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For most self-employed people in Canada, the cash or accrual accounting question has already been answered for tax. The CRA says farmers, fishers and self-employed commission agents can choose either method, and all other self-employment income has to be reported on the accrual method. So if you run a plain sole proprietorship, accrual is usually the tax rule, whatever your bookkeeping app defaults to.
What is the real difference between the two methods?
Timing. That’s it. Cash accounting counts income when the money arrives and expenses when you pay them. Accrual counts income when you earn it and expenses when you incur them, paid or not.
Say you finish a job on December 20 and the client pays on January 10. On the cash method that income belongs to next year. On the accrual method it belongs to this year, even though your bank balance hasn’t moved.
Which method can you use for tax?
The table shows what the CRA’s page for sole proprietorships and partnerships says. We didn’t confirm the rules for corporations, so this page doesn’t cover them. If you run a corporation, ask whoever prepares your T2 which method the return uses.
| Type of income | Method the CRA allows |
|---|---|
| Farming | Cash or accrual |
| Fishing | Cash or accrual |
| Self-employed commission agent | Cash or accrual |
| All other self-employment income | Accrual |
You may have read that a business under a certain revenue size can use cash. We found no such size test on the CRA page, so don’t rely on one.
What does the timing do to your tax?
Numbers help here. Take an Ontario sole proprietor with $80,000 of net business income for the year. The self-employed tax calculator shows $13,233.57 of income tax and $8,892.90 of CPP for both halves, so $22,126.47 in total.
Now suppose $10,000 of that was invoiced in December and paid in January. On the cash method the year shows $70,000, and the calculator gives $10,384.82 of income tax and $7,913.50 of CPP. That’s $2,848.75 less income tax and $979.40 less CPP this year.
Not a saving, though. The $10,000 shows up next year, and if the next year is bigger, it may be taxed at a higher rate. Timing moves the bill around. It rarely removes it.
Which method fits your books better?
Your tax return and your management books don’t have to match line for line. Plenty of owners track cash in a spreadsheet to see what’s in the bank, then adjust to accrual at year end. That works if you keep the adjustments written down.
Accrual gives a truer picture when you invoice on credit, hold stock, or owe bills that come due later. Cash is easier to follow when clients pay on the spot. If you sell taxable goods, the HST reverse calculator helps split a tax-included price back into the sale and the tax, which you need under either method.
Changing methods and common slip-ups
Going from accrual to cash, when you’re allowed, means using cash on your next return and attaching a statement that shows each adjustment to income and expenses. Going from cash to accrual needs written permission from your tax services office before you file, with your reasons.
The usual mistakes are quieter than that. People forget unpaid invoices at year end. They deduct an expense they haven’t been billed for yet, or they count a customer deposit as earned before the work is done. Another one: mixing methods, so revenue is counted on receipt and expenses on invoice. Pick the rule that applies to you and stay with it.
If you have staff, the payroll side follows its own timing. Check what each pay run adds up to with the payroll remittance calculator. For a corporation, the corporate tax calculator shows the rate on what’s left.
Where the numbers come from
The accounting method rules come from the Canada Revenue Agency’s page on accounting methods for sole proprietorships and partnerships. The tax and CPP amounts come from this site’s own calculators, which use 2026 rates. The calculator leaves out GST/HST, EI and business expenses, so your real bill will differ.
Frequently asked questions
Can a small business in Canada use cash accounting for taxes?
Farmers, fishers and self-employed commission agents can choose cash or accrual. The CRA says all other self-employment income must be reported on the accrual method.
Is there a revenue limit for using the cash method?
We found no revenue limit on the CRA page for sole proprietors, so don't count on one. Check with the CRA if you think a special rule applies to you.
Can I switch from cash to accrual?
The CRA asks for written permission from your tax services office before you file, with your reasons for the change.
What changes if I switch from accrual to cash?
You use the cash method on your next return and attach a statement showing each adjustment to income and expenses.
Does accrual mean I pay tax on money I haven't received?
Yes, income counts in the period you earn it. An unpaid December invoice is taxed in that year, which is why cash flow planning matters.
- Self-employed taxes in Canada: income, CPP and GST
How tax works when you are self-employed in Canada: reporting income and expenses, paying both halves of CPP, instalments and when to register for GST
Information only. This page is general information, not tax, legal or accounting advice. Tax-Services.ca is an independent publisher: we don't prepare or file tax returns or offer tax services, and we have no connection with the CRA, Revenu Québec, any government or any company named on this page. Check the figures that matter with an official source or a qualified professional.