T2125 Tax Form: Reporting Business and Professional Income and Expenses

Simplifying Your Taxes with the T2125 Form

Navigating the tax world doesn’t have to feel overwhelming. The T2125 form is your key to simplifying the process of declaring your business or professional income and expenses. It’s where you showcase the fruits of your labor, reporting both your earnings and the costs you’ve incurred to keep your business running.

Here’s everything you need to know about filing self-employed taxes and claiming the deductions you’re entitled to this year.

What Is the T2125 Form?

The T2125 form, or Statement of Business or Professional Activities, is used by self-employed individuals to report income and expenses. It applies whether you are operating as a sole proprietor or in a partnership with up to five other people.

How Do You Pay Income Tax on Your Business in Canada?

Income tax on your business’s net profit is due at both the federal and provincial/territorial levels. If your business earns $30,000 or more in revenue over any four consecutive quarters, you are required to register for Goods and Services Tax (GST) or Harmonized Sales Tax (HST) and remit these amounts to the Canada Revenue Agency (CRA).

Filing Self-Employed Taxes

To file as self-employed, you need to meet certain criteria. You are considered self-employed if:

• You control the time, place, and method of your work.
• You supply your own tools and equipment and cover rental and maintenance costs.
• You take on the risk of making a profit or loss and handle your operating costs.

Even if your income is sporadic or earned through multiple clients, you still have to file self-employed or freelance taxes.

Business vs. Professional Income

• Business income: This includes income from selling products or services, commissions, or fees. You may not always receive a T-slip for these earnings.
• Professional income: Similar to business income, but this applies when you're paid as a member of a recognized profession with a governing body (e.g., lawyer, accountant, engineer).

If you have more than one business or profession, use a separate T2125 form for each source of income.

For a more detailed guide on paying taxes as a self-employed person, consult CRA’s T4002: Self-employed Business, Professional, Commission, Farming, and Fishing Income.

What Business Expenses Can You Claim?

You can claim a wide range of business expenses, including:

• Advertising
• Rent
• Home office expenses
• Motor vehicle expenses
• Legal fees, interest, and bank charges
• Repairs and maintenance
• Travel expenses
• Salaries paid to employees
• Capital cost allowance (CCA)
• Meals and entertainment

How to Fill Out the T2125 Form

Filling out the T2125 form is easier than you might think. Follow these three simple steps:

1. Provide Identifying Information: Enter your business name, address, main product or service, and business number. If you’re in a partnership, include the partnership’s business number and your share of the income and expenses.
2. Report Income Earned: Record your gross income from business and professional activities, along with the gross profit after deducting applicable costs, like wages and inventory.
3. Enter Expenses: List eligible expenses like advertising, insurance, and motor vehicle costs. For home office or capital property expenses, additional calculations may be necessary. Motor vehicle expenses should be logged based on business use, and you can calculate this using Area A of the T2125 form.

What Is Capital Cost Allowance (CCA)?

Capital Cost Allowance (CCA) refers to the depreciation of assets like vehicles, tools, and equipment used in your business. Instead of deducting the full cost in one year, the expense is spread out over time. You’ll use Area A on the T2125 form to calculate CCA for assets. Even if you’re not claiming CCA for the current year, it’s important to fill out this section to track additions or dispositions.

When Are Self-Employed Taxes Due?

• Filing deadline: Self-employed individuals have until June 17 to file their tax returns (extended because June 15 falls on a weekend).
• Balance due: Any tax balance must be paid by April 30 to avoid interest charges.

Filing Your Self-Employed Taxes with Confidence

The T2125 form is your roadmap to navigating the tax process as a self-employed individual. With this guide, you’ll be well-equipped to file your taxes accurately, claim all eligible deductions, and maximize your tax savings.

Key Points:

• If you manage the terms of your work, supply your own tools, and incorporate your clients’ activities into your business, you likely qualify as self-employed.
• Understanding which expenses are tax-deductible, such as advertising, home office expenses, and capital cost allowance, can help lower your tax liability.
• Ensure you file your 2023 taxes by June 17, and pay any balance owed by April 30 to avoid interest charges.