Differences Between T2 Corporate Return and T1 Self-Employed Return

Table of Contents

1. Introduction
2. Overview of the T1 Self-Employed Tax Return
   2.1 Who Files a T1 Self-Employed Return
   2.2 How Business Income Is Reported on a T1
3. Overview of the T2 Corporate Tax Return
   3.1 Who Must File a T2 Corporate Return
   3.2 Corporate Income Reporting Requirements
4. Key Differences Between T1 and T2 Tax Returns
5. Tax Rate Comparison: Self-Employed vs Incorporated
6. Filing Deadlines and CRA Compliance Obligations
7. CRA Audit Risk and Enforcement Considerations
8. Choosing Between T1 and T2: Which Is Right for You
9. How BBA Tax Ottawa Supports T1 and T2 Filers
10. Conclusion

1. Introduction

Understanding the difference between a T1 self-employed tax return and a T2 corporate tax return is essential for Canadian business owners. Filing the incorrect return—or misunderstanding your obligations—can result in CRA reassessments, penalties, audits, and unnecessary tax exposure.

At BBA Tax, a trusted Ottawa accounting firm, we help individuals, contractors, and business owners determine which tax return applies to their situation and ensure filings are completed accurately, efficiently, and in full compliance with CRA regulations.

2. Overview of the T1 Self-Employed Tax Return

2.1 Who Files a T1 Self-Employed Return

A T1 return is a personal income tax return used by individuals who operate a business without incorporation, including:

• Sole proprietors
• Independent contractors
• Freelancers
• Self-employed professionals

If your business is not incorporated, all business income is reported on your personal tax return.

2.2 How Business Income Is Reported on a T1

Self-employed income is reported using Form T2125 – Statement of Business or Professional Activities, which is filed as part of your T1 return.

Key characteristics:

• Business income is combined with personal income
• Income is taxed at personal marginal tax rates
• The individual pays both employee and employer portions of CPP
• There is no legal separation between the individual and the business

While a T1 structure is simpler, it can become less tax-efficient as income increases.

3. Overview of the T2 Corporate Tax Return

3.1 Who Must File a T2 Corporate Return

A T2 return must be filed by incorporated businesses in Canada, regardless of whether the corporation earned income or owes tax for the year.

Once incorporated, the business becomes a separate legal entity from its owner(s).

3.2 Corporate Income Reporting Requirements

A T2 corporate return includes:

• Corporate revenue and expenses
• Balance sheet and income statement
• Corporate tax calculations
• Schedule reporting for shareholders, dividends, and loans

Personal income is reported separately through salary (T4) or dividends (T5).

4. Key Differences Between T1 and T2 Tax Returns

5. Tax Rate Comparison: Self-Employed vs Incorporated

5.1 T1 Self-Employed Taxation

• Income taxed at personal rates, which can exceed 50% at higher income levels
• CPP contributions increase total tax burden
• No ability to defer taxes

5.2 T2 Corporate Taxation

• Ontario small business corporate tax rate is approximately 12.2% (2025)
• Ability to retain earnings inside the corporation
• Personal tax is paid only when funds are withdrawn

This tax deferral advantage is a key reason many businesses choose to incorporate.

6. Filing Deadlines and CRA Compliance Obligations

6.1 T1 Self-Employed Deadlines

• Filing deadline: June 15
• Tax payment deadline: April 30
• Interest accrues after April 30 regardless of filing date

6.2 T2 Corporate Deadlines

• Filing deadline: Six months after fiscal year-end
• Corporate tax payment due: Two or three months after year-end
• GST/HST and payroll filings may apply

Missing deadlines significantly increases CRA enforcement risk.

7. CRA Audit Risk and Enforcement Considerations

The CRA closely monitors both self-employed individuals and corporations.

7.1 Common T1 Audit Triggers

• Home office and vehicle expenses
• High deductions relative to income
• Repeated business losses
• Inconsistent income reporting

7.2 Common T2 Audit Triggers

• Shareholder loan balances
• Salary and dividend inconsistencies
• GST/HST discrepancies
• Poor bookkeeping or missing documentation

BBA Tax Ottawa provides full CRA audit defense and representation for both T1 and T2 filers.

8. Choosing Between T1 and T2: Which Is Right for You

You may benefit from remaining self-employed (T1) if:

• Business income is modest
• Operations are part-time
• Simplicity is preferred

You may benefit from incorporating (T2) if:

• Income is growing
• You do not need all profits personally
• Tax deferral is important
• Long-term growth is planned

A professional accountant can help determine the optimal timing for incorporation.

9. How BBA Tax Ottawa Supports T1 and T2 Filers

BBA Tax provides comprehensive accounting services, including:

• T1 self-employed tax returns
• T2 corporate tax filings
• Business incorporation services
• CRA audit defense
• Bookkeeping and payroll
• Strategic tax planning

Our Ottawa accountants ensure filings are accurate, optimized, and CRA-compliant.

10. Conclusion

Understanding the difference between a T1 self-employed return and a T2 corporate return is critical to minimizing taxes and avoiding CRA issues. Filing the correct return—and using the right structure—can significantly impact your long-term financial success.

If you are unsure which return applies to you, or whether incorporation makes sense, BBA Tax Ottawa can provide clear, professional guidance.

📞 Contact BBA Tax today to speak with an experienced Ottawa accountant.