If you run your trade as a sole proprietor, you and your business are one taxpayer. You do not file a separate business return. Your net profit is reported on Form T2125 and flows straight onto your personal T1 return, where it is added to any other income and taxed at the ordinary federal and provincial rates. There is no special lower rate for being self-employed: a sole proprietor pays exactly the same brackets as a salaried worker on the same taxable income.
Your business income lives on your personal return
A sole proprietor reports business income and expenses on Form T2125, Statement of Business or Professional Activities. You file one T2125 for each separate business. The net income at line 9946 of the T2125 carries to line 13500 of your T1, where it sits alongside any employment income, rental income or interest. The whole total is then run through the personal tax tables.
Your fiscal year is the calendar year, January 1 to December 31. Unlike a corporation, an unincorporated business cannot pick a different year-end without CRA approval.
What counts as income
Report gross revenue before any expenses. That includes cash, cheque, e-transfer and card payments for labour and materials, barter and in-kind work at fair market value, and holdbacks released to you during the year. One important exception: GST/HST you collect from clients is not business income. It belongs to the CRA and is reported separately on your GST/HST return, not on the T2125 (see GST/HST for Tradespeople).
Income is recognised on the accrual basis by default: you record it when it is earned, not when the customer finally pays. That is the CRA standard for construction.
How the tax is worked out
Your taxable income is gross revenue, minus cost of materials and subcontractors, minus the business deductions you are allowed under the Income Tax Act (see Tax Deductions for Trades). That net profit is added to your other income, and the personal brackets are applied. The detail of the 2026 federal and provincial rates is in Federal and Provincial Tax Brackets.
The Basic Personal Amount means the first slice of income is effectively tax free. For 2026 the full federal Basic Personal Amount is $16,452, delivered as a non-refundable credit at the lowest rate. Each province has its own Basic Personal Amount on top.
Worked example: $80,000 net profit (2026, Ontario)
A tradesperson clears $80,000 net profit and has no other income:
- The first $58,523 is taxed at the 14 percent federal rate: $8,193.
- The next $21,477 (from $58,523 to $80,000) is taxed at 20.5 percent: $4,403.
- Federal tax before credits: about $12,596.
- The federal Basic Personal Amount credit (14 percent of $16,452) removes about $2,303.
- Federal tax payable: roughly $10,293, before CPP, provincial tax and other credits.
Ontario tax is then added on the same $80,000 using the Ontario brackets, and you also owe CPP on your self-employment income (see CPP and CPP2 for the Self-Employed). The CPP bill on $80,000 alone is close to $8,893, which catches a lot of first-year tradespeople by surprise.
How you actually pay
No employer deducts tax at source from a sole proprietor, so the CRA collects two ways. You file and pay any balance owing by April 30, even though the self-employed filing deadline for the return itself is June 15. Once your tax owing passes $3,000 in a year (and in one of the two prior years), the CRA also requires quarterly instalments, due March 15, June 15, September 15 and December 15. Instalments cover income tax and your CPP together.
Common mistakes
- Spending the tax and GST money. The single biggest cash-flow killer. Move a set percentage of every payment into a separate account the day it lands. The GST/HST portion in particular is not yours.
- Forgetting CPP. On a sole proprietor's profit, CPP is paid in full by you at 11.90 percent, and it is a large, separate bill on top of income tax.
- Mixing income years. Cash basis is not the construction default. Holdbacks and progress draws are income when earned.
- Missing the April 30 balance date. The June 15 filing date does not delay interest on tax you owe; interest runs from May 1.
Common questions
When do I have to file and pay?
If you are self-employed your T1 filing deadline is June 15, but any balance you owe is still due April 30. Interest runs from May 1 on anything unpaid, so most people pay by April 30 even if they file later.
Do I have to pay by instalments?
If your net tax owing tops $3,000 ($1,800 in Quebec) two years running, the CRA expects quarterly instalments on March 15, June 15, September 15 and December 15. Miss them and interest applies.
What can I deduct?
Reasonable expenses you incur to earn business income: tools, materials, the business-use share of your vehicle and home office, insurance and more, reported on form T2125. Personal costs are not deductible, and keep your receipts for six years.
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