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← Curriculum /Individual tax (T1) /Level 3

Self-employment and business income

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A self-employed individual is taxed on profit, not on receipts — revenue less the reasonable expenses incurred to earn it. That single difference from employment income drives everything else: a much broader set of deductions, an obligation to keep records that support them, quarterly instalments instead of withholding, Canada Pension Plan contributions at both the employee and employer rates, and a later filing deadline that does not move the payment deadline. This tutorial covers what business income is, how expenses are treated, the capital-versus-current distinction that governs large purchases, and the obligations that come with working for yourself.

How to work through this tutorial

This follows a self-employed individual through a tax year: 1. Establish whether the activity is a business at all, and whether the person is genuinely self-employed. 2. Determine business income — revenue on an accrual basis, not cash received. 3. Deduct reasonable expenses incurred to earn that income. 4. Distinguish current expenses from capital ones, and apply capital cost allowance. 5. Handle the expense categories with their own rules — home office, vehicle, meals. 6. Meet the other obligations: instalments, CPP, GST/HST registration, records. 7. File on the right date, and pay on a different one. 8. Check your work against the common errors. 9. Verify every specific against CRA's published guidance before relying on it.

Is it a business, and are they self-employed?

Two threshold questions come before any calculation. **Is the activity a business?** An activity carried on with a view to profit is a business; a hobby is not, and losses from a hobby are not deductible. The distinction turns on commerciality — the manner of operation, the intention, the capability of producing a profit. A taxpayer with persistent losses from something that looks recreational should expect the question to be asked. **Is the person self-employed or an employee?** This has defined criteria — control over how the work is done, ownership of tools, chance of profit and risk of loss, and integration into the payer's business — and it is decided on the substance of the relationship, not on what the parties called it or what the contract says. The stakes are high in both directions. A misclassified worker treated as a contractor loses employment protections and the employer avoids payroll obligations, which is why CRA takes the question seriously. Either party can request a ruling on the status, and where an agent encounters a genuine dispute that is the route rather than an opinion on a call. A taxpayer who is an employee cannot obtain business deductions by describing themselves as a contractor.

Income and expenses

Business income is generally reported on an **accrual** basis: revenue when earned and receivable, expenses when incurred, regardless of when cash moves. A taxpayer who invoiced in December and was paid in February reports the revenue in the earlier year. This is the most common surprise for someone newly self-employed. The general test for an expense is that it was incurred to earn business income and is reasonable in the circumstances. Both halves matter — an expense genuinely incurred but wildly disproportionate can be reduced. Personal expenses are not deductible, and expenses with both a business and a personal element must be apportioned. That apportionment is where most disputes live, and it is why records matter more than receipts alone: a receipt shows an amount was spent, not that it was spent to earn income. Specific things are denied by the Act regardless of purpose — club dues and certain memberships among them. Confirm the denied categories rather than reasoning from the general test. Business income and expenses are reported on a prescribed statement filed with the T1. Professional activities have their own version of the same form, reflecting work in progress and other differences. A business loss can generally be applied against other income of the year, which is a significant difference from a capital loss.

Current versus capital, and capital cost allowance

An expense that is consumed in earning this year's income is a **current expense**, deducted in full this year. An outlay that acquires something with lasting value is a **capital expenditure**, and it is not deducted in full — it is depreciated over time through capital cost allowance. The distinction is the most consequential one in business income and the least intuitive. Repairing a piece of equipment to keep it working is usually current; replacing it, or improving it beyond its original condition, is usually capital. Capital cost allowance works by class. Each type of property falls into a prescribed class with its own rate, and the deduction is calculated on the declining balance of the class rather than on individual assets. Classes and rates are set in the Regulations. Several rules attach that catch people. A rule generally restricts the deduction in the year an asset is acquired, and incentive measures have at times modified it — confirm what applies for the year in question rather than assuming. When an asset is disposed of, the proceeds reduce the class and can produce a recapture included in income, or a terminal loss. CCA is also **optional**: a taxpayer may claim less than the maximum, or none, which is sometimes sensible in a low-income year since unclaimed CCA remains available later. It cannot be used to create or increase a business loss.

