T2125 Tax Form Guide: Declare income and expenses from a business or profession
What is the T2125 Form?
The T2125 form, 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 calendar year. A T2125 form is a schedule that goes along with your individual income tax return (filed in April every year), and it lists income, and expenses where taxpayers operate certain types of businesses.
It is common for many individuals not to realize they may actually need to complete a T2125 with their individual income tax returns. At times, people may not understand they are not required to be officially registered as a business in Canada, in order for the CRA to consider them to be running a ‘business’ for tax-purposes, if that business is a sole proprietorship. (If you need to register or incorporate your business in Canada, Contact Kalfa Law to help guide you) .
Why does the CRA require a T2125 Form?
The CRA primarily references the form when assessing the aggregate value of business income earned by a taxpayer in a given year and to determine the available losses for carry-forward or carry-back. The CRA also uses these forms to determine the allowable capital cost deductions for capital outlays incurred to produce income for that tax year.
Where can I find the T2125 Form?
You can find the CRA form here: Form T2125, Statement of Business or Professional Activities
What does T2125 look like?
T2125 is a six-page document from the CRA, the first page of the fillable version looks as follows:
Where can I learn more about the T2125 Form?
For more information on how to fill out Form T2125, go to guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Who is the T2125 tax form designed for?
The Statement of Business or Professional Activities is used to calculate your business or professional income as a self-employed person. You should complete a T1215 if you are the only person in the business (sole proprietorship) or if you are in business with one to five other people (partnership).
What can I