Tax guide for entrepreneurs

What taxes and fees must an entrepreneur pay in Canada?

Canadian entrepreneurs are subject to two levels of taxation: federal (Canada Revenue Agency, CRA) and provincial (in Quebec, Revenu Québec). Depending on your business structure, you pay income tax (personal or corporate), collect and remit the GST/QST, and make source deductions if you have employees.

Your obligations depend primarily on your legal structure. Self-employed individuals and sole proprietorships are considered a single tax entity with you: everything is reported on your personal tax return. A corporation is a separate legal entity that files its own tax return and pays its own taxes.

• Self-Employed Individuals: Taxes via the personal tax return (T1 / TP1); GST/QST on sales of $30,000 or more; advance payments may be required; source deductions may be applied only if you are an employer.
• Incorporated Company: Corporate tax return (T2 / CO-17); GST/QST on amounts of $30,000 or more; advance payments may be required; source deductions on wages paid.
• Employer (with employees): source deductions (tax, QPP, EI, QPIP) in addition to their other obligations.

Distinguishing between these cash flows is the first tax skill an entrepreneur needs to master: don’t confuse the tax collected (which doesn’t belong to you) with your actual taxable income.

Taxes for the Self-Employed (T1 and TP1)

Self-employed individuals report their business income on their personal tax returns: Form T1 at the federal level (along with the income statement for business operations, Form T2125) and Form TP1 in Quebec. Their net business income is added to their other income and is taxed at the combined federal and provincial progressive individual tax rates.

In practical terms, you add up your business income, subtract your deductible expenses, and the net profit becomes taxable. Since no tax is withheld at source on this income, you need to plan for the amount you’ll owe, ideally by setting aside a percentage of each payment you receive.

• You make contributions to the Quebec Pension Plan (QPP) on your net business income, often covering both the employee and employer portions.
• You can generally deduct your legitimate business expenses.
• Your T1 and TP1 returns have a specific filing deadline for self-employed individuals, but the tax due is still payable by April 30.
• Accurate bookkeeping ensures that every deduction can be justified in the event of an audit.

Corporate tax (T2 and CO-17)

An incorporated company is a separate tax entity. It files its own tax return, the T2 at the federal level and the CO-17 in Quebec, and pays corporate income tax on its profits. You, as a shareholder, are taxed separately, only on what you withdraw from the corporation (salary or dividends).

This separation creates planning opportunities, but also entails additional obligations. The small business tax rate is generally lower on the first portion of active income eligible for the small business deduction.

• The T2/CO-17 return is generally due six months after the end of the fiscal year, but the tax balance is often due sooner.
• A company operating in Quebec files both the T2 (federal) and the CO-17 (provincial) forms.
• It is essential to keep your business accounts separate from your personal accounts.

Bankeo isn’t an accounting firm: Get matched with an accountant who understands corporate taxes and your specific situation as a shareholder.

GST and QST: The $30,000 threshold

In Canada, you must register for the GST, and in Quebec for the QST, as soon as your taxable sales exceed $30,000 over four consecutive calendar quarters. Below this threshold, you’re considered a small supplier, and registration isn’t required. Once registered, you collect these taxes on your sales and remit them to the governments.

The GST and QST are not costs to you: you collect them on behalf of the CRA and Revenu Québec. In return, you recover the taxes paid on your business purchases through input tax credits (ITCs) and input tax refunds (ITRs). You therefore only remit the difference between the tax collected and the tax paid.

• The $30,000 threshold is calculated based on your taxable income, not your profit.
• Even if you’re below the threshold, voluntarily registering can be beneficial if you purchase a lot of taxable inputs.
• The filing frequency (monthly, quarterly, or annually) depends on your sales volume.
• Set aside the tax you’ve collected: it’s money owed, not income.

Tax instalments: When and how much

The tax instalments These are advance payments of your taxes, made throughout the year rather than in a single payment. The CRA and Revenu Québec require them when the net tax you owe exceeds a certain amount for the current year and at least one of the two preceding years.

• The CRA and Revenu Québec often send notices with suggested amounts, calculated based on your past tax years.
• You can estimate your tax for the current year if your income decreases, but an estimate that is too low could result in interest charges.
• Make a note of the four payment dates and set aside the necessary funds in advance.
• An accountant can calculate the right amount so you don’t tie up too much cash.

What expenses are deductible (including a home office)

An expense is deductible if it is incurred to earn business income, is reasonable, and is supported by documentation. Deducting Your Legitimate Expenses reduces your taxable income, and therefore your tax bill. The golden rule: keep every invoice and receipt.

• Supplies, equipment, and software used for business purposes.
• Office expenses, rent, and business insurance.
• Professional fees (accountant, lawyer, consultants).
• Vehicle expenses for business use, with a logbook.
• Meal and entertainment expenses are generally deductible up to a certain percentage.
• Advertising, marketing, and business banking fees.

