A simple guide to Form T2125

If you’re a business owner and do not own a corporation (i.e. you’re a sole proprietor or a partner), you will be required to report your income and expenses to the CRA on Form T2125.  In this post we will cover the various sections of Form T2125 who needs to file it, when is the deadline, and how to fill out the form.

What is Form T2125?

Form T2125 is a form you need to fill out if you need to report professional or business income and expenses. 

Many Canadians are self-employed and don’t get tax slips such as a T4 and/or T5 to use to report their income on their tax returns. 

Instead, self-employed individuals must calculate their own income and expenses and report this information on their tax return to the CRA. This is done on Form T2125. 

Who needs to use form T2125?

Anyone who runs a business and is not incorporated, must file a T2125.  If you’re a partner in a partnership or a sole proprietor, you need to file a T2125. 

Generally speaking, if you’ve earned any business income outside of the salary you’re getting, you will most likely need to fill out Form T2125. This business income could be earned from a freelancing gig or from a hobby.

What if I have multiple businesses?

If you have multiple businesses that are not incorporated, you need to file a separate Form T2125 for each of them. For example if you have a personal training business and website design agency, you will need to fill a separate Form T2125 for each business 

When is the deadline to file Form T2125?

The tax deadline for self-employed individuals in Canada is June 15th. However, if you have any taxes owing to the CRA, payment needs to be made by April 30th. From a practical standpoint then, the deadline to get your T2125 filed is April 30th. If you decide to file on June 15th and have an amount owing, you will be charged interest by the CRA. 

How do you fill out form T2125?

Filling out Form T2125 can be quite complicated. If your situation is too complex, do not hesitate to get in touch with us here.  In this section, we will cover how you can fill form T2125 by yourself if you chose to do so:

Part #1 Identification

In this section, you’re required to fill out some basic information such as:

• Your Name
• Your Business Name
• Your Business Number
• The Main Product or Service you Sell
• The Business Industry code
• The Business Address
• If you’re a partner is a business, you would include the partnership business number and your percentage ownership of the partnership

Part #2 Internet Business Activities

If you have a business that earns income from websites, you will need to identify the individuals websites in this section. If this section doesn’t apply to your business, simply enter “0” at the bottom of Part 2. You will need to specify a percentage (%) of your gross income generated from the websites you’ve listed in this section.

Part #3 Income and Cost of Goods Sold

The income section has three parts: Part 3A, Part 3B, Part 3C and Part 3D.

Part 3A

If you’ve earned any business income, you should record this in Part A. The income number reported here is usually inclusive of sales tax (GST/HST).

Part 3B

If you’ve earned any professional income for example from your work as a dentist, law firm, etc., you should report this income in Part B. Again, the income number reported here is usually inclusive of sales tax (GST/HST). 

Part 3C

This section will add your income from Parts A or B and adjust for reserves (usually for bad debt) and other income. 

Part 3D

If you own a business that has inventory, you are required to fill out Part 3D. This section also includes areas to record direct wage costs, subcontractor costs, and other costs.

Part 4: Net Income before adjustments 

This is the section where you will include most of your expenses. These expenses can include advertising, meals and entertainment, office expenses, professional fees, rent, salaries and much more (see below for the full list). 

For some expenses, there are more detailed schedules that you will be required to complete. In our experience the most frequently used sections are for Home Office Expenses and Car Expenses. 

Home Office Expenses on Form T2125

If you’d like to claim home office expenses, you should complete Part 7 of the form. In this section you can claim expenses for your home such as heat, electricity, mortgage interest, property tax, etc. (see the full list below). These expenses must be prorated by the area in your home that you use for business. Hence, you can’t claim the entire expense but only the portion applicable to the square footage of your home office. 

Car expenses on Form T2125

There is a full page on Form T2125 that you need to fill out if you’d like to claim car expenses. There are three subsections within this section: Chart A, Chart B, and Chart C. In Chart A you would include your car’s fuel expenses, maintenance and repairs, insurance, etc. You can also include interest costs if you’re financing your vehicle or lease charges if you’re leasing your vehicle. To claim interest costs and leasing costs, you need to fill Chart B and Chart C and carry over these amounts to Chart A to the appropriate line to calculate Total motor vehicle expenses on line 12.

Areas of Complexity

As we mentioned above, there are areas of complexity when it comes to filing certain portions of Form T2125. In particular, this applies to the section where you need to calculate Capital Cost Allowance or CCA. Calculating CCA requires that you fill out a separate schedule and understand which assets can be capitalized and how CCA should be claimed. This an area that can be confusing for many DIY tax-filers so do not hesitate to get in touch with us here if you need help. 

Let us help you. Do you have questions about your tax situation? Get in touch with us here or sign up to get more accounting and tax tips in our newsletter here.

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.