As a self-employed tradesperson you report your business profit on Form T2125 as part of your personal T1, you pay income tax at the ordinary brackets plus the full cost of the Canada Pension Plan, you file by June 15 but pay any balance by April 30, and once your tax owing passes $3,000 you pre-pay through quarterly instalments. There is no special lower rate for being self-employed. What there is, instead, is a long list of deductions a sole proprietor can claim that an employee cannot. This is the complete guide: CPP and CPP2, EI, instalments, the filing dates, the deductions that matter most, capital cost allowance and record-keeping.
How a sole proprietor is taxed
If you run your trade as a sole proprietor, you and the business are one taxpayer. You do not file a separate business return. Your net profit is reported on Form T2125, Statement of Business or Professional Activities, and the net figure at line 9946 flows straight to line 13500 of your personal T1, where it is added to any other income and taxed at the ordinary federal and provincial rates. Your fiscal year is the calendar year, January 1 to December 31, and income is recognised on the accrual basis (when earned, not when paid), which is the CRA standard for construction. GST/HST you collect is not income; it belongs on your separate GST/HST return (see GST/HST: The Complete Guide). The federal Basic Personal Amount for 2026 is $16,452 (maximum), a credit that wipes out federal tax on the first slice of income. The full bracket detail is in Federal and Provincial Tax Brackets.
CPP and CPP2: the bill that ambushes first-year trades
This is the single most common nasty surprise. As a self-employed tradesperson you pay both halves of the Canada Pension Plan, the employee half and the employer half, because there is no employer to split it with. That doubles the rate.
For 2026:
- CPP1 self-employed rate: 11.90 percent on pensionable earnings (your net profit minus the $3,500 basic exemption), capped at the Year's Maximum Pensionable Earnings (YMPE) of $74,600. The maximum CPP1 contribution is $8,460.90.
- CPP2 self-employed rate: 8.00 percent on earnings between the YMPE of $74,600 and the Year's Additional Maximum Pensionable Earnings (YAMPE) of $85,000. The maximum CPP2 contribution is $832.
- At full earnings that is a combined maximum of $9,292.90 a year, paid on top of your income tax.
An employee pays 5.95 percent and their employer quietly pays the other 5.95 percent. You pay the full 11.90 percent yourself. CPP is mandatory once your net self-employment income passes $3,500, for those aged 18 to 70 (from 65 to 70 you can elect to stop once you are receiving your CPP retirement pension).
It is not as brutal as the sticker price once the offsets apply. Roughly half the base CPP cost is a deduction on line 22200 (worth your marginal tax rate), and half is a non-refundable credit on line 31000 (worth 14 percent federally plus the provincial equivalent). The enhanced portions go to line 22215 as a further deduction. The full detail is in CPP and CPP2 for the Self-Employed.
EI: optional, and most trades skip it
Regular Employment Insurance (job-loss coverage) does not apply to the self-employed. There is a voluntary opt-in, through Service Canada, that buys access to EI special benefits only: maternity, parental, sickness, compassionate care and family caregiver. For 2026 the self-employed premium is $1.63 per $100 of net self-employment income (Quebec is $1.30 per $100, because the Quebec Parental Insurance Plan already covers maternity and parental). You pay only the employee portion.
Most tradespeople skip it, for sound reasons: there is a 12-month wait after registering before you can claim, you must reduce your business activity by at least 40 percent of the time to draw benefits, and once you have received benefits you are locked into paying premiums for the rest of your self-employed career (the only exit is to cancel within 60 days of registering, before any premium is incurred). Private income-protection insurance is often more flexible. The opt-in mainly suits someone planning a parental leave.
Instalments: pre-paying tax through the year
No employer deducts tax at source from a sole proprietor, so the CRA collects through quarterly instalments. You are required to pay instalments for a year if your net tax owing (federal plus provincial, including CPP) will exceed $3,000 in the current year ($1,800 for Quebec residents) and also exceeded that amount in one of the two prior years. A profitable tradesperson with no source deductions almost always meets this test after the first good year.
The 2026 instalment due dates are March 15 (March 16 in practice, as the 15th falls on a Sunday), June 15, September 15 and December 15. You can use the CRA's no-calculation reminder amounts (the safest harbour), the prior-year method, or a current-year estimate. Instalments cover income tax and your CPP together. The CRA charges interest at the prescribed rate plus 4 percent on shortfalls (the prescribed rate was 3 percent for the first two quarters of 2026, making the overdue rate 7 percent, and it is reset quarterly, so check the current figure on canada.ca).
