Sole Proprietorship Bookkeeping in Canada: CRA Rules & Setup

How a sole proprietorship affects your bookkeeping

A sole proprietorship is an unincorporated business owned by one individual with no separate legal status. You receive all profits, claim all losses, and report net business income directly on your personal T1 income tax and benefit return across lines 13500 to 14300. Canadian law requires you to keep complete, organised records of every business transaction to support your income and expense claims.

Your obligation to track transactions starts when your business begins significant activity that is a regular part of operations or necessary to get the business going. Preliminary research on how to start a business does not count, and you cannot deduct research costs incurred before operations begin. Buying inventory for resale or purchasing core equipment marks the official start date, allowing you to record and deduct eligible expenses incurred to earn income.

If you bill clients under your own personal name, the CRA does not mandate a separate business bank account, though keeping duplicate deposit slips, bank statements, and cancelled cheques is required. If your business operates under a registered name other than your own, you need a separate bank account to process cheques payable to the business. If you run more than one business, you must keep a separate set of records for each operation.

• Line 13500 (Business income), Line 13700 (Professional income), and Line 13900 (Commission income) use Form T2125, Statement of Business or Professional Activities.
• Line 14100 (Farming income) uses Form T2042, Statement of Farming Activities (or AgriStability/AgriInvest forms T1163, T1164, T1273, or T1274).
• Line 14300 (Fishing income) uses Form T2121, Statement of Fishing Activities.

• CRA: Sole proprietorships and partnerships
• CRA: Sole proprietorship

Step 1: Set your fiscal period and accounting method

Unless you are a farmer, a fisher, or a self-employed commission agent, the CRA requires you to report your self-employment income using the accrual method.

If you are a farmer, fisher, or commission agent switching from the accrual method to the cash method, simply use the cash method on your next return and attach a statement showing every adjustment made to your income and expenses. Switching from the cash method to the accrual method requires written permission from your CRA tax services office before your filing deadline, along with a letter explaining why you want to change.

• CRA: Accounting methods
• CRA: Where to keep your records, for how long and how to request the permission to destroy them

Step 2: Choose an acceptable bookkeeping format

The CRA does not issue official record books or require specific accounting software. You can use a paper columned book with separate pages for income and expenses, a spreadsheet, cloud bookkeeping software, or a combination of paper and electronic records. Computerised records must be clear, easy to read, and maintained in an electronically readable format that CRA software can read during a review, including backup copies.

You must keep your business records at your place of business or residence in Canada unless the CRA grants written permission to store them elsewhere. Under CRA policy, records stored on servers located outside of Canada and accessed electronically from Canada are not considered kept in Canada. If your cloud software uses servers outside the country, you must write to your tax services office for permission, ensure true copies can be read by CRA software in Canada, and arrange server access for CRA officials upon request.

• CRA: Where to keep your records, for how long and how to request the permission to destroy them
• CRA: Business records

Step 3: Record income, expenses, and capital property

Every entry in your sales and expense journals must be backed up by original source documents. Do not send your receipts or journals with your income tax return, but keep them organised in case the CRA asks to see them.

For income records, track gross income, which is your total revenue before deducting expenses or cost of goods sold. Record the date, amount, and source for every sale, whether you received cash, property, or services. If you accept or spend crypto-assets (such as cryptocurrency, utility tokens, security tokens, or non-fungible tokens) for business goods or services, the CRA treats the exchange as a barter transaction that must be valued and recorded in your business income. If you sell physical or digital gift cards, report the proceeds as business income on the day the card is sold, though you may deduct a reserve for cards you predict will be redeemed after your fiscal year-end (added back to income the following year). Do not collect GST/HST when selling a gift card. Calculate GST/HST only when the customer redeems the card.

When you buy depreciable property like a building, furniture, tools, or equipment, you cannot deduct the full initial cost as a current operating expense. Instead, you deduct the cost over several years using Capital Cost Allowance (CCA). If you transfer personal assets into your sole proprietorship, the Income Tax Act requires you to record the transfer at the asset's fair market value (FMV), which becomes the starting cost on your CCA schedule. For Class 10.1 passenger vehicles acquired on or after January 1, 2025, the prescribed CCA ceiling increases from $37,000 to $38,000 before tax. The maximum deductible leasing cost for new leases entered into on or after January 1, 2025, increases from $1,050 to $1,100 per month before tax. Diggers, drills, and tools costing $500 or more belong in Class 8.

• Original income documents to keep: sales invoices, cash register tapes, receipts, bank deposit slips, fee statements, and contracts (plus grain cash purchase tickets and marketing board cheque stubs for farmers, and landing sales slips and trip settlement sheets for fishers).
• Home daycare receipt rules: receipts issued to parents must show the parent's name, child's name, amount received, service period (from and to dates), your name, address, Social Insurance Number (SIN), signature, and signature date.
• Five mandatory details on every expense receipt: purchase date, seller's name and address, buyer's name and address, full description of the goods or services, and the vendor's GST/HST business number when purchasing $100 or more (before tax) from a registrant.
• Missing descriptions or missing receipts: if a receipt has no description (such as a cash register tape), write what the item is on the receipt or in your expense journal. If a supplier does not give you a receipt, write the seller's name and address, amount paid, payment date, and transaction details in your expense journal.
• Capital property logs: keep a permanent record of every property bought, sold, or traded, listing who sold it to you, the cost, the purchase date, and the date and proceeds or trade-in credit when you dispose of it.

