If you receive business or professional income from an unincorporated business, the Canada Revenue Agency (CRA) considers you to be self-employed. This is also the case if you work for someone else and have a business on the side.
You’ll need to complete and submit the T2125 Form as part of your T1 income tax return each financial year - the same return you use to file your personal income taxes. The T2125 Form is also called the Statement of Business or Professional Activities.
What is the T2125 Form?
The T2125 Form is part of the Canadian government’s T1 income tax package. It enables the Canada Revenue Agency (CRA) to accurately evaluate how much money you made in your business or profession. It also shows the expenses you incurred.
The form helps you calculate your gross and net income (or loss) which are essential for when you file your T1 Federal Income Tax and Benefit Return. The information you provide can determine your tax refund or any money you need to pay in business taxes.
Got more than one source of business or professional income? You’ll have to complete a separate T2125 for each business or professional activity you have. So if you’re a lawyer by day and teach samba dancing at night, you’ll need to complete the T2125 Form twice.
Who is the T2125 Form designed for?
You’re regarded as self-employed if you fit into the following categories:
- Sole proprietorship: This is an unincorporated business owned by an individual. It could be something like a small convenience store, a screen-printing workshop, or an online store. As long as you’re the only one responsible for the business and have no shareholders, you’ll use this form.
- Business partnership (unincorporated): If your unincorporated business is set up as a partnership of individuals, each partner who receives income from the business will use this form.
- Freelancers and independent contractors: These two terms have a lot of overlap and are often used interchangeably. You work for yourself, on a case-by-case basis, on limited-time contracts and you may have multiple employers at the same time.
- Self-employed workers: 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 self-employed worker and you should use the T2125 Form.
Remember, you can be employed by someone else and also be self-employed if you have a side business that earns you income. For instance, you’re employed in a restaurant but run a business selling your crafts at weekend markets.
Exceptions to the T2125 Form:
If you’re confused about which form is right for you, consult a tax professional for advice.
What kind of documentation do you need?
Accurate and honest record keeping and accounting are key to completing the T2125 Form. You’ll need to show your expenses, bank and payment card statements, any invoices from clients and evidence of your income.
The best way to do this without errors or added stress is by investing in the right tools. There are many apps and software programs available to help you with this. Hubdoc is a great way to import and consolidate all your important financial documents. From emails to invoices, receipts to bank statements – a streamlined and automated system can ensure that your documents are accurate and ready for when you need them.
The next thing you need is solid and reliable accounting software like Xero to help you stay on top of your numbers, manage your expenses and income and even issue invoices and quotations.
When you start earning revenue, it’s important to immediately document your income and expenses. Small businesses that only have a few expenses can get by with a spreadsheet. If you choose to do this, we recommend using a spreadsheet that is saved on the cloud so you can access it from anywhere at any time and that is password protected and safe.
However, for businesses that expect to scale quickly and require data analysis in a detailed manner, we recommend using accounting software.
What is the difference between professional income and business income?
While both professionals and business owners are taxed in a similar manner, you should be aware of key distinctions between the two so you can fill out the form correctly.
Professional income is earned as a member of a recognized profession with a governing body. Examples of professionals are dentists, accountants, lawyers, engineers and architects.
Business income is earned by selling products or services. For instance, a freelance graphic designer earns business income, as does a partner in a bakery.
Navigating the Canadian tax code can get confusing, which is why our accounting professionals are ready to help you at any time.
How to fill out the T2125 Form
It can be a daunting experience to fill out the T2125 Form, especially if you’re doing it for the first time. This seven-page document is divided into nine parts, and you can access it directly from CRA or ask your accountant for it.
Most tax filing software, like TaxCycle, also has the T2125 Form available, and many also assist you in filling out the form.
Part 1: Identification
Enter the basic personal and business information that is required.
This includes your full name and Social Insurance Number (SIN). You’ll also need to provide your business name, address and CRA business number.
Identifying information about the business will also need to be filled out. Examples include your industry code and what product or service you deal with.
Part 2: Internet business activities
Only complete this section if your business has a website or web pages that generate income. You’ll be required to enter each relevant URL and the percentage of gross income earned from each.
Part 3: Income types and cost of goods sold
Use this section to record your income and expenses. It can be quite straightforward to do depending on the type of business you run. There are four parts to this section.
- 3A Business income: Only complete if you have business income, not professional income
- 3B Professional income: Only complete if you have professional income
- 3C Gross business or professional income: This is the gross total you calculated in either 3A or 3B
- 3D Cost of goods sold and gross profit: Deduct certain costs such as opening inventories and wages to calculate your gross business profit
Part 4: Net income (loss) before adjustments
Report any expenses over the year, and differentiate by categories. Some deductible expenses include office expenses, insurance, travel expenses, licenses and memberships, advertising and marketing, capital cost allowance (CCA), motor vehicle expenses (not including CCA), property taxes and bad debts. The CRA has a full list of deductible expenses and more information about filling out this section.
Part 5: Your net income (loss)
This section lets you calculate your final net income or loss for the year. You can read more about this section on the CRA page.
Part 6: Other amounts deductible from your share of the net partnership income (loss)
If you have other business expenses that didn’t fit into Part 4 or Part 5 of the form, here’s where you’ll claim them. You may not repeat expenses anywhere in the form.
Part 7: Calculating business use of home expenses
If you work from home you can claim certain expenses that go towards the running of your business, such as heating, electricity and mortgage interest.
Part 8: Details of other partners
This section is only for those in a business partnership. Provide the contact details, names and addresses of your partners and percentages of their shares.
Part 9: Details of equity
Report any debts the business owes, and all the personal contributions or withdrawals you made for the business. This includes any startup cash you entered the business with and if you used your savings for the running of the business.
How to file T2125 Form
Start by gathering all the necessary documents and going through the T1 personal income tax package. You can then file the form with your T1 income tax package.
There are three different ways to file:
Be aware of key dates and deadlines. You have until June 15 to file your income tax return but any amounts owing are due by April 30 to avoid any interest charges. If either of those dates fall on the weekend you get until the following Monday to file.
Frequently asked questions about the T2125 Form
I work under contract. Am I an employee or self-employed?
If your contract states that the payer controls what work you do, then you’re an employee. If you are in control of your work, the services you provide and how much you will charge, then you’re self-employed. The CRA has more information on the difference.
What should partnerships be aware of?
Each partner has to complete a T2125 Form. When going into a business partnership, make sure that terms and conditions are properly documented. This can include share percentages, who gets a salary and how much, how decision-making will be done and what the goals are of the business.
What if I have several businesses or professions?
Each business activity needs its own T2125 Form.
What does capital cost allowance mean?
This means that you can deduct the cost of certain depreciable property over a period of time.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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