All the Numbers

Self-employment income

From the All the Numbers wiki · Tax

Someone who runs a business on their own, a sole proprietor, has no employer. Revenue less business expenses is their net business income, and it goes on their personal return with any other income, taxed at the same brackets. No tax is taken off the money as it comes in.

How it differs from a salary

  • Both halves of CPP. An employee pays half the contribution and the employer pays the other half. The self-employed pay both, which is twice the employee rate.[1] See CPP and EI contributions.
  • Half is a deduction, half is a credit. Half of the base contribution, and all of the enhanced part, are deducted from income.[2] The other half of the base contribution earns the usual credit at the lowest rate.[3]
  • Shared ceilings. CPP on business income uses the same yearly ceilings as CPP on a salary, so a person with both cannot pay past the maximum.
  • Nothing is withheld. The tax and CPP are settled when the return is filed. See tax withheld from pay.
  • A loss offsets other income. A business loss reduces the year's other income, and what cannot be used becomes a loss carried forward.

What the engine does

The engine can model a simple sole proprietorship as a monthly revenue and a monthly amount of current expenses, paid through household cash. The calendar-year net is the business income on the return.[4] It then calculates self-employed CPP at both halves, and leaves the balance of tax to the April settlement.

What the planner does

The planner does not ask for business income, so a plan from the planner treats each person as an employee with a salary, and the CPP in it is the employee share. Someone self-employed will pay more CPP than the plan shows and will not have tax taken off during the year.

What it does not do

Quarterly instalments, capital cost allowance, a home office or vehicle share, GST/HST, fiscal years that do not end in December, the EI opt-in for the self-employed, partnerships and corporations are not modelled. See capital cost allowance for how depreciation of a rented property is handled instead.

See also

  • Capital cost allowance · Capital cost allowance (CCA) is the tax write-off for the building part of a rental property, at 4% of the remaining balance a year for most rental buildings. Claiming it can cost the principal-residence exemption on a rented home and creates recapture on a sale, so the planner never claims it.
  • CPP and EI contributions · Canada Pension Plan and Employment Insurance contributions come out of each paycheque up to a yearly ceiling. The plan calculates both from salary, and treats the self-employed as paying both halves of CPP.
  • Income tax brackets and your marginal rate · Federal and Ontario tax are each charged in slices of income at rising rates, then reduced by credits, with an Ontario surtax and health premium on top. The marginal rate is what the next dollar costs; the average rate is total tax over income.
  • RRSP room, deduction and withdrawals · Room accrues at 18% of earned income up to the annual cap, contributions earn a deduction refunded the following April, and withdrawals are taxed as income. The plan assumes you start with no carried-forward room unless you say otherwise.
  • Tax withheld from pay, and the April refund · Employers withhold income tax, CPP and EI from each paycheque as an estimate. The real tax is worked out on the return, and the difference arrives or is owed the following April.

References

  1. ↑Canada Pension Plan s.10(1), 10(1.1), 10(1.2); s.11.1 ("contribution rate for self-employed persons") · Self-employed CPP: base, first and second additional contributions at twice the employee rates on the lesser of contributory self-employed earnings (less the unused basic exemption) and the maximum contributory earnings less salary already contributed on · 200% · effective 2019-01-01
  2. ↑ITA 60(e)(i) ("1/2 of the lesser of... a contribution under subsection 10(1)"), 60(e)(ii) · Deduction for CPP on self-employed earnings: one-half of the base contribution and all of the first and second additional contributions · 50% · effective 2019-01-01
  3. ↑ITA 118.7 B(c) · Credit at the appropriate percentage on self-employed CPP contributions in excess of the 60(e) deduction (the other half of the base) · See the source · effective 2019-01-01
  4. ↑ITA s.9(1) income from a business; s.3(d) losses; T2125 · A sole proprietorship is monthly revenue and current expenses posted through household cash; the calendar-year net is business income on the return; no CCA, home office, GST/HST, instalments, fiscal periods or EI opt-in · See the source · effective 2026-09-18