Quick answer: Canadian businesses generally have to report income using the accrual method, which recognizes income when earned and expenses when incurred. The cash method is permitted only for farmers, fishers and self-employed commission agents. A corporation reports on the accrual basis for tax purposes.
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On this page
- Key takeaways
- The general rule
- What the accrual method means
- Who can use cash-basis accounting in Canada
- Where the confusion usually starts
- Changing from cash to accrual accounting
- Fiscal periods
- What this means for your bookkeeping
- The bottom line
- Frequently asked questions about cash vs Accrual Accounting in Canada
Key takeaways
- The CRA’s general rule: you have to report business income using the accrual method.
- Farmers, fishers and self-employed commission agents may use the cash method or the accrual method, but not a combination of both.
- Accrual means income when earned and expenses when incurred, regardless of when cash moves.
- Under the cash method, expenses are deducted when paid, with an exception for prepaid expenses.
- Switching methods has a formal process, and switching from cash to accrual requires a written request before the return’s due date.
Cash accounting is simple: money in is revenue, money out is expense. Accrual accounting is less intuitive, and almost every Canadian business must use it for tax. Your bank balance is not your profit.
The general rule
Generally, the CRA requires business income to be reported using the accrual method. The cash method is a narrow permission for specific businesses.
| Cash method | Accrual method | |
|---|---|---|
| Income is reported | In the fiscal period you receive it — cash, property or services. | In the fiscal period you earn it, whenever it is received. |
| Expenses are deducted | In the fiscal period you pay them, except prepaid expenses. | In the fiscal period you incur them, whether or not paid in that period. |
| Who may use it | Farmers, fishers and self-employed commission agents — one method, not a mix. | Everyone else, including every corporation carrying on an ordinary business. |
| A corporation’s T2 | No cash-basis election exists for an ordinary operating company. | Prepared on this basis; the tax year is the fiscal period, at most 53 weeks. |
| Receivables and payables | Not carried — a December invoice paid in March is March income. | Carried on the balance sheet — the December invoice is December revenue. |
What the accrual method means
Under the accrual method, you report income in the fiscal period you earn it and deduct allowable expenses in the period you incur them, whenever the money moves. “Incur” usually means you paid or will have to pay.
In practice that means:
- An invoice issued in December for work completed in December is December revenue, even if the customer pays in March.
- A supplier bill received in December for materials used in December is a December expense, even if you pay it in January.
- A deposit received in December for work you will do in the spring is generally not December revenue — the work has not been earned yet.
That is why a profitable business can be short of cash, a cash-rich month can hide a loss, and receivables and payables sit on the balance sheet. Getting them wrong is one of the costlier bookkeeping mistakes small businesses make.
Who can use cash-basis accounting in Canada
Under the cash method, income is reported when received (as cash, property or services) and expenses when paid, except prepaid expenses. The CRA permits it for:
- Farmers
- Fishers
- Self-employed commission agents
Either method is allowed, but not both. Everyone else uses accrual. Whether a business uses cash or accrual is therefore set by what it is: only farmers, fishers and self-employed commission agents get the choice.
Where the confusion usually starts
Two things create most of the friction for owner-managed businesses.
Cash-basis reports inside accounting software. Owners who manage from a cash-basis profit and loss are often surprised when year-end figures differ. Both can be right; they answer different questions.
The GST/HST reporting basis. GST/HST is generally accrual too: the tax is collectible when you issue the invoice, not when the customer pays. That catches out businesses with slow payers, and it interacts with the quick method.
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Changing from cash to accrual accounting
Farmers, fishers and self-employed commission sales agents can switch methods, and the process depends on direction:
- Accrual to cash: file your return using the cash method and attach a statement showing the adjustments made to income and expenses as a result of the change.
- Cash to accrual: submit a written request to the director of the taxpayer’s tax services office before the due date of the tax return.
Note the asymmetry: moving to cash is done with the return, while moving to accrual needs permission in advance. Missing that deadline means waiting a year.
Fiscal periods
Income is reported annually under either method. Sole proprietorships and most partnerships of individuals use the calendar year unless they elect a different fiscal period on Form T1139. A corporation’s tax year is its fiscal period, and a new corporation chooses its year end; see choosing a corporate fiscal year end.
What this means for your bookkeeping
If you are incorporated, keep accrual books all year: enter supplier bills on arrival, invoice when work is done, and review receivables and payables monthly. You get figures you can trust and a year end that needs no reconstruction, the same discipline behind clean advertising and promotion deductions.
Both bases depend on the categories your transactions land in. A chart of accounts designed around the GIFI codes the T2 uses is what turns a correct accounting basis into a return that is quick to file.
The bottom line
Accrual is the rule; cash is a narrow exception. For a corporation, the work is keeping the books that way. In short, on cash vs accrual accounting Canada keeps a simple rule: accrual for almost everyone, and cash only as a narrow exception.
This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and it does not create a client relationship. Tax rules change and your situation is unique, so please speak with a CPA before acting on anything here.
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Accrual books are easiest to keep when receivables and payables are recorded as they happen, which is how monthly bookkeeping on the accrual basis runs.
Frequently asked questions about cash vs Accrual Accounting in Canada
Can a Canadian corporation use cash-basis accounting for tax?+
What is the difference between cash and accrual accounting?+
Who is allowed to use the cash method in Canada?+
How do I switch from the cash method to the accrual method?+
Why does my accountant’s profit figure differ from my bank balance?+
How long can a corporation’s fiscal period be?+
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The gap between the two bases is exactly what reporting that separates the two has to make visible.
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