ELI5 summary
RRSP room comes from profit, not revenue
For RRSP purposes, earned income from a business is your net self-employment income: revenue minus business expenses, as reported on form T2125. A consultant who bills $120,000 and has $30,000 of expenses has $90,000 of earned income. A business loss reduces earned income and can reduce your RRSP room for the following year.
Your new room for a year is 18% of the previous year’s earned income, up to the annual dollar limit of $33,810 for 2026. Self-employed people have no pension adjustment, so a strong year translates directly into room the next year.
You pay both halves of CPP
An employee and their employer each pay CPP. When you are self-employed you pay both shares:
- 11.9% of net self-employment earnings between $3,500 and $74,600 for 2026;
- a further 8% on earnings between $74,600 and $85,000 (the second additional contribution, CPP2).
Worked example
Nadia, a self-employed designer, has $70,000 of net business income in 2026. Her CPP contribution is ($70,000 − $3,500) × 11.9% = $7,914, paid with her return rather than through payroll. Her 2027 RRSP room from this year’s income is 18% × $70,000 = $12,600.
Part of what you pay reduces your tax. The employer’s share is a deduction on line 22200. From your own share, the enhanced portion is also deductible, and the base portion earns a non-refundable tax credit. In practice, a little over half of your CPP contributions come off your income.
Quebec residents contribute to the Quebec Pension Plan instead, with its own rates, and also pay into the Quebec Parental Insurance Plan.
Employment Insurance is optional for the self-employed. You can opt in to cover special benefits such as maternity, parental and sickness benefits, but not regular unemployment benefits.
Instalments and deadlines
Because no tax is withheld from business income, the CRA may ask you to pay during the year:
- Instalments are required if your net tax owing is more than $3,000 ($1,800 in Quebec, for federal tax) in the current year and in either of the two previous years. They are due March 15, June 15, September 15 and December 15. The CRA sends reminders with suggested amounts.
- Your return is due June 15 if you or your spouse had self-employment income, but any balance owing is still due April 30. Interest runs from April 30.
A good habit is to move a fixed share of every payment you receive, often 25% to 35% depending on your bracket, into a separate savings account or a high-interest TFSA for tax.
Use deduction timing in uneven years
Self-employed income often swings from year to year. The RRSP gives you a useful lever: you do not have to deduct a contribution in the year you make it. You can contribute when you have cash and claim the deduction in a later year when your marginal rate is higher.
Worked example
Omar, in Ontario, has a lean year at $45,000 of taxable income, then expects $150,000 the next year. He contributes $20,000 to his RRSP in the lean year. Deducting it right away would save about $3,960. Carrying the deduction forward and claiming it in the $150,000 year would save about $8,682, and the money grows tax-sheltered in the meantime either way.
The FHSA works the same way: contributions can be deducted in a later year. The TFSA has no deduction to time, and its room does not depend on income at all, which makes it a natural home for savings in years when business income, and therefore future RRSP room, is low.
If you are incorporated
Once a business is incorporated, what you pay yourself matters for RRSP room:
- Salary from your corporation is employment income. It creates RRSP room and requires CPP contributions.
- Dividends are investment income. They create no RRSP room and no CPP.
Owners who pay themselves only dividends often have little or no RRSP room and rely on the TFSA and on savings inside the corporation instead. The right mix depends on the corporation’s tax rate, your personal rate and your retirement plans, and is worth working through with an accountant.
Show the math
Earned income for RRSP purposes (ITA s.146(1)) includes income from carrying on a business, alone or as an active partner, net of losses. New room(Y) = min(18% × earned income(Y−1), dollar limit(Y)). Self-employed CPP (2026 values): base + first additional rate × 2 = 11.9% on pensionable earnings between the basic exemption and YMPE; second additional rate × 2 = 8% between YMPE and YAMPE. Deductions: employer-equivalent share on line 22200; employee enhanced share on line 22215; employee base share credited on line 31000. Instalment threshold: net tax owing above $3,000 ($1,800 for Quebec residents) in the current year and either of the two preceding years.
Key takeaways
- RRSP room is based on net self-employment income from the previous year.
- You pay both halves of CPP; a little over half of it is deductible.
- Budget for instalments and the April 30 payment deadline even though you file by June 15.
- In uneven years, contribute when you can and deduct when your rate is highest.