Expense categories with their own rules

**Business use of home.** Deductible where the space is the principal place of business, or is used exclusively for business and regularly for meeting clients. The claim is a reasonable proportion of home costs — typically by area — and it is limited to the business income remaining after other expenses. It cannot create a loss, but the unused portion carries forward to future years. **Vehicle expenses.** Deductible in proportion to business use, which must be supported by a logbook recording business and total kilometres. Without a log the claim is unsupportable, and a taxpayer who did not keep one is in real difficulty at review. Commuting between home and a regular place of business is personal, not business. **Meals and entertainment.** Deductible at a limited percentage rather than in full. Confirm the percentage and the exceptions, since some situations are treated differently. **Salaries to family members** are deductible if the work was genuinely performed and the amount is reasonable for that work. This is legitimate and routinely questioned, so records matter. **Home internet, phone, supplies** all follow the apportionment principle: business proportion only, supported by something more than an assertion.

The other obligations

**Instalments.** With no withholding, a self-employed individual will usually cross the instalment threshold. The instalments topic covers the test and the options. **Canada Pension Plan.** A self-employed person pays **both** the employee and employer portions on their net business income — roughly double what an employee pays on the same earnings. Part of it is deductible and part generates a credit. This is the single largest unpleasant surprise for someone newly self-employed, and it is worth raising before they discover it on assessment. **Employment Insurance.** Self-employed individuals are not covered for regular benefits and do not pay EI premiums on business income. They may opt into a scheme covering certain special benefits, which is a deliberate election with its own conditions. **GST/HST.** Registration is required once taxable supplies exceed the small supplier threshold, measured over a rolling period rather than a calendar year. Below it, registration is optional and sometimes advantageous. This is its own line of business and should be routed rather than improvised. **Records.** Books and records supporting the return must be kept for a defined retention period, generally measured from the end of the tax year they relate to. A claim without records is a claim that will not survive review.

Filing and paying

A self-employed individual — and their spouse or common-law partner — has a later filing deadline than other individuals, reflecting the time needed to assemble business records. The payment deadline does not move with it. A balance owing is due on the ordinary date, so a taxpayer filing on the later deadline with tax to pay has been accruing interest in the meantime. The Foundations topic on deadlines covers this, and it remains the single most common avoidable cost in this population. The fiscal period for an individual's business is generally the calendar year. An alternative method permitting a non-calendar fiscal period exists but requires an adjustment that brings the reporting back into line with the calendar year, and it is rarely worth it for a small business. A business loss can generally be carried back a defined number of years and forward a longer period, applied against income of those years. Confirm the periods. Where a business ceases, there are consequences beyond simply stopping — disposition of assets, potential recapture, final GST/HST filings. Route rather than improvise.

Common errors

Treating a hobby as a business. Losses from an activity not carried on with a view to profit are not deductible. Accepting the parties' description of an employee-versus-contractor relationship. It is decided on substance, and either party can request a ruling. Reporting on a cash basis. Business income is generally accrual — earned when receivable. Deducting an expense because a receipt exists. The test is that it was incurred to earn business income and is reasonable, and mixed-use expenses must be apportioned. Deducting a capital expenditure in full. It goes to a CCA class and is depreciated. Assuming CCA must be claimed at the maximum. It is optional, cannot create a loss, and unclaimed amounts remain available later. Overlooking recapture on disposing of an asset. Claiming business-use-of-home so as to create a loss. It is limited to remaining income, with the excess carried forward. Claiming vehicle expenses without a logbook, or treating commuting as business travel. Deducting meals and entertainment in full. Forgetting that the self-employed pay both CPP portions. Assuming EI applies. It does not for regular benefits, absent an election. Overlooking the GST/HST registration threshold, which is measured over a rolling period. Filing on the later deadline with a balance owing and not mentioning that interest has been running since the earlier one.

What to verify this tutorial against

This was drafted without a source document. The CCA classes and rates, the meal limitation, the GST/HST threshold and the record retention period are all specific and all published. CRA's guide for self-employed business, professional, commission, farming and fishing income is the primary reference. It covers income recognition, deductible expenses, CCA, business use of home and vehicle expenses. The prescribed statement of business or professional activities carries its own instructions and shows how the income and expense categories are organised. The Income Tax Regulations set the CCA classes and rates. Confirm the class for a particular asset there rather than from memory. CRA's guidance on employee versus self-employed status sets out the criteria and the ruling process. CRA's GST/HST pages cover the small supplier threshold, how it is measured, and the registration requirement. CRA's guidance on keeping records sets out the retention period and what must be kept. The instalments topic in this line, and the Foundations topic on deadlines, cover the payment obligations that come with self-employment.

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