If you're self-employed in Canada, filing taxes as a sole proprietor might feel overwhelming at first. Between tracking income, claiming deductions, and figuring out CPP contributions, there's a lot to keep straight.

But here's the good news: it's simpler than you think! Once you understand the process, you'll have a clearer picture of your business finances and the tax deductions available to you.

This guide walks you through everything Canadian sole proprietors need to know about filing taxes. You'll learn: 

• How to report business income and expenses using Form T2125
• When and how to pay Canada Pension Plan (CPP) contributions and income taxes 
• Which deductions can help reduce your tax bill

Plus, we'll show you how Wave helps Canadian sole proprietors track business income, organize expenses, and generate tax-ready reports, making tax filing easier.

What is a sole proprietor: Definition for tax purposes in Canada

A sole proprietor is an individual who operates an unincorporated business in their own name. It's the default structure for freelancers, contractors, and side hustlers across Canada. If you're earning income from clients, gig platforms, or selling products without formally incorporating, you're likely a sole proprietor.

No separate business tax return

Unlike corporations, sole proprietors don't file a separate business tax return. Instead, you include your business income on your T1 General Personal Tax Return. Business activity is reported using Form T2125 (Statement of Business or Professional Activities), which breaks down your revenue, expenses, and net income.

Setting the stage for filing

The beauty of being a sole proprietor is that no formal incorporation is needed. You can start earning income and claim business expenses right away.

However, you are responsible for tracking income, organizing expenses, and making tax installment payments if required. Staying on top of your records throughout the year makes filing season much less stressful!

Step-by-step: How to file taxes as a sole proprietor in Canada

Follow this six step guide to help you file your taxes as a sole proprietor in Canada:

1. Gather your business records

Before you can file, you need to collect all your business records. This includes income from invoices, contracts, and gig platforms, as well as receipts for business expenses like office supplies, software subscriptions, and travel costs.

With Wave, you can easily track income and expenses and generate income and expense summaries with just a few clicks, giving you a clear snapshot of your business finances. No more digging through shoeboxes full of receipts!

2. Complete Form T2125

Form T2125 is where you report your business income and expenses to the CRA. You'll need to include:

• Total income: All the money you earned from your business during the tax year
• Cost of goods sold: If you sell physical products, this is where you account for inventory costs
• Deductible expenses: Common categories include advertising, meals and entertainment, vehicle expenses, office supplies, and professional fees

Take your time with this form. The more accurate your expense tracking, the more deductions you can claim, and the lower your taxable income will be.

3. Include net business income on your T1 Return

Once you've completed Form T2125, your net business income (total income minus expenses) is transferred to Line 13500 of your T1 General return. This amount is added to your total taxable income, which determines how much federal and provincial tax you owe.

If you also have T4 income (from an employer), your business income is combined with that amount on your T1. This is why it's important to keep business and personal finances separate—mixing them makes tax filing confusing and increases the risk of errors.

4. Calculate and pay CPP contributions

As a sole proprietor, you're considered both the employer and the employee for Canada Pension Plan purposes. That means you must contribute both portions of CPP—roughly 11.9% of your net self-employment income (as of 2025).

Use Schedule 8 to calculate your CPP contribution. The CRA will include this amount on your Notice of Assessment, and it's payable when you file your tax return. This contribution counts toward your future CPP retirement benefits, so it's worth understanding how it works.

5. Make quarterly installment payments (If required)

If you owed more than $3,000 in taxes last year (or in both of the two preceding years), you may need to pay quarterly tax installments. These payments help you avoid a large tax bill at the end of the year.

The CRA provides installment reminders and due dates, which are typically March 15, June 15, September 15, and December 15. Missing these deadlines can result in interest charges, so mark them on your calendar.

6. Work with a professional (Optional)

If tax filing feels too complex or you simply want peace of mind, working with a professional can be a smart move. Wave’s in-house experts, Wave Advisors, help you stay organized and confident:

Bookkeeping support: Get an in-house bookkeeper to categorize and reconcile your transactions on a monthly basis, helping you and your business stay organized and ready when tax season rolls around.

Accounting coaching: Get a live, 1:1 coaching session with an accounting professional who can walk through your books, provide recommendations on how to clean things up, and give you confidence when tax season rolls around.

