If you file after the due date and owe tax, the penalty is 5% of the balance owing plus 1% for each full month late, up to 12 months. If you were penalized in any of the three previous years and received a demand to file, it is 10% plus 2% for each full month, up to 20 months. Filing on time avoids the penalty even if you can’t pay yet.

A balance owing of $4,000 on a return filed three full months late, with no earlier late-filing penalty: 5% is $200, three months at 1% is $120, so the penalty is $320, plus daily interest on the unpaid balance.

Tax instalments

Instalments are payments made during the year toward the tax you would otherwise pay in one lump sum on April 30 of the following year. Income tax can’t be withheld from self-employment income, which is why instalments come up for self-employed people. From the CRA’s instalment pages, you have to pay instalments for a year only if both of the first two conditions below apply:

  • Your net tax owing for the year is more than $3,000 ($1,800 for Quebec residents), and
  • your net tax owing was also more than that in either of the two previous years.
  • The province or territory where you live on December 31 decides which threshold applies.
  • Instalments are due March 15, June 15, September 15 and December 15.
  • A payment due on a Saturday, Sunday or public holiday is on time if the CRA receives it on the next business day.
  • If your main source of income is self-employment income from farming or fishing, you have one instalment due date a year, December 31.

The same pages cover reminders, amounts, interest and the penalty:

  • Reminders. The CRA sends instalment reminders to people who will likely have to pay: the February reminder is for the March and June payments, and the August reminder is for the September and December payments. If you get a reminder but your net tax owing for the year will be at or below the threshold, you don’t have to pay instalments for that year.
  • How much. There are three ways to calculate the amounts: the no-calculation option (the amounts on your reminders, based on your latest assessed return), the prior-year option (based on last year’s return) and the current-year option (your estimate for this year). The prior-year and current-year options count net tax owing plus CPP contributions payable and any voluntary EI premiums. Under those two options, the CRA doesn’t charge instalment interest or a penalty if you pay in full by the due dates, unless your estimated amounts are too low.
  • Interest. Instalment interest applies if you were required to pay instalments, received a reminder showing an amount to pay, and paid late, paid too little or didn’t pay. It is compounded daily at the prescribed interest rate and charged only if it is more than $25. Paying the next instalment early, or paying more than required, earns credit interest that offsets interest charges for the same year.
  • Penalty. A penalty applies only if your instalment interest for the year is more than $1,000. The CRA takes the higher of $1,000 and 25% of the interest you would have owed with no instalments at all, subtracts it from your actual instalment interest, and the penalty is half of what is left.

What this means in the first year. Because the test also looks back at the two earlier years, someone whose earlier returns showed little or no net tax owing (for example, an employee whose tax was withheld from each pay) isn’t required to pay instalments in their first self-employed year. The whole year’s tax is then due on April 30. The second year is different:

Year 1: net tax owing is $9,000; in the two years before, tax was withheld from a salary and net tax owing was $0. No instalments are required for year 1, and the $9,000 is due April 30 of year 2. Year 2: if net tax owing is again expected to be about $9,000, both conditions apply (year 2 and year 1 are both above $3,000), so year-2 instalments are due March 15, June 15, September 15 and December 15 of year 2, at the same time as the year-1 balance.

This site’s guide to tax instalments covers how to pay them.

Keeping records

The CRA says to keep your records for six years from the end of the last tax year they relate to (unless it lets you destroy them earlier), at your Canadian residence or place of business unless it allows another place; you are responsible for them even when a bookkeeper or accountant keeps them, and you must make them available to the CRA on request. Guide T4002 adds that you keep separate records for each business you run, and that income records must include the date, amount and source of the income, supported by original documents such as sales invoices, receipts, bank deposit slips and contracts. The CRA may disallow expenses you can’t support.

Incorporating later

Incorporating changes how business income is taxed and adds a separate corporate tax return. The should I incorporate guide and the business structures guide compare the options.

Sources

The figures and rules on this page come from these sources, last checked against them between September 5, 2026 and October 1, 2026. How we check facts.