8 Tax Filing Tips for Sole Proprietors

What Is a Sole Proprietor?

It’s the simplest type of business structure. Sole proprietorships are owned by one individual and are not incorporated. 

It’s cheaper and easier to start a sole proprietorship than a corporation, but one downside is that you also assume all the risks, which extends to your assets. That includes filing (and paying) your taxes on time and making sure you have the right tools, knowledge, and liability insurance to protect yourself. 

Zensurance recommends that sole proprietors, small business owners, and self-employed professionals consult an accountant, tax lawyer, or tax expert to help file taxes.

In the meantime, here are eight tax-filing tips to consider:

1. Understand What You Need to File

Even if, as a sole proprietor, you didn’t make much money, are operating at a loss, or are currently inactive, you still need to file your business and personal taxes together using a T2125 Statement of Business or Professional Activities form. 

You also need to file a T1 return, including if you:

• Disposed of a capital property or had a taxable capital gain
• Have to make Canada Pension Plan (CPP) payments on earnings
• Want to access employment insurance (EI) special benefits
• Received a demand from the government to file a return
• Are claiming an income tax refund, a refundable tax credit, a GST/HST credit, or the Canada Child Benefit
• Are entitled to receive provincial tax credits

It’s recommended that you speak to an accountant or tax-filing advisor to ensure that you file the correct type of return.

2. File Your Return on Time

Suppose you didn’t turn a profit in 2024. You still need to file your business tax return on time to avoid late-filing penalties and having to pay interest if you owe the government money. Failure to file on time can result in penalties and interest charges, which can significantly increase your tax bill.

If you owe but don’t have the funds to pay the balance in full, the CRA offers payment arrangements to make it easier.

Also, be aware the CRA will transition to online correspondence through its My Business Account portal in the spring of 2025. That means all notices, letters, forms, statements, and other documents the CRA needs to send to you will be delivered electronically instead of via Canada Post.

3. Set Money Aside Throughout the Year

If you operate a sole proprietorship and have a salaried position, you may be surprised by how much you owe at the end of the year. Especially if you are used to having taxes and CPP payments deducted from your paycheque automatically.

Being a sole proprietor means you are responsible for figuring out your taxes and other payments owed. If you wait until tax time and don’t set money aside over the year, you may find yourself owing a large sum of money you cannot easily pay. It’s helpful to also budget for RRSP contributions, as these can offset the taxes you will owe.

Finally, you are also required to register for a GST/HST number once your business makes $30,000 or more in 12 months. This means that if your business revenue exceeds this threshold, you need to start collecting and remitting GST/HST. Therefore, you need to set aside those payments, too.

 4. Be Prepared to Pay in Installments

According to the CRA, you have to pay in installments for 2025 if:

• Your net tax for 2024 will be more than the threshold amount for your province or territory (anywhere from $1,800 to $3,000, depending on where you live).

• Your net tax owing in either 2023 or 2024 was above the threshold for your province or territory.

The CRA will send reminders when you need to pay income tax and GST/HST installments, but these are easy to miss, especially if they have an old address or email on file for you, so make sure you keep on top of it.

 5. Don’t Delay If You Owe Money

If you are not required to pay in installments, the deadline for payment is April 30, 2025. If you are required to pay in installments, the CRA has installment deadlines to pay quarterly within the previous year. If you owe money and have still not paid your taxes by now, you are likely accruing interest on any balance owing.

If you don’t know exactly how much you owe, it’s better to estimate and send payment as soon as possible to minimize any interest charges. Estimate more than you think you owe. If you end up overpaying, you will get a refund once you file your taxes. If you need to adjust later, you can do so. 

 6. Keep Track of Payments and Business Expenses

If you wait until tax time to start looking through that shoebox full of receipts, you’ll be in for a long night. It will be easy to miss a lot of things.

Consider having a separate bank account and credit card for your business. Being diligent about using these only for business expenses and deposits will help keep things straight when sorting them later.

Another tip is to list your monthly expenses and payments, so you will understand how much money you are making and spending (and will owe). This will make doing your taxes much easier and with far fewer surprises.

 7. Know What You Can Deduct

One of the greatest benefits of being self-employed is the number of things you can deduct or “write off” – especially if you work out of your home. “Business use of home” expenses mean you can claim a portion of:

• Your mortgage or rent
• Home repairs
• Home utilities like heat, water, etc.
• Phone, internet
• Your home insurance and taxes

Other things you can claim as a sole proprietor include:

• Motor vehicle expenses (keep a logbook of mileage)
• Business parking, transit, travel, hotel rooms
• Food and entertainment (if business-related)
• Product inventory, office supplies, and other tools
• Marketing, professional memberships, websites
• Business advisories such as accountants, lawyers, courses, coaches
• Office space rental and utilities
• Liability insurance

 8. Know When and Where to Get Help

If you need direction on which specific forms you’ll need to submit for your business, the CRA has a list here.

It can be challenging to run a business by yourself. It’s wise to turn to an expert, such as an accountant or a tax lawyer, if you find yourself being audited, owing money, or needing advice. Doing so will often pay for itself if the direction can save you money. Plus, it is a business expense, so you can also deduct that expense from your taxes.

Protect Your Personal and Professional Assets: Get Liability Insurance

As a sole proprietor, all the business and personal risk rests with you. A comprehensive business insurance policy is critical to protect your finances and reputation.

Fill out an application for a free quote. 

Our friendly, knowledgeable brokers will quickly find the low-cost coverage you need and customize it to suit your requirements.

– Updated January 10, 2025.

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