Congratulations on starting a business! Let’s start on the right foot and learn about filing taxes as a sole proprietor.
Employee vs. Self-Employed
As a new sole proprietor (with an unincorporated business), you need to understand how your pay and income taxes as a business owner will differ from when you were an employee.
Employee – Tax Paid via Source Deductions
If you were an employee in the past, you may be used to receiving a net pay cheque (what you earned less what you needed to pay into CPP, EI, and income taxes). At tax time, you likely had very little tax liability (if any) because your employer handled remitting these source deductions to the CRA (Canada Revenue Agency) throughout the year on your behalf.
Self-Employed – Tax NOT Paid via Source Deductions
As a self-employed business owner, no one is regularly remitting source deductions to the CRA on your behalf. Tax-free income, score! Well – not quite. You will have to pay income tax when you file your personal income tax return.
Then, eventually, you’ll have to remit quarterly income tax instalments throughout the year (due March 15th, June 15th, September 15th, and December 15th) rather than making a lump-sum payment once a year.
When does this happen?
If you previously didn’t owe over $3,000 in net tax at tax time, you won’t initially face this quarterly tax instalment requirement.
However, you will eventually have to pay personal income tax by quarterly instalments for the tax year if:
- Your net owing in the current year is more than $3,000, AND
- If your net tax owing in either the last year OR second last year is more than $3,000
Put Money Aside!
It’s important that you put funds aside throughout the year so you have it to pay income tax.
The last thing you want is to spend all your income tax money that should have been earmarked for the CRA, leaving yourself up at night worrying about a large tax bill.
How Much?
How much should you put aside? The CRA combines all of your personal sources of taxable income for the year and then reduces your taxable income by eligible deductions, such as expenses incurred to earn income or RRSP contributions.
They calculate your tax owed based on progressive tax rates and then reduce it using various personal tax credits you may qualify for, depending on your circumstances.
An accountant can provide a more accurate estimate, but a good starting point is 25% of your net business income (total income minus eligible deductible expenses).
Filing & Extended Filing Deadlines
Most taxpayers must file their personal income tax returns by April 30th following the tax year. However, if you or your spouse are self-employed, you both qualify for the extended filing deadline of June 15th.
This extension gives you more time to gather the information needed to complete your T2125 (Statement of Business Activities), which reports your business income and expenses for the year.
Failing to track income and expenses during the year creates a daunting task and increases the risk of errors and omissions. Get organized sooner and do this throughout the year to avoid making it such a grueling task at tax time.
Also, prepare your spouse’s return at the same time to optimize the tax returns. This provides an advantage and explains why the extension also applies to your spouse.
If you have a balance owing and file after the deadline, the CRA will assess a late filing penalty. Make sure you file on time!
Here’s a helpful factsheet the CRA has supplied for filing in 2025.
The CRA Does Not Extend the Payment Deadline
Although the CRA extends the filing deadline, it does not extend the payment deadline. The CRA will start charging arrears interest on any unpaid amounts after April 30th. So, although you have until June 15 to file your return, you must remit what you owe by April 30.
Filing taxes as a sole proprietor doesn’t have to be a headache when you know what to expect and have a plan. It does, however, require a level of understanding of how to properly record your income and expenses and report them properly. If you want help at tax time, or throughout the year, to make sure you’re recording and filing properly and on time, reach out to us at Compass CPA. We’re happy to help.
