If you run an unincorporated business in Canada, whether you freelance, consult, drive or sell online, the tax system treats your business profit as personal income. There is no separate corporate return: your net earnings flow onto your T1, and you pay federal tax, provincial tax and Canada Pension Plan (CPP) contributions on them. This guide sets out the 2026 numbers, works two examples, and covers the deadlines, deductions and penalties that decide what you keep.
Who counts as self-employed in Canada
You are self-employed if you carry on a business as a sole proprietor or a partner in a partnership, rather than through a corporation. Income and expenses go on Form T2125 (Statement of Business or Professional Activities), filed with your personal return. The figure that matters is net income: gross revenue minus allowable expenses. That net profit is the base for income tax and, above a small exemption, for CPP.
Because nothing is deducted at source, you are responsible for setting money aside and, once your bill is large enough, for paying quarterly instalments during the year. The CRA expects you to keep receipts, invoices and mileage logs for six years from the end of the tax year they relate to.
Self-employment is a question of substance, not of what your contract calls you. The CRA weighs control over the work, who supplies the tools, whether you can subcontract, and your chance of profit or risk of loss. If those point to employment, it can reclassify you.
Federal income tax brackets for 2026
Federal brackets are indexed each year, and for 2026 the CRA applied a factor of 2.0 percent. The big change carried into 2026: the lowest federal rate is cut from 15 percent to 14 percent. The basic personal amount, the slice you can earn before any federal tax applies, rises to $16,452 (tapered to $14,829 in the top bracket).
| Taxable income (2026) | Federal rate |
|---|---|
| Up to $58,523 | 14.0% |
| $58,523 to $117,045 | 20.5% |
| $117,045 to $181,440 | 26.0% |
| $181,440 to $258,482 | 29.0% |
| Over $258,482 | 33.0% |
Source: CRA, current year tax rates and income brackets. These are marginal rates: each rate applies only to the slice inside its band. Note one credit employees get and you do not, the Canada employment amount, available only against employment income.
Provincial tax: how Ontario stacks on top
Every province levies its own income tax with its own brackets and credits, so your bill depends on where you lived on December 31. Ontario's 2026 brackets are indexed by 1.9 percent (the $150,000 and $220,000 thresholds are not indexed) and its basic personal amount is $12,989.
| Taxable income (2026, Ontario) | Provincial rate |
|---|---|
| Up to $53,891 | 5.05% |
| $53,891 to $107,785 | 9.15% |
| $107,785 to $150,000 | 11.16% |
| $150,000 to $220,000 | 12.16% |
| Over $220,000 | 13.16% |
Ontario adds two things people forget. A surtax: 20 percent of basic Ontario tax above $5,818, plus a further 36 percent above $7,446. And the Ontario Health Premium, running from nil to $900 a year once taxable income passes $20,000. A resident of Alberta (top combined rate near 48 percent) or Quebec, which collects its own tax and runs QPP instead of CPP, sees a very different provincial line (CRA Ontario tax package).
CPP contributions for the self-employed in 2026
As an employee you pay half of CPP and your employer pays the rest. Self-employed, you pay both halves. For 2026 the combined self-employed rate is 11.9 percent on pensionable earnings up to the Year's Maximum Pensionable Earnings (YMPE), after a $3,500 basic exemption. A second tier, CPP2, applies between the YMPE and the Year's Additional Maximum Pensionable Earnings (YAMPE) at a combined 8 percent.
| 2026 CPP figure | Amount |
|---|---|
| Basic exemption | $3,500 |
| Year's Maximum Pensionable Earnings (YMPE) | $74,600 |
| Year's Additional Maximum Pensionable Earnings (YAMPE) | $85,000 |
| Self-employed base rate (both halves) | 11.9% |
| Maximum base CPP contribution | $8,460.90 |
| Self-employed CPP2 rate (both halves) | 8.0% |
| Maximum CPP2 contribution | $832.00 |
| Maximum total CPP for the self-employed | $9,292.90 |
Source: CRA, CPP contribution rates, maximums and exemptions.
