Sole proprietorship is the simplest business structure in Canada — and the most common. Your business income flows directly through your personal T1 tax return, and you are taxed at your marginal rate on net business income. Understanding what you can deduct and how to file correctly is essential to keeping your tax bill manageable.
Business income includes any income from a profession, trade, or commercial activity you carry on for profit. This includes:
Business income is reported gross on your return, and you deduct eligible expenses to arrive at net business income — which is what is taxed.
T2125 has three main sections:
Net business income from T2125 is transferred to line 13500 (or 13700 for professional income) of your T1 return.
| Expense Category | Common Examples |
|---|---|
| Advertising | Website hosting, Google Ads, social media ads, business cards |
| Business start-up costs | Eligible costs can be deducted in the first year |
| Business use of home | Proportion of rent, utilities, internet |
| Office supplies | Paper, ink, software subscriptions |
| Professional fees | Accountant, lawyer, bookkeeper fees |
| Telephone and utilities | Business portion of phone and internet |
| Travel | Airfare, hotels, meals (50%) for business travel |
| Vehicle | Business portion of operating costs; CCA on vehicle |
| Salaries paid | Legitimate salaries to employees or family members |
Sole proprietors must pay both the employee and employer portions of CPP on their net self-employment income. In 2025, the combined rate is 11.9% on income between $3,500 and $68,500. Half of the CPP contributions (the employer portion) is deductible from business income; the other half generates a non-refundable tax credit.
If your business revenue exceeds $30,000 over four consecutive quarters, you must register for GST/HST, collect it from customers, and remit it to CRA (net of input tax credits on your business purchases). Registration is beneficial even before the threshold because it allows ITC recovery.
If your net tax owing exceeded $3,000 in either of the two previous years, CRA will require quarterly instalment payments. For 2025, instalment payment dates are:
Failing to make instalment payments results in interest charges at the prescribed rate plus 4 percentage points.
Sole proprietors have until June 15, 2025 to file their T1 return for the 2024 tax year. However, any balance owing must be paid by April 30, 2025 to avoid interest.
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