Self-Employed in Canada: CPP, T2125 & Incorporation
Tax basics for sole proprietors, common T2125 deductions, CCA classes, and when incorporation might matter.
By Prosperics Editorial Board · DIGITI LLC
Prosperics is published by DIGITI LLC, a California company. Calculators and guides are written and maintained by the Prosperics editorial board. Figures are checked against primary sources — IRS, CRA, SSA, and central bank publications — and each page shows the date it was last reviewed.
How Self-Employment Taxes Work in Canada
Self-employed Canadians report business income on Form T2125 and pay federal and provincial income tax on net business income plus both the employer and employee portions of CPP contributions. Unlike employees, there is no EI requirement (though you can opt in).
Key takeaways
- ✓Both portions of CPP total 11.9% on pensionable earnings
- ✓CPP2 adds 8% on earnings between $74,600 and $85,000
- ✓Business expenses directly reduce your taxable income
- ✓Quarterly tax instalments may be required if you owe over $3,000
Maximizing Business Deductions (T2125)
Deductible business expenses include advertising, office supplies, professional fees, insurance, travel, vehicle expenses (business portion), and home office costs. Keeping detailed records and receipts is essential — CRA can reassess up to 3 years back (6 years in some cases).
Key takeaways
- ✓Home office deduction based on office square footage as a proportion of total home
- ✓Vehicle expenses must be split between personal and business use
- ✓Capital assets are depreciated through CCA rather than expensed immediately
- ✓Meals and entertainment are only 50% deductible
Capital Cost Allowance (CCA) Classes Explained
CCA lets you deduct the cost of business assets over several years. Each asset is assigned a class with a specific rate. Common classes include Class 10 (30% — vehicles), Class 50 (55% — computers), and Class 8 (20% — furniture and equipment). The half-year rule limits first-year claims to 50% of the normal rate.
Key takeaways
- ✓Class 10: Motor vehicles at 30% declining balance
- ✓Class 50: Computers and peripherals at 55%
- ✓Class 8: Office furniture and equipment at 20%
- ✓Accelerated Investment Incentive may allow higher first-year deductions for eligible property
Sole Proprietorship vs Incorporation
Incorporating creates a separate legal entity with its own tax rate. The Canadian small business tax rate (combined federal-provincial) ranges from roughly 11% to 15%, far below personal rates. However, money left in the corporation is eventually taxed again when paid out as dividends, so the benefit is primarily tax deferral.
Key takeaways
- ✓Small business deduction applies to first $500,000 of active business income
- ✓Incorporation provides liability protection
- ✓Additional costs include legal fees, annual filings, and corporate tax returns
- ✓Generally worthwhile when net income exceeds $80,000-$100,000
Sources
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Educational content only. Not financial, legal, or tax advice.