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For most Canadian businesses, the accounting method isn’t a free choice. If you’re a sole proprietor or a partner, only farmers, fishers and self-employed commission agents may use the cash method for tax. Everyone else reports income on the accrual method, whatever their bookkeeping app lets them click.
Which accounting method can your business use?
Here’s the rule as the CRA words it for self-employed people.
Farmers, fishers and self-employed commission agents can use the cash method or the accrual method to report income. All other self-employment income must be reported using the accrual method.
Accounting methods, Canada Revenue Agency, canada.ca
So a consultant, a shop owner or a tradesperson doesn’t get to pick. Picture Dana, a graphic designer in Winnipeg who bills clients on 30-day terms. She reports what she has earned by year-end, paid or not.
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. In that case you keep a separate set of records for each method.
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 taxman still comes calling a year later. Shifting income can only help if next year’s rate is lower, and with a growing business it often isn’t.
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.
Is cash allowed if your business is small?
Small doesn’t change the answer. The CRA page sets the rule by type of income, not by revenue, so a side business earning a few thousand a year is in the same boat as a bigger one. If you’re unsure which group you’re in, look at where the income comes from. Fees for your own work as a commission agent are one thing; selling services or goods under your own name is another.
When the line is blurry, ask a tax services office or an accountant who prepares sole proprietor returns. Guessing wrong in the cash direction means amended returns later.
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. Read the CRA guide that matches your business for those.
Our sources
The method rules come from the CRA page on accounting methods quoted above, the CRA pages on reporting business income, and the T2 corporation guide, all from Canada Revenue Agency. 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. This is an independent site with no tie to the CRA or any government.
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.
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