Sole proprietorship

How the income is taxed

A sole proprietorship does not file its own income tax return. You calculate gross and net business income on Form T2125, Statement of Business or Professional Activities, and carry the net amount to your personal return. If you run more than one business, you complete a separate T2125 for each. The profit is taxed at your personal rates in the year it is earned, whether or not you took it out of the business.

For 2026, most self-employed individuals have until June 15, 2027 to file, but any balance owing is still due by April 30, 2027. Keep your income and expense records for at least six years from the end of the last tax year they relate to.

Liability and what it means

Because the business is not a separate legal entity, you are personally liable for its debts and for claims against it. In a dispute or default, personal assets may be exposed. A corporation is a separate legal entity and can limit that exposure, although the extent of any protection depends on the facts.

Insurance, written contracts and clear separation of personal and business bank accounts help, but they do not change the underlying legal position. Liability is one of the main questions to review when considering incorporation.

GST/HST and payroll accounts

Being a sole proprietor does not by itself mean you must charge GST/HST. You generally must register once you are no longer a small supplier, which for most businesses means exceeding $30,000 of taxable supplies in a single calendar quarter or over four or fewer consecutive quarters. You may register voluntarily below that level.

A payroll account is relevant if you hire employees, because you then have deductions to withhold and remit. Your own draws are not wages for a payroll account; ask your accountant how CPP and instalments apply to you.

An illustrative example

Suppose, for illustration, a sole proprietor earns $90,000 in revenue and has $30,000 of allowable expenses. The net business income of $60,000 goes on the personal return, whether $20,000 or $60,000 was withdrawn. Describe the expenses and the owner’s regular draws to your accountant, and ask whether instalments are likely.