Updated Checked by the Tax-Services.ca editorial team How we check
Most self-employed people in Canada do not get to choose between cash and accrual for tax. The CRA says farmers, fishers and self-employed commission agents can use either method, and all other self-employment income must be reported on the accrual method. A plain sole proprietorship therefore follows accrual, whatever the 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.
The same thing happens on the spending side. Buy supplies on a December invoice and pay in January, and accrual puts that cost in December’s year, while cash waits for the payment.
Which method can you use for tax?
The table shows what the CRA’s accounting methods page says for sole proprietorships and partnerships. Corporations are a different story, 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. The CRA page has no such size test, 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, and a few bucks of deferral isn’t worth a messy set of books.
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.
Can a farmer or commission agent switch methods?
Yes, if you’re in one of the groups allowed to choose. Going from accrual to cash 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.
Everyone else has nothing to switch, since accrual is the rule. If you’ve been reporting on cash by mistake, talk to the CRA or a preparer about correcting past returns rather than quietly changing next year.
Common slip-ups to avoid
The usual mistakes are quieter than a method change. 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 we got these figures
The accounting method rules come from the Canada Revenue Agency‘s page on accounting methods for sole proprietorships and partnerships, linked above. 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. We’re an independent site, not part of the CRA. All official pages were checked in November 2026.
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, so a consultant or shop owner has no choice. Corporations start from their financial statements, so ask whoever prepares your T2.
Is there a revenue limit for using the cash method?
We found no revenue test on the CRA accounting methods page for sole proprietors and partnerships. The rule is set by the type of income, not by how small the business is, so do not rely on a size limit. If you think a special rule applies, check with the CRA.
Can I switch from cash to accrual?
If you are allowed to choose, the CRA asks for written permission from your tax services office before you file, with your reasons for the change. Do not just switch on your next return. A change without approval means you may have to explain the adjustments later.
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. This option is only open to the groups allowed to choose, such as farmers and fishers, so check you qualify before you make the change.
Does accrual mean I pay tax on money I have not received?
Yes. Income counts in the period you earn it, so a December invoice paid in January is taxed in the December year. That is why cash flow planning matters: set money aside for the tax on unpaid invoices instead of waiting for the client to pay.
- 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