If you’ve recently started freelancing, founded a business, or earned any other kind of income outside of your regular day job, you might have heard about the Canada Revenue Agency’s (CRA) Form T2125.
What is T2125?
T2125, also called the Statement of Business or Professional Activities, is the form that sole proprietors and partnerships use to report the income their business earned in the previous tax year.
You can find the CRA form here: Form T2125, Statement of Business or Professional Activities
Generally speaking, anyone who runs an unincorporated business in Canada is considered a sole proprietor or partner by the CRA, and needs to file a T2125 as part of their T1 general tax return—the same return you use to file your personal income taxes. (If you run an incorporated business, you should file a T2 to report your income instead.)
Who needs to file it?
You must complete T2125 if you run a sole proprietorship or partnership with five or fewer partners, and earned any business income in the previous year. (Partnerships with more than five members must file a T5013 Partnership Information Return.)
Business income is any income earned outside of regular employment. You can earn business income through self-employment, freelancing on the side, or even selling crafts online for fun. You must report business income even if you haven’t registered as a business, and even if you also earned employment income that year.
How can I tell if I’m a sole proprietor or in a partnership?
If you made any income outside of your regular employment income (i.e. the regular salary and wages your employer pays you) and you don’t run an incorporated business, the CRA will probably recognize you as a sole proprietor or member of a partnership.
Remember, the law doesn’t consider sole proprietorships or partnerships to be individual legal entities, so they’re not taxed as such. Instead, sole proprietors and partners report their income on their individual T1 tax return.
This question can get tricky if you’re working for someone under a contract and aren’t sure whether you’re an employee or a freelancer/sole proprietor.
The CRA looks at four major factors to determine what kind of relationship an individual has with their employer:
control over where and how you work
tools and equipment
opportunity for profit
If your employer sets your hours, decides when and where you work, controls how your work is done, sets your salary and supervises you, you’re an employee, and you shouldn’t use T2125 to report your income.
If you control your hours, decide when and how you carry out your work, provide your own equipment, assume most of the business costs associated with the work, and you incur a profit or a loss, you’re a sole proprietor or partner, and you should use T2125.
What’s in the T2125?
T2125 is a six-page document from the CRA, the first page of which looks like this:
There are nine parts to T2125:
Identification, which includes all of your personal information, including your name, business name, SIN, business number, etc.
Internet business activities, which you should fill out only if you have a website that generates income.
Business and professional income, where you report all of the income your business generated. The four subsections are:
Gross business or professional income
Cost of goods sold and gross profit
Net income (loss) before adjustments, where you report all of the expenses you incurred while running your business.
Your net income (loss), where you calculate your final net income or loss for the year.
Other amounts deductible from your share of the net partnership income (loss), which gives you an opportunity to write in any expenses that might not fit into parts 4 or 5.
Calculation of business-use-of-home expenses, a schedule you should use to calculate how much of your home office expenses are deductible from your business income.
Details of other partners, where you provide personal and contact information for any other partners in your partnership, if you are part of one.
Details of equity, which you should use to report any debts your business owed at the end of the tax year, and any personal contributions or withdrawals you made to or from the business.
How do I complete it?
The point of T2125 is to take all of the business income you earned and subtract all of your relevant business expenses to come up with your net business income (or loss).
If this is the first time you’re filling out T2125, there are a few things you should keep in mind.
How do I report income for multiple businesses?
If you have more than one business—for example, if you run a web design practice by day and a lucrative event promotion company by night—you need to fill out a seperate T2125 for each business.
What’s the difference between “business” and “professional” income?
Professional income is any business income earned by a member of a recognized profession (i.e. a lawyer, doctor, accountant, etc.) For example, if you’re an accountant and you rent out some of your office space to a neighboring startup, you would report the professional income from your accounting practice and the business income you make from renting out office space separately.
The business-professional income distinction is a holdover from earlier days when the CRA had two different forms to report business and professional income—forms T2124 and T2032, respectively. As the lines between the two types of income have blurred, the CRA merged the two forms into T2125.
Business and professional income are taxed very similarly today, but some minor differences remain. (Talk to a tax professional to see if you can benefit from them.)
Which business expenses can I deduct?
Once you’ve recorded your business and/or professional income in Parts 3A-3C, Parts 3D, 4 and 5 will ask you to report any relevant business expenses.
These include, but aren’t limited to:
The cost of goods sold
This includes any inventory costs, returns, allowances, and discounts, wages paid to employees, any money you paid to subcontractors, and any other purchases directly associated with selling your goods or services.
General operational expenses
These include any marketing or advertising costs, membership or professional fees, salaries or wages, travel expenses, meals and entertainment, and telephone or internet.
Business use of car or home office
These include any money you spent on car insurance, maintenance or repair, and any money you spent on home insurance, your mortgage, utilities, etc. (Use Part 7 of T2125 to calculate your business-use-of-home expenses.)
Your capital cost allowance
The equipment, furniture, tools and buildings you use while operating your business depreciate over time. You can claim some of that depreciation on your taxes using the capital cost allowance, which is calculated in Area A of T2125 (on page 5).
Ideally, you should take all of your financial records from the current year and have a tax professional fill out T2125 for you. They’ll be able to tell you exactly which expenses do and don’t qualify for inclusion on T2125, and how to maximize the amounts you claim for business-use-of-vehicle, business-use-of-home, and your capital cost allowance.
T2125 filing deadline
T1 tax returns for self-employed individuals (including form T2125) must be filed by June 15. However, most tax professionals recommend that individuals file their taxes before the regular April 30 deadline, because you’ll be charged interest on any taxes you owe starting April 30.