The relief is worth getting right, because most guides simplify it wrongly. Of the 11.9 percent, 9.9 percent is the legacy base and 2.0 percent is enhanced. You deduct the employer-equivalent half of the base (4.95 percent of pensionable earnings) plus the entire enhanced portion (that 2.0 percent, and all of CPP2) on line 22200. The employee half of the base (4.95 percent) becomes a non-refundable credit on line 31000. So about 58 percent of your CPP bill cuts taxable income, the rest cuts tax directly, and all of it buys pension.
Two worked examples: $80,000 and $45,000 of profit
Priya, Ontario, $80,000 net income. Base pensionable earnings are $74,600 minus $3,500, that is $71,100, and at 11.9 percent that is $8,460.90. CPP2 applies to the $5,400 above the YMPE at 8 percent, giving $432. Total CPP is $8,892.90. Her deduction is $71,100 at 6.95 percent ($4,941) plus $432, so $5,373, and her CPP credit base is $71,100 at 4.95 percent, or $3,519. Taxable income becomes $74,626.
Federal: 14 percent on the first $58,523 is $8,193, plus 20.5 percent on the next $16,103 is $3,301, so $11,494 gross. Credits at 14 percent are $2,303 (basic personal amount) and $493 (CPP), leaving about $8,698. Ontario: 5.05 percent on $53,891 is $2,722 plus 9.15 percent on $20,735 is $1,897, so $4,619 gross, less credits of $656 and $178, giving basic tax of $3,785. That is below the $5,818 surtax threshold, so no surtax, but the Health Premium adds $750, for about $4,535. Total: roughly $22,126, an effective rate of 27.7 percent. Reproduce it with the Canada sole proprietorship tax calculator.
Marc, Ontario, $45,000 net income. Pensionable earnings are $41,500, so CPP costs $4,938.50 with no CPP2. His deduction is $2,884 and his credit base $2,054, so taxable income is $42,116. Federal tax is 14 percent of that ($5,896) less credits of $2,303 and $288, about $3,305. Ontario tax is 5.05 percent ($2,127) less credits of $656 and $104, giving $1,367, plus a $450 health premium: about $1,817. Total: roughly $10,061, or 22.4 percent.
Look at the split. CPP alone is $4,939 of Marc's $10,061, or 49 percent of the total. At lower incomes CPP, not income tax, is the dominant cost of self-employment: the basic personal amounts shelter income from tax but shelter nothing from CPP. That is where incorporating enters the conversation, since a corporation paying dividends rather than salary avoids CPP entirely (and builds no pension). Compare with the sole proprietorship vs corporation comparison and the Canada corporation tax calculator.
Business expenses: the 2026 deduction limits that matter
Expenses must be incurred to earn business income and must be reasonable. Several categories carry hard caps, and these are the ones people get wrong.
| Item (2026) | Limit or rule |
|---|---|
| Mileage allowance rate (provinces) | 73 cents per km for the first 5,000 km, 67 cents after |
| Mileage allowance rate (territories) | 77 cents per km for the first 5,000 km, 71 cents after |
| Class 10.1 passenger vehicle CCA ceiling | $39,000 before tax (up from $38,000 in 2025) |
| Class 54 zero-emission vehicle CCA ceiling | $61,000 before tax (unchanged) |
| Meals and entertainment | 50 percent deductible |
| Business-use-of-home | Pro rata by area and time; cannot create a loss |
Sources: Department of Finance, 2026 automobile deduction limits and CRA guide T4002. Two traps: those per-kilometre rates are ceilings for a tax-free allowance, while a sole proprietor normally claims actual vehicle costs pro-rated by business kilometres (so keep a logbook), and home-office costs cannot create a loss.
GST/HST and the $30,000 small supplier threshold
GST/HST is separate from income tax. You are a small supplier, not required to register or charge it, as long as worldwide taxable revenue stays at or under $30,000 over four consecutive calendar quarters. That figure has been fixed since 1991 and is unchanged for 2026.
