Updated Checked by the Tax-Services.ca editorial team How we check
For most Canadian businesses the accounting method isn’t a free choice. If you’re a sole proprietor or partner, only farmers, fishers and self-employed commission agents may use the cash method for tax. Everyone else reports income on the accrual method.
Which accounting method can your business use?
Here’s the rule as the CRA states it for self-employed people. Farmers, fishers and commission agents pick between cash and accrual. All other self-employment income goes on an accrual basis, so a consultant, a shop owner or a tradesperson doesn’t get to choose.
Corporations sit in another box. The T2 return starts from your financial statements and then adjusts them to reach income for tax purposes. That reconciliation is a schedule of its own (Schedule 1), and the CRA tells you to report amounts under generally accepted accounting principles.
| Type of business | Methods allowed for tax |
|---|---|
| Farmer or fisher, sole proprietor | Cash or accrual |
| Self-employed commission agent | Cash or accrual |
| Any other sole proprietor or partner | Accrual |
| Corporation | Financial statements, adjusted on Schedule 1 |
What is the difference between cash and accrual?
Under the cash method you report income in the period you receive it, and you deduct expenses in the period you pay them (prepaid expenses are the exception). Under accrual you report income when you earn it, whether or not the client has paid, and you deduct expenses when you incur them.
Inventory is where the two really part ways. On accrual, the value of what you hold at year end is part of the calculation. A farmer on the cash method leaves inventory out.
And there’s a wrinkle for farmers. You can keep the cash method for the farm, but the accrual method applies to any separate business activity and to GST/HST and QST.
What does the choice cost you in tax?
Timing, mostly. Say you invoice $10,000 in December and the client pays in January. On accrual that money belongs to this year. On cash it would fall in next year.
We ran an Ontario sole proprietor through the self-employed tax calculator with no other income. At $80,000 of net business income the income tax is $13,233.57 and CPP is $8,892.90. Add the $10,000 and the income is $90,000, so income tax becomes $16,079.97 and CPP $9,292.90. The extra $10,000 costs $2,846.40 in income tax and $400 in CPP, about $3,246 in all.
That’s the price of the gap when the invoice lands in this year instead of the next. It isn’t a saving, because the tax shows up a year later. Shifting income can only help if next year’s rate is lower.
Can you change your accounting method later?
You can, with conditions. Going from accrual to cash, you use the cash method on your next return and attach a statement showing each adjustment. Going from cash to accrual, you need permission from your tax services office, and you ask in writing before your return is due.
So pick with some care at the start. A switch means adjustments, and you’re the one who has to explain them.
Mistakes that catch small businesses
The first is assuming cash is allowed because your bookkeeping app has a cash view. Many programs show a cash report, and that’s fine for watching your bank balance. It doesn’t change what you report to the CRA.
The second is mixing the two. If you record income when it’s paid but expenses when they’re billed, you’ll overstate your loss in a slow year and understate profit in a busy one. Pick one basis and stick to it for the whole set of books.
The third is forgetting GST/HST. Your registration and filing period follow their own rules, and the accrual point above applies to them for farmers. If you charge tax, the GST/HST calculator shows the amount on a sale, and the corporate tax calculator gives a feel for what a corporation pays on profit.
What this page doesn’t cover: farm-specific inventory rules, professionals with work in progress, and the detail of Schedule 1 adjustments. We haven’t confirmed how each of those applies, so read the CRA guide that matches your business.
Where the numbers and rules come from
The method rules come from the Canada Revenue Agency pages on accounting methods and on reporting business income, and from the T2 corporation guide. The tax figures in the example come from the 2026 tax data in our calculator, which follows the federal and Ontario rates published for that year.
Frequently asked questions
Can a freelancer use the cash method?
Not for tax, unless the work is farming, fishing or commission sales. Other self-employed income is reported on the accrual method.
What is the difference between cash and accrual?
Cash counts income and expenses when money moves. Accrual counts them when you earn or incur them, paid or not.
Can I switch from accrual to cash?
For a farmer, fisher or commission agent, yes. You use cash on your next return and attach a statement showing each adjustment.
Do I need permission to move from cash to accrual?
Yes. You ask your tax services office in writing before your return is due.
Does my corporation choose an accounting method?
Its return starts from financial statements, then Schedule 1 adjusts them to income for tax. Ask your accountant which basis your statements use.
All family and benefits calculators
- 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.