The filing dates: June 15 to file, April 30 to pay
This catches people every year because the two dates are different. As a self-employed person, your T1 return for 2026 is not due until June 15. But any balance of tax you owe is due by April 30, and interest runs from May 1 on anything unpaid. So the later filing date does not buy you more time to pay; it only buys time to file the paperwork. The safe habit is to know your number and pay the balance by April 30 even if the return goes in later.
The deductions that matter most
A self-employed tradesperson can deduct any reasonable expense incurred to earn business income, claimed on the T2125. The full list is in Tax Deductions for Trades; the ones with the biggest dollars and the most rules:
Vehicle. Your work truck or van is one of the biggest deductions and one of the most audited. A sole proprietor claims actual costs (fuel, insurance, maintenance, interest, lease and capital cost allowance) multiplied by the business-use percentage from a mileage logbook. Two costs are capped for 2026: loan interest is deductible up to $350 per month, and lease payments up to $1,100 per month before tax. (Earlier figures of $300 and $900 are out of date; the 2026 caps are $350 and $1,100.) The per-kilometre reasonable allowance, 73 cents for the first 5,000 km and 67 cents after (plus 4 cents in the Northwest Territories, Nunavut and Yukon), is the rate for reimbursing employees, not the method a sole proprietor uses for their own vehicle. No logbook means no defensible claim. The detail is in Vehicle and Mileage Claims.
Home office. Deductible if your home is your principal place of business, or you use a space there regularly and exclusively to meet clients. You claim a share of rent or mortgage interest, utilities, property taxes, insurance and maintenance, based on the workspace area as a percentage of the home, in Part 7 of the T2125. It cannot create or increase a business loss, but the unused portion carries forward.
Tools, where the self-employed win big. An employed tradesperson (a T4 earner) is limited to the Tradesperson's Tool Deduction, capped at $1,000 for 2026 (the lesser of $1,000 and trade income plus apprenticeship grants minus the Canada Employment Amount), and it needs a signed Form T2200. A self-employed tradesperson has no cap: small tools and consumables are written off in full in the year of purchase, and durable equipment is written off over time through capital cost allowance. A $5,000 tool purchase gives a self-employed person a full $5,000 deduction over time, against a maximum of $1,000 for an employee.
Other common claims. Materials and subcontractors (file a T5018 for construction subcontractors), business insurance, the business share of your phone, accounting and bookkeeping fees, advertising and your website, trade licences and dues, required safety gear, and client meals at 50 percent of cost.
Capital cost allowance: depreciating the big stuff
You cannot deduct the full cost of a long-lived asset (a van, major machinery, a computer) in one year. Instead you claim capital cost allowance (CCA), the CRA's name for tax depreciation, a percentage of the asset's remaining value each year. The classes a trade meets most:
- Class 8 (20 percent): durable tools, equipment and machinery costing $500 or more.
- Class 10 (30 percent): most motor vehicles, and passenger vehicles costing $39,000 or less before tax (all pooled together).
- Class 10.1 (30 percent): passenger vehicles costing more than $39,000 before tax, with the cost capped at $39,000 for 2026 (up from $38,000), each in its own class, with no terminal loss on sale.
- Class 50 (55 percent): computers, laptops and most systems software.
The half-year rule normally lets you claim only half the usual CCA in the year you buy an asset. You are not forced to claim the maximum; claiming less in a low-profit year preserves the deduction for a year when it is worth more. The full treatment is in Capital Cost Allowance Classes.
Record-keeping: the six-year rule
You must keep all books, records and supporting documents for at least six years from the end of the tax year they relate to (for capital assets, six years from the year of disposition). That covers invoices issued and received, bank statements, contracts, subcontractor agreements, vehicle logbooks and your T2125 workpapers. No record means no deduction if you are reviewed, and destroying records early without CRA permission is an offence. The CRA targets the construction sector specifically for the underground economy, using building permits and supplier data, and the most reliable automatic audit trigger is income on your T1 that does not match your GST/HST return. Reconcile the two before you file.
Common mistakes
- Forgetting CPP. It is a separate, large bill on top of income tax: up to $8,460.90 in base CPP plus $832 in CPP2. Budget for it from day one.
- Missing the April 30 balance date. The June 15 filing date does not delay interest. Pay the balance by April 30.
- Under-paying instalments. They cover CPP as well as income tax. Forgetting CPP in the calculation triggers interest.
- Spending the tax and GST money. Move a fixed percentage of every payment into a separate account the day it lands.
- No vehicle logbook. The single most common reason a vehicle claim is denied.
- Binning receipts. The six-year rule is not optional, and a mismatch with your GST/HST return invites an audit.
Know someone who needs this?
Keep reading
Was this guide useful?
Didn't find what you were looking for?
Spotted something wrong or out of date? Email us at hello@kilnguides.co.uk.
In crisis? 988 Suicide Crisis Helpline (call or text 988) ·