Once you cross it you must register. If a single sale takes you over $30,000 within one calendar quarter, you cease to be a small supplier immediately on that sale and must charge tax on it. If you creep over across four rolling quarters instead, small supplier status ends at the close of the month following that quarter. Many freelancers register voluntarily below the threshold, because registration unlocks input tax credits on business costs (CRA, when to register and charge GST/HST).
Once registered, reporting frequency follows revenue: annual if taxable supplies are $1,500,000 or less, quarterly up to $6,000,000, monthly above. Most sole proprietors file annually, though an annual filer with over $3,000 of net GST/HST owing must also pay quarterly GST/HST instalments. Under $400,000 of taxable supplies including tax, look at the Quick Method: you remit a flat percentage of collected revenue instead of tracking every input tax credit.
Deadlines, instalments, and what being late costs you
| Date | What is due |
|---|---|
| March 15, June 15, Sept 15, Dec 15 | Quarterly income tax instalments, if required |
| April 30 | Income tax balance owing, and GST/HST balance for annual filers |
| June 15 | T1 filing deadline for the self-employed and their spouse |
| June 15 | GST/HST return for annual filers with a Dec 31 year end |
The filing deadline and the payment deadline are different, which trips people up every year. You may file by June 15, but interest runs on any unpaid balance from May 1.
You must pay by instalments if your net tax owing tops $3,000 ($1,800 in Quebec) in the current year and in either of the two previous years. Critically, net tax owing includes the CPP payable on self-employment income, not just income tax. Marc above, with $10,061 payable, is firmly in instalment territory even though his income tax alone is $5,122 (CRA, required tax instalments).
The cost of getting it wrong in 2026: the CRA charges 7 percent on overdue amounts, compounded daily, and it is not deductible (CRA prescribed interest rates). The late-filing penalty is 5 percent of the balance owing plus 1 percent per full month late, up to 12 months. If you were charged that penalty in any of the three prior years, it doubles to 10 percent plus 2 percent per month for up to 20 months. Instalment interest above $1,000 attracts a further penalty.
EI, RRSPs, and how much to set aside
Self-employed people pay no regular EI premiums and cannot claim regular EI benefits. You may opt in to EI special benefits (maternity, parental, sickness, compassionate care, family caregiver). For 2026 you pay the employee rate of $1.63 per $100 of insurable earnings on maximum insurable earnings of $68,900, so at most $1,123.07 a year. There is a 12-month waiting period, and once you claim you cannot opt out again (EI for self-employed people).
RRSP room is 18 percent of the previous year's earned income, capped at $33,810 for 2026, and business profit counts as earned income. An RRSP contribution reduces taxable income but not CPP, which is charged on net business income before RRSP deductions.
Practical rule: move 30 percent of every client payment into a separate savings account the day it lands, or 35 percent in a high-rate province or above $100,000 of profit. If you are GST/HST registered, the tax you collect is never your money, so park it separately from that 30 percent and reconcile quarterly against your instalment notices.
Common mistakes, and who this guide does not apply to
Five errors recur. Budgeting for income tax but forgetting that CPP roughly doubles when you leave employment. Missing the April 30 payment deadline because June 15 is the date in your calendar. Ignoring the first instalment notice. Leaving GST/HST registration until year end, by which point you owe tax on sales you never charged it on. And claiming 100 percent of a home internet bill or a personal vehicle, the quickest way to invite a review.
This guide does not apply if you operate through a corporation (the company files a T2 and you are taxed on the salary or dividends it pays you), if you are a Quebec resident (separate return with Revenu Quebec, and QPP rather than CPP), or if you are an employee whose employer already deducts at source. Nor does it cover farming and fishing income, which use different forms and instalment rules.
These figures come from official 2026 CRA, Department of Finance and provincial sources and are current at the time of writing, but tax is a Your Money, Your Life subject where a wrong number has a real cost. Treat this as a planning estimate, run your numbers through the calculators linked above, and confirm anything binding with a licensed Canadian accountant before you file.