The T4002 Guide for small businesses

The T4002 Guide helps Canadian self-employed business professionals, farmers and fishers fill out their income tax returns. The guide has six chapters. It covers tips and advice on business income, expenses, capital cost allowance, losses and capital gains.

If you have an unincorporated business where you earn income, even if it is a side hustle, you may need to read and understand this guide in order to complete your T1 Federal Income Tax and Benefit Return, especially the T2125 Form.

Note that the T4002 Guide is not for businesses that are incorporated or operated by a trust. Such businesses must use different forms. Further, although farmers and fishers can use the guide, there are special guidelines for them.

What is Guide T4002?

This guide is officially called "T4002 Self-employed Business, Professional, Commission, Farming, and Fishing Income." It assists self-employed Canadian small business owners in reporting their self-employment income. This enables them to complete their business taxes. It’s regularly updated by the Canada Revenue Agency (CRA).

Guide T4002 is for sole proprietors or partners of a partnership. Small businesses that provide services or sell a product, but aren’t incorporated, can use the guide. The guide defines sole proprietors as self-employed persons. This includes business persons or professionals doing professional activities. It also includes commission salespersons or those who provide daycare in their home. Also included are people who work as a farmer or fisher.

Additionally, a partner of a partnership who is a business person, a professional or a fishing or farming business could also use the form.

You can download Guide T4002 from the CRA website.

What the T4002 covers

The guide has six chapters, plus general information and definitions.

The introduction includes further information on who can use the guide and any new tax information that came into effect in that year. It also contains a breakdown of how professional, farming and fishing information is highlighted in the guide. The guide then includes a list of definitions and simple explanations for small business owners to understand.

A closer look at the details

If you plan to complete your own business income tax return, this guide will help you find information relevant to you. It will also help you determine what’s important.

Chapter 1: General information

This chapter has helpful advice for keeping accounting records and preparing for tax time. You can find out vital information such as what qualifies as a business and what counts as business income. You can also learn how to report gift cards or certificates and crypto-assets.

Chapter 1 explains what activities count towards farming income. It also has specific information on what are not considered farming activities, such as raising animals to be sold as pets.

This section of the guide lays out how to report your self-employment income. It provides information on when you must begin reporting your income and deducting expenses.

Additional important information in this chapter includes the following:

• Dates to remember, such as installment payment dates, balance owing dates and filing deadlines.
• Reporting methods and who can use the accrual method or cash method.
• Suggestions for keeping business records and what records you need.
• Information about installment payments, which some self-employed individuals may have to pay.

Chapter 1 also provides details about employment insurance premiums and registering for GST/HST. If your business earns above $30,000 in a calendar quarter or a year, you are generally required to register for GST/HST. If you are making less than or equal to $30,000, you do not have to register for GST/HST.

Daycare owners who provide care in their home to children under the age of 14 for less than 24 hours per day are usually exempt from GST/HST.

Chapter 2: Income

This chapter covers reporting your income and how to fill out the forms for a fiscal period. In Chapter 2, you learn which form to complete if you’re a sole proprietor. This depends on whether your income is from business or a profession, fishing or farming. You’ll also get guidance for partnerships on which forms to fill in.

Next, Chapter 2 advises how to fill in:

Part 1: Identification

This section includes your CRA account number and industry codes. This is also where you fill in your partnership business number (if you have one) and your Social Insurance Number. Finally, if you have a tax shelter identification number, fill it in here.

Part 2: Internet business activities

Fill out this section if your business earns business income from web pages or websites. For example, if you sell goods online, enable online booking, or sell advertising on your sites, please complete Part 2.

Part 3: Income

This is filled out if you have business income or professional income. Part 3A is only filled out for business income. Part 3B is filled out if you have professional income. If you have both business and professional income, you fill in a separate Form T2125 for each. Part 3 then goes into gross income, including gross business or professional income. It also discusses cost of goods sold, and farming and fishing income.

Chapter 3: Expenses

This chapter covers common expenses that can be claimed or deducted. You can often claim or deduct expenses you incur so you can earn income. These include expenses you have paid or will pay.

Chapter 3 defines current and capital expenses.

Part 4: Net income (or loss) before adjustment

Part 4 details which expenses you can deduct. Deductions include mortgage interest, business licence fees, and property taxes. They also include professional fees, office expenses, repairs, and maintenance. Finally, they include some passenger vehicle costs, such as leasing costs and motor vehicle expenses.

Part 4 also explains that you can use input tax credits for GST and HST if applicable. If you are claiming motor vehicle expenses, this section outlines which records you must keep.

Part 5: Your net income (or loss)

Part 5 includes a line for entering business-use-of-home expenses. It also describes the details you need to provide about partners if you are part of a partnership.

Chapter 4: Capital Cost Allowance (CCA)

This chapter explains the capital cost allowance (CCA). It gives examples, including CCA on equipment and building alterations. It also advises how much CCA you can claim and how to calculate it, including the proceeds of dispositions.

Chapter 4 defines CCA (depreciation) and the classes of depreciable property. Buildings may belong to Class 1, 3 or 6 depending on the materials in the building and the date of purchase. Other property belongs in different classes, depending on the type of property it is.

Finally, Chapter 4 outlines the rules for special situations. Special situations include personal use of property, grants and capital gains.

Chapter 5: Losses

This chapter covers losses:

• Farm losses, including non-deductible and fully deductible farm losses
• Fishing losses
• Non-capital losses from other types of business

Chapter 6: Capital gains

This chapter covers capital gains for people who farm or fish. (General capital gains rules are covered in Guide T4037, Capital Gains.)

Such capital gains include disposing of farmland that includes your personal residence. Chapter 6 also explains how to calculate capital gains and other special capital gains rules.

If you sold property that you owned before 1972, there are special rules on calculating capital gains. This is because you didn’t have to pay tax on capital gains before 1972. In this case, use Form T1105.