• CRA: Business records
• CRA: Self-employed Business, Professional, Commission, Farming, and Fishing Income: Find out if

Worked example: CRA daily sales and expense journals

Guide T4002 provides a one-month ledger setup for a sole proprietor in a province with 5% GST and 8% provincial sales tax (PST). Sales taxes are separated into their own columns so they are never mixed into gross revenue or operating expense totals. Under the accrual method, cash payments received from customers settling older credit invoices are tracked in a separate account column and excluded from daily total sales because those credit sales were already counted as income when invoiced.

By our calculation from the CRA Guide T4002 July expense journal example, the 6 sample cheques total $4,226.05 in bank outflows, which breaks down into $201.24 of refundable 5% GST input tax credits ($4,226.05 minus $4,024.81 net cost), $2,524.81 in current operating expenses ($1,749.14 purchases + $250.00 accounting + $350.00 advertising + $150.00 permit + $25.67 repairs), and $1,500.00 in capital items that must be depreciated through CCA.

• CRA: Small businesses and self-employed income
• CRA: Accounting methods

Step 4: Track GST/HST, instalments, and filing deadlines

You must register for GST/HST once your worldwide gross revenues from taxable supplies (including zero-rated supplies, but excluding sales of capital property, financial services, and goodwill) exceed $30,000 in a single calendar quarter or over four consecutive calendar quarters. Taxi and commercial ride-sharing businesses must register immediately regardless of revenue. If your only business is providing home daycare for children age 14 or under for periods of less than 24 hours a day, your service is exempt and you generally cannot register.

Once registered, accurate expense logs let you claim Input Tax Credits (ITCs) to recover GST/HST paid on business purchases. You can verify a vendor's business number using the CRA online GST/HST Registry (or the Quebec Sales Tax validation service for QST). GST/HST paid to foreign digital-economy suppliers registered under the CRA simplified regime is not eligible for ITCs.

Failing to report an income amount of $500 or more in a tax year after a previous reporting omission in any of the three preceding tax years triggers a repeated failure penalty equal to the lesser of 10% of the unreported amount or 50% of the understated tax. Knowingly making a false statement or omission under gross negligence carries a penalty of the greater of $100 or 50% of the understated tax.

• February 28: Deadline to file T4 and T4A summaries and distribute slips if you have employees.
• March 15, June 15, September 15, and December 15: Quarterly income tax and CPP instalment payment due dates for business, professional, and commission sole proprietors.
• April 30: Deadline to pay any tax balance owing for the prior tax year to avoid interest charges (and the filing deadline if your business expenditures are mainly tax shelter investments). Also the payment due date for self-employed Employment Insurance (EI) special benefits premiums, which apply to self-employment earnings up to an annual maximum of $65,700 for 2025.
• June 15: Deadline for self-employed individuals (and their resident spouses or common-law partners) to file their T1 income tax and benefit return.
• June 30 (or 6 months after fiscal period end): Deadline for construction businesses to file the T5018 Summary of Contract Payments and subcontractor slips.
• December 31: Single annual instalment payment due date for self-employed farmers and fishers whose net tax owing exceeds $3,000 in the current year and each of the two preceding years ($1,800 in Quebec).

• CRA: Self-employed Business, Professional, Commission, Farming, and Fishing Income: Chapter 1
• CRA: Fiscal period

Step 5: Follow the 6-year CRA record retention rules

Under the Income Tax Act, the Excise Tax Act (GST/HST), the Canada Pension Plan, and the Employment Insurance Act, you must keep all business records and supporting documents for at least 6 years from the end of the last tax year (calendar year) to which they relate. Records supporting your 2025 tax return must be kept until at least December 2,031, 2031.

To destroy paper or electronic books of account before the retention period expires, you must obtain written permission by filing Form T137, Request for Destruction of Records, or writing to your tax services office. Destroying records early without CRA permission can result in prosecution.

• CRA: Where to keep your records, for how long and how to request the permission to destroy them
• CRA: Business records

Bookkeeping setup checklist and hiring help

Our team built this checklist from CRA Guide T4002 and Publication RC188 so you can keep your books compliant.

• Day 1 Setup: Open a dedicated business bank account, confirm your accounting method, and check that your bookkeeping files are stored in Canada.
• Weekly Routine: Log every gross sale by date, amount, and source with original invoices or deposit slips, and file every purchase receipt.
• Monthly & Year-End Close: Reconcile journals against monthly bank statements, monitor rolling 4-quarter gross taxable revenue, count closing inventory (if using accrual), update your CCA schedule, and back up electronic files.

• CRA: Business records
• CRA: Where to keep your records, for how long and how to request the permission to destroy them

Delegating your bookkeeping and tax filing

As your transaction volume grows, you can delegate record keeping to a bookkeeper or accountant. Bookkeepers maintain the general ledger, record debits and credits, prepare bank deposits, and produce financial statements. Accountants and auditors examine financial statements for accuracy and legal compliance, compute taxes owed, prepare tax returns, and organise and analyse financial records.

Under CRA Publication RC188, you remain legally responsible for ensuring adequate records are kept and made available to CRA officials upon request, even when a bookkeeper, accountant, or internet application service provider maintains your books.

Aldro is the cheapest way to get your business taxes done: $399 flat, with bookkeeping at $20 a month. For Canadian sole proprietors, the flat tax price covers your T1 personal return with Form T2125 (including Quebec returns), T4/T4A and T5018 slips, each unfiled prior year billed at the same flat price, and we work out quarterly estimates and CRA instalments. Bookkeeping covers unlimited bank and card accounts, monthly reconciliation and statements, but not payroll processing or sales-tax filing.

• CRA: Keeping Records
• CRA: Where to keep your records, for how long and how to request the permission to destroy them