Your home office deserves special attention. If you use part of your home primarily for your business, you can deduct a portion of your housing expenses proportional to the business area. An accountant can tell you what’s eligible and how to calculate the proportion without overstating the deduction.

Tax credits you should know about

A tax credit directly reduces the amount of tax owed, while a deduction reduces taxable income. For entrepreneurs, certain credits can result in significant savings, particularly in the areas of innovation, hiring, and investment. There are several such credits available at both the federal and provincial levels, and they change regularly.

• Tax credits for scientific research and experimental development (federal SR&ED), often combined with provincial measures.
• Tax credits related to investments and the purchase of eligible equipment.
• Sector-specific tax credits (technology, culture, digital transformation) based on your province and business activity.
• Hiring or training credits, depending on the programs in effect.

Since eligibility and rates change from year to year, treat tax credits as something you need to review annually. An accountant or tax specialist can identify any tax credits you’re missing out on.

Salary or dividends: How to legally optimize your compensation

If your business is incorporated, you can pay yourself Salary, Dividends, or a combination of the two. This choice affects your personal income tax, corporate income tax, QPP contributions, and certain benefits. There is no one-size-fits-all answer.

• Salary: It is tax-deductible for the company, generates QPP and RRSP benefits, but results in source deductions and more paperwork.
• Dividends: Not tax-deductible, do not accrue QPP or RRSP benefits, no source deductions, and are simpler to pay.

Legitimate tax optimization involves structuring your compensation and expenses in compliance with the rules, not circumventing them. This is an area where a strategic mistake can be costly: it’s the kind of decision that warrants consulting an accountant or tax specialist before taking action.

When to hire an accountant for your taxes

It’s in your best interest to consult an accountant as soon as your tax situation goes beyond a simple return: your first year in business, exceeding the $30,000 threshold, incorporation, hiring your first employees, applying for tax credits, or choosing your compensation structure. A good accountant does more than just file your returns: they plan ahead, help you avoid penalties, and identify savings opportunities you might overlook. When it comes to budgeting, the Bankeo Fee Barometer estimates the median accounting fees at around $3,000 per year, ranging from $500 to $6,000 depending on the industry.

Bankeo is not an accounting firm. We’ll match you for free with the right accountant based on your situation, industry, and needs, from a network of over 1,500 accountants. You fill out a request, and we’ll find the right match, as many vetted accountants as it takes to find the one that’s right for you, usually within 48 hours. The service is free for entrepreneurs, with no obligation, and we’re here to support you: if the matching process no longer works out, even later on, we’ll find you another one at no cost.

Since 2023, Bankeo has received over 15,000 requests and has a 4.7/5 rating based on over 180 Google reviews. Whether you’re a self-employed individual filing your first TP1 or a company preparing your CO-17, you can find an accountant who speaks your tax language, without having to shop around blindly.

When should an entrepreneur register for the GST and QST?

You must register for the federal GST and the Quebec QST as soon as your taxable sales exceed $30,000 over four consecutive calendar quarters. Below this threshold, you are considered a small supplier, and registration is optional, though it can sometimes be advantageous if you pay a lot of taxes on your business purchases.

Do I need an accountant if i’m self-employed?

It’s not mandatory, but it’s highly recommended as soon as your income starts to grow. An accountant ensures your T1 and TP1 returns are filed correctly, maximizes your legitimate deductions, calculates your estimated tax payments, and helps you avoid penalties. Bankeo connects you for free with an accountant suited to your situation, usually within 48 hours.

What is the difference between taxes for self-employed individuals and those for a corporation?

Self-employed individuals report their business income on their personal tax returns (T1 and TP1), and the tax is added to their other income. An incorporated company is a separate entity: it files its own tax return (T2 and CO-17) and pays corporate income tax, while you are taxed only on the amount you withdraw from the company.

How do I know if I need to make tax instalments?

You are generally required to make estimated tax payments when your net tax liability exceeds a certain threshold for the current year and at least one of the two preceding years. The CRA and Revenu Québec often send notices with suggested amounts. An accountant can calculate the correct amount to avoid interest charges.

How much does it cost to hire an accountant to file my business taxes?

The cost varies depending on the complexity of your case, your business structure, and the volume of transactions. Bankeo’s matching service, however, is completely free for entrepreneurs: you’re connected with vetted accountants at no cost and with no obligation, and you then discuss fees directly with the accountant you choose.

What expenses can I deduct from my business income?

You can deduct expenses incurred to earn business income that are reasonable and supported by documentation: supplies, office expenses, professional fees, the business portion of vehicle use, advertising, and a portion of home office expenses. Keep every receipt to support your deductions in the event of an audit.