How to Start a Home-Based Business in Canada: Complete 2026 Guide

Is a Home-Based Business Right for You?

Before you register anything, run a quick self-assessment. A home-based business works well if you meet most of these criteria:

• You provide services (consulting, freelancing, design, writing, tutoring, bookkeeping) or sell products online
• You do not need walk-in customers or retail foot traffic
• You have a dedicated room or defined workspace in your home
• Your work does not generate excessive noise, traffic, or hazardous materials
• You are comfortable with the discipline of working from home

Home-based businesses are the fastest-growing segment of small business in Canada. Statistics Canada reports that over 50% of new businesses operate from a home address. The overhead is low, the risk is manageable, and the tax advantages are real.

If your business requires a storefront, heavy equipment, or on-site customer visits that violate residential zoning, a home-based setup is not the right fit. Everyone else — keep reading.

Choosing Your Legal Structure

The first real decision is how to structure your business legally. For home-based businesses in Canada, there are two practical options.

Sole Proprietorship vs. Corporation

Start as a sole proprietorship. The vast majority of home-based businesses in Canada begin this way. You can incorporate later when your revenue justifies the added cost and complexity. There is no penalty for switching structures as your business grows.

For sole proprietors, all business income and expenses are reported on Form T2125 as part of your personal tax return.

Business Registration: The Three Steps

Starting a home-based business in Canada requires three levels of registration. None of them are difficult, but all three are necessary.

Step 1: Federal — CRA Business Number

Apply for a Business Number (BN) through the CRA. This 9-digit number identifies your business for tax purposes. You can register online through CRA's Business Registration Online service, by phone at 1-800-959-5525, or by mailing Form RC1.

When you register, the CRA will ask which program accounts you need:

• GST/HST account — Required if revenue exceeds $30,000 (or you register voluntarily)
• Payroll account — Only if you plan to hire employees
• Import/export account — Only if you import goods

Most home-based sole proprietors need only the GST/HST account, and only once they approach the $30,000 threshold.

Step 2: Provincial — Business Name Registration

If you operate under any name other than your legal name, you must register the business name with your province. Costs and processes vary:

If you use your legal name (e.g., "Jane Smith Consulting"), most provinces do not require registration. Check your province's rules to be sure.

Step 3: Municipal — Home Occupation Permit

Contact your municipal government or city hall to check zoning bylaws. Most municipalities require a home occupation permit or home-based business licence.

Common municipal requirements:

• No exterior signage (or limited signage)
• No client parking that disrupts neighbours
• No retail walk-in traffic
• Business use limited to a percentage of total home floor area (typically 25-50%)
• No employees working from your home (some municipalities allow 1-2)

Permits typically cost $50-$200 per year. Skipping this step is common but risky — a neighbour complaint can trigger a bylaw investigation.

Setting Up Your Finances

Get your financial infrastructure right from the start. Mixing personal and business finances is the single most common mistake new home-based business owners make.

Open a Separate Business Bank Account

Open a dedicated business chequing account. Most major Canadian banks offer small business accounts starting at $5-$7 per month. Some digital banks (like Wise or Wealthsimple) offer free business accounts.

A separate account makes bookkeeping dramatically easier. Every deposit is business income. Every expense is a business expense. No sorting required.

Get a Business Credit Card

Use a dedicated credit card for all business purchases. This creates an automatic paper trail and keeps business expenses separate from personal spending. Look for a card with no annual fee and cashback on common business categories (fuel, office supplies, internet services).

Make the GST/HST Registration Decision

You must register for GST/HST once your revenue exceeds $30,000 over four consecutive calendar quarters. Below that threshold, registration is voluntary.

Register voluntarily if your business expenses are significant relative to your income. Registration lets you claim Input Tax Credits (ITCs) to recover the GST/HST you pay on business purchases — office supplies, software, equipment, phone bills, and more. If your ITCs exceed the GST/HST you collect, you get a refund from the CRA.

Delay registration if you sell primarily to individual consumers who are price-sensitive, and your business expenses are minimal. Adding 5-15% to your prices can deter customers when competitors are not charging GST/HST.

For a complete breakdown, see our GST/HST guide for Canadian small businesses.

Home Office Deductions

This is one of the biggest tax advantages of running a home-based business. You can deduct a portion of your housing costs as a business expense on your T2125 form.

Does Your Home Office Qualify?

Your workspace must meet one of two CRA tests:

1. Principal place of business — You use the space primarily (more than 50% of the time) for earning business income
2. Client meeting space — You use the space exclusively and regularly for meeting clients or customers

Most home-based business owners qualify under the first test.