Block Advisors offer a range of small business tax filing services, including:

• Year-end tax filing readiness: Work with a tax pro to organize your documents and find opportunities for credits and deductions when filing
• Year-round tax planning services: Get individualized care from your Block Advisors small business certified tax pro, with check-ins scheduled throughout the year‍
• Small business tax consulting: Talk with a small business certified tax pro about your taxes, including general help and recommendations

Key tax deductions for Canadian sole proprietors

One of the biggest advantages of being a sole proprietor is the ability to claim business expenses and reduce your taxable income. Here are five key deductions you should know about:

1. Home office deduction

If you use part of your home exclusively for business, you can claim a portion of your rent, utilities, and internet. The CRA allows you to deduct the percentage of your home that's used for business purposes. For example, if your home office takes up 10% of your home's square footage, you can claim 10% of your rent and utilities.

2. Office supplies and equipment

Pens, notebooks, computers, and software are all deductible if used for business purposes. Even smaller purchases add up, so keep track of everything you buy throughout the year.

3. Phone and internet

If you use your cell phone and internet for business, you can deduct the business-use percentage of your monthly bills. For example, if you use your phone 50% for business and 50% for personal use, you can claim 50% of the cost.

4. Vehicle expenses

Track and deduct mileage or actual vehicle expenses used for business purposes. This includes gas, insurance, maintenance, and lease payments. Keep a detailed mileage log to support your claim.

5. Professional services

Bookkeepers, accountants, legal advice, and consulting fees are all tax deductible. If you hire Wave Advisors or Block Advisors to help with your taxes, those fees can be claimed as a business expense.

Common filing mistakes sole proprietors should avoid

Even experienced business owners make mistakes when filing taxes. Here are five common mistakes to watch out for:

Not registering for GST/HST when required: If your business earns more than $30,000 in revenue annually, you must register for GST/HST. Failing to do so can result in penalties.

Mixing business and personal expenses: Keep separate bank accounts and credit cards for your business. Mixing expenses makes it harder to track deductions and increases the risk of errors.

Forgetting to track smaller expenses or collect receipts: Every receipt counts. Even small purchases like coffee with a client or parking fees can add up to significant deductions over the year.

Missing tax instalment deadlines: If you're required to pay quarterly installments, missing a deadline can result in interest charges. Set reminders to stay on track.

Filing late or inaccurately due to poor recordkeeping: Disorganized records lead to filing errors and missed deductions. Wave helps you avoid this by automatically tracking income and expenses throughout the year.

How Wave simplifies tax filing for sole proprietors in Canada

Wave is designed to make tax filing easier for Canadian sole proprietors. Here's how:

Automatic expense categorization

Wave automatically categorizes your expenses based on CRA categories from Form T2125. This means less time sorting receipts and more time running your business.

Invoicing and payments

Send professional invoices and track income from freelance or gig work. Wave keeps everything organized in one place, so you always know what you've earned and what's outstanding.

Tax-ready reports

Export clean summaries of business income, categorized expenses, and receipts. These reports are ready to share with your accountant (if you have one!) or for use when completing Form T2125.

Cloud storage for receipts and records

Keep CRA-compliant records securely stored in the cloud. Wave stores your receipts and invoices for seven years, which is the CRA's requirement for record retention.

FAQs about Canadian sole proprietor taxes

What forms do I need to file as a sole proprietor in Canada?

You'll need to complete Form T2125 (Statement of Business or Professional Activities) and include it with your T1 General Personal Tax Return. You'll also use Schedule 8 to calculate your CPP contributions.

Do I need to register my business name or GST/HST?

Registering a business name is optional, but if your business earns more than $30,000 in revenue annually, you must register for GST/HST. Once registered, you'll need to collect and remit GST/HST on taxable sales.

How do I calculate my CPP contributions?

Use Schedule 8 to calculate your CPP contribution. As a sole proprietor, you contribute both the employer and employee portions, which is roughly 11.9% of your net self-employment income (as of 2025).

What if I also have T4 (employee income) and freelance income?

You can have both T4 income and self-employment income. Report your T4 income as usual, and include your business income using Form T2125. Both amounts are combined on your T1 to determine your total taxable income.

Can I carry forward business losses to future years?

Yes. If your business expenses exceed your income, you have a net loss. This loss can be carried back three years or forward up to 20 years to reduce taxable income in those years.

Stay organized and confident this tax season

Filing taxes as a sole proprietor in Canada means reporting business income on your personal return, tracking expenses, and staying on top of deadlines and contributions. The good news? Wave makes this easy by automating expense tracking, generating tax-ready reports, and storing receipts securely in the cloud.

Wave helps Canadian freelancers and sole proprietors stay organized, track expenses, and generate tax-ready reports, making tax time less stressful. Try Wave today and take control of your business finances — start for free!