Sole Proprietorship: Payroll

A sole proprietor is self-employed and cannot be an employee of the proprietor's own business. The proprietor therefore draws no salary and is not subject to payroll source deductions on personal earnings; instead, the proprietor pays income tax and Canada Pension Plan contributions on net business income through the personal tax return and instalments. Where the proprietor hires employees, the proprietorship becomes an employer and must operate a payroll for those employees under the same rules that apply to any employer. General payroll procedures and the full provincial schedule appear on the Payroll page.

OBLIGATIONS OF THE PROPRIETOR AS A SELF-EMPLOYED INDIVIDUAL

• Income tax: the proprietor reports net business income on Form T2125 and pays federal and provincial income tax on the T1 return. No tax is withheld at source on business income.

• Instalments: quarterly instalments (March 15, June 15, September 15, and December 15) are required where net tax owing exceeds $3,000 (or $1,800 in Quebec) in the current year and in either of the two preceding years. The CRA issues instalment reminders based on the no-calculation option.

• Canada Pension Plan: the proprietor pays both the employee and employer portions on net self-employment earnings, calculated on Schedule 8: 11.9% on earnings between $3,500 and $74,600 (maximum $8,460.90 for 2026) and 8% CPP2 on earnings between $74,600 and $85,000 (maximum $832). Where the proprietor also has employment income, contributions already made through employment are taken into account.

• Tax treatment of CPP: the employer-equivalent portion of base contributions and all enhanced and CPP2 contributions are deductible; the employee-equivalent base portion generates a non-refundable tax credit.

• Quebec: the proprietor contributes to the Quebec Pension Plan and pays Quebec Parental Insurance Plan premiums as a self-employed worker, calculated on the TP-1 return.

• Employment Insurance: the proprietor is not covered for regular benefits, but may register with Service Canada for EI special benefits (maternity, parental, sickness, compassionate care, and family caregiver) by paying premiums on self-employment earnings; registration must precede a claim by at least twelve months.

• Drawings: amounts withdrawn for personal use are not deductible and are not reported as wages.

REGISTRATION AS AN EMPLOYER

• A CRA business number with a payroll deductions program account (RP) is required before the first remittance due date for employees.

• Provincial registrations: employer health tax where payroll exceeds the provincial exemption; workers' compensation registration with the provincial board within the prescribed period after hiring the first worker; and, in Quebec, registration with Revenu Québec for source deductions and employer contributions.

• Distinguishing employees from independent contractors: the CRA and the courts consider control over the work, ownership of tools, chance of profit and risk of loss, integration into the business, and the intention of the parties (Form RC4110). Misclassification exposes the proprietor to assessment for unremitted deductions, penalties, and interest.

PAYROLL CYCLE FOR EMPLOYEES

1. Obtain a Social Insurance Number and completed federal and provincial TD1 forms from each new employee.

2. Determine gross pay, including regular pay, overtime, vacation pay (at the provincial minimum of generally 4% or two weeks, rising with length of service), statutory holiday pay, commissions, and taxable benefits.

3. Calculate source deductions: federal and provincial income tax, CPP or QPP employee contributions, EI premiums, and QPIP premiums in Quebec, using the CRA Payroll Deductions Online Calculator or Guide T4127.

4. Record the payroll entry: Dr Wages Expense; Cr Income Tax Payable; Cr CPP Payable; Cr EI Payable; Cr Wages Payable (net pay). Record the employer portion: Dr Payroll Expense; Cr CPP Payable (employer share); Cr EI Payable (1.4 times the employee premium).

5. Pay net wages and provide a pay statement in accordance with provincial employment standards.

6. Remit deductions and employer contributions by the 15th day of the following month (regular remitter), quarterly (eligible small employers), or on the accelerated schedule.

7. At year-end, issue T4 slips and file the T4 Summary by the last day of February (RL-1 slips in Quebec), and issue a Record of Employment within five calendar days after any interruption of earnings.

EMPLOYMENT OF FAMILY MEMBERS

• Wages paid to a spouse, common-law partner, or child are deductible only where the services are actually performed and the amount is reasonable for the work done; payment must actually be made and documented.

• Wages paid to a spouse or relative are subject to income tax withholding and CPP contributions in the same manner as for any employee (CPP applies from age 18).

• Employment of a related person is excluded from insurable employment for EI unless the terms are substantially similar to those of an arm's-length employee; employment of a spouse in an unincorporated business is generally not insurable.

PERSONAL LIABILITY

Because a sole proprietorship has no separate legal existence, the proprietor is personally liable for all unremitted source deductions, employer contributions, penalties, and interest, as well as for employee wages and vacation pay under provincial employment standards legislation. Source deductions are held in trust for the Crown and may be collected from the proprietor's personal assets.

PROVINCIAL AND TERRITORIAL OBLIGATIONS FOR EMPLOYEES

• Ontario: Employer Health Tax (0.98% to 1.95%; $1,000,000 exemption for eligible employers with payroll of $5,000,000 or less); WSIB registration within ten days of hiring the first worker in a covered industry; Employment Standards Act, 2000; minimum wage $17.95.

• British Columbia: Employer Health Tax (exempt to $1,000,000); WorkSafeBC; Employment Standards Act; minimum wage $18.25.

• Alberta: no payroll tax; WCB-Alberta; Employment Standards Code; minimum wage $15.00.

• Saskatchewan: no payroll tax; Saskatchewan WCB; The Saskatchewan Employment Act; minimum wage $15.70.

• Manitoba: Health and Post-Secondary Education Tax Levy above the exemption; WCB Manitoba; The Employment Standards Code; minimum wage $16.40.

• Quebec: Health Services Fund (1.65% for payroll of $1,000,000 or less, other employers); CNESST labour standards contribution and workplace health and safety premiums; Act respecting labour standards; minimum wage $16.60.

• New Brunswick: no payroll tax; WorkSafeNB; Employment Standards Act; minimum wage $15.90.

• Nova Scotia: no payroll tax; WCB Nova Scotia; Labour Standards Code; minimum wage $17.00.

• Prince Edward Island: no payroll tax; WCB PEI; Employment Standards Act; minimum wage $17.30.

• Newfoundland and Labrador: Health and Post-Secondary Education Tax (2% above $2,000,000); WorkplaceNL; Labour Standards Act; minimum wage $16.35.

• Yukon: no payroll tax; Yukon Workers' Safety and Compensation Board; minimum wage $18.51.

• Northwest Territories and Nunavut: 2% payroll tax withheld from employees; WSCC; minimum wages $17.20 and $20.17.

SOURCES

• Canada Revenue Agency, Guide T4001 Employers' Guide: Payroll Deductions and Remittances; Guide RC4110 Employee or Self-employed?

• Canada Revenue Agency, Guide T4002; Schedule 8 CPP Contributions on Self-Employment Income.

• Employment and Social Development Canada, EI Special Benefits for Self-employed People.

• Provincial employment standards statutes and workers' compensation boards.