Calculating Your Workspace Percentage

Measure the square footage of your dedicated workspace and divide it by the total square footage of your home.

Example: Your office is 150 sq ft. Your home is 1,200 sq ft. Your business-use percentage is 150 / 1,200 = 12.5%.

Apply this percentage to all eligible housing expenses.

Eligible Home Office Expenses

Simplified Method vs. Detailed Method

Detailed method: Calculate actual expenses and multiply by your workspace percentage. This is the standard CRA approach and typically produces a larger deduction.

Simplified (flat rate) method: The CRA's temporary flat rate method (introduced during COVID) allowed $2 per day worked at home, up to $500 per year. As of 2024, this method is no longer available. Use the detailed method for 2026 tax filing.

The Loss Restriction Rule

Home office expenses cannot create or increase a business loss. If your business income is $4,000 and your home office deduction totals $5,000, you can only claim $4,000 this year. The remaining $1,000 carries forward to the next tax year.

Essential Bookkeeping Setup From Day One

Do not wait until you have "enough" transactions. Set up your bookkeeping system the same week you register your business.

What to Track

Every home-based business needs to track three things:

1. Income — Every dollar earned, from every source. Platform payouts, client invoices, cash payments, referral bonuses.
2. Expenses — Every business purchase with date, vendor, amount, category, and GST/HST paid.
3. Receipts — Digital or physical proof of every expense. The CRA requires receipts for six years.

Choose Your System

For a deeper comparison, see our guide on AI bookkeeping for small businesses.

Receipt Management

The CRA requires supporting documentation for every expense you claim. A shoebox of faded receipts is not a system. Use one of these approaches:

• Snap and scan — Photograph every receipt immediately and store it digitally. AI tools like BookKeeper extract the data automatically.
• Email receipts — Forward digital receipts to a dedicated email folder or directly to your bookkeeping software.
• Bank statements — Your bank and credit card statements serve as secondary proof, but the CRA prefers itemized receipts showing GST/HST amounts.

Mileage Tracking

If you drive for business — client meetings, supply runs, post office trips — keep a mileage logbook. Record the date, destination, kilometres driven, and purpose of every business trip. Your business-use percentage determines how much of your vehicle expenses you can deduct.

For detailed mileage tracking guidance, see our bookkeeping guide for gig workers.

Understanding Your Tax Obligations

Running a home-based business means you are responsible for your own taxes. Nobody is withholding income tax or CPP from your earnings.

Income Tax

All net business income (revenue minus expenses) is added to your personal income and taxed at your marginal rate. Federal rates for 2026:

Provincial tax is added on top. Combined federal-provincial rates range from approximately 20% to 54% depending on your province and income level.

CPP Self-Employed Contributions

As a self-employed Canadian, you pay both the employee and employer portions of CPP. For 2026, the combined rate is 11.9% on net self-employment income between $3,500 and the annual maximum ($71,300). That is a maximum CPP contribution of approximately $8,068.

This is real money. Budget for it.

GST/HST Obligations

If registered, you collect GST/HST on your sales and remit it to the CRA on your filing schedule (annually, quarterly, or monthly). You offset the amount owing with Input Tax Credits on business expenses. See our GST/HST guide for filing details.

T2125 Form Requirements

Every self-employed Canadian files Form T2125 — Statement of Business or Professional Activities — as part of their T1 personal tax return. This is where you report all business income and expenses.

Key deadlines:

Self-employed Canadians have until June 15 to file, but any balance owing is due April 30. Late payment triggers interest charges even if your return is not due yet.

For a complete section-by-section walkthrough, see our T2125 form guide.

Common Startup Costs for Home Businesses

Home-based businesses are inexpensive to start compared to traditional brick-and-mortar operations. Here is what to budget for:

Total first-year estimate: $1,500-$5,000 for most service-based home businesses. Compare that to $30,000-$100,000 for a typical storefront.

Every one of these costs is tax-deductible as a business expense. Equipment over $500 may need to be depreciated using Capital Cost Allowance (CCA) rather than expensed in full.

Insurance Considerations

Your home insurance policy likely does not cover business activities. Check your policy and consider these options:

Home-Based Business Endorsement

The simplest option. Contact your home insurer and add a business endorsement (also called a rider) to your existing policy. This typically costs $50-$200 per year and covers basic business equipment and liability within your home.

Commercial General Liability Insurance

If clients visit your home or you provide professional services, a standalone commercial liability policy provides broader coverage. Costs range from $300-$1,500 per year depending on your industry and revenue.

Professional Liability (Errors & Omissions)

Consultants, accountants, designers, and other professionals should carry E&O insurance. This covers claims arising from mistakes or omissions in your professional work. Expect $500-$2,000 per year.

What Happens Without Coverage

If a client trips in your home office and your home insurance excludes business activities, you are personally liable. If your laptop containing client data is stolen and you have no business equipment coverage, the loss is yours. The premiums are a small price for protection.

Common Mistakes New Home Business Owners Make

Mixing personal and business finances. Open a separate bank account. Use a separate credit card. If the CRA audits you and your business expenses are tangled with personal spending, you will spend hours sorting it out — and you may lose deductions you cannot prove.

Skipping the home occupation permit. A neighbour complaint or bylaw inspection can result in fines and a forced shutdown. Spend $50-$200 and get the permit.

Not tracking expenses from day one. Every unrecorded business expense is a missed tax deduction. At a 30% marginal tax rate, a $1,000 missed deduction costs you $300 in extra taxes.

Underestimating CPP contributions. Self-employed Canadians pay both sides of CPP — up to $8,068 for 2026. Budget for this on top of income tax.

Waiting too long to register for GST/HST. If you crossed the $30,000 threshold and did not register within 30 days, the CRA can retroactively assess the GST/HST you should have been collecting. You owe it out of pocket.

Ignoring quarterly tax instalments. If you owe more than $3,000 in taxes for the current year, the CRA may require quarterly instalment payments the following year. Missing instalments triggers interest charges.

Claiming 100% of shared expenses. Your internet bill, phone plan, and utilities serve both personal and business use. Claim the business portion only. The CRA expects reasonable percentages — claiming 100% of your internet as a business expense when you have a family of four streaming Netflix is a red flag.

How AI Bookkeeping Helps From Day One

The biggest bookkeeping challenge for new home-based business owners is consistency. You are busy building your business — the last thing you want is to spend hours each week on data entry.

AI bookkeeping tools solve this by automating the repetitive work:

• Receipt scanning — Snap a photo. The AI extracts vendor, date, amount, tax, and category automatically.
• Expense categorization — Expenses are mapped to CRA T2125 categories without manual sorting.
• Tax separation — GST/HST amounts are extracted from receipts and tracked separately for ITC claims.
• Home office calculation — Enter your workspace percentage once. The tool applies it to eligible housing expenses automatically.
• Year-end reports — Your income, expenses, and deductions are organized and ready for T2125 filing or handoff to your accountant.

The difference between manual bookkeeping and AI-assisted bookkeeping for a typical home-based business is 4-6 hours per month versus 15-30 minutes. That is time you can spend on revenue-generating work.

For a detailed look at how AI bookkeeping compares to traditional methods, see our complete guide to AI bookkeeping for small businesses.

For practical bookkeeping habits and tips, see our bookkeeping tips for self-employed Canadians.

Frequently Asked Questions

Do I need a business licence to run a home-based business in Canada?

It depends on your municipality. Most cities and towns require a home occupation permit or home-based business licence. Some types of businesses (food preparation, childcare, personal services) may require additional permits from provincial health or safety authorities. Contact your municipal government to confirm what is required in your area.

How much can I earn before I need to register for GST/HST?

The small supplier threshold is $30,000 in gross taxable revenue over four consecutive calendar quarters. Once you exceed this amount, you must register within 30 days. Below this threshold, registration is voluntary but can be beneficial if your business expenses generate significant Input Tax Credits. See our GST/HST guide for the full breakdown.

Can I claim my entire internet bill as a business expense?

No. You can claim only the business-use portion. If you use your internet 40% for business and 60% for personal use, you can deduct 40% of the monthly cost. The CRA expects a reasonable percentage — and "reasonable" depends on your actual usage pattern. If the internet is essential to your business (e.g., you run an online store), a higher percentage is defensible. Document your reasoning.

What is the best legal structure for a new home-based business?

Start as a sole proprietorship. It is the simplest, cheapest, and most common structure for home-based businesses in Canada. You report income and expenses on Form T2125 as part of your personal tax return. Consider incorporation only when your net business income consistently exceeds $75,000 per year, at which point the small business tax rate (approximately 12.2%) creates meaningful tax deferral compared to personal marginal rates.

How long do I need to keep business records?

The CRA requires you to keep all business records for six years from the end of the tax year they relate to. This includes receipts, invoices, bank statements, mileage logs, and tax returns. Digital records are accepted — you do not need to keep paper originals. Store backups in a secure cloud location to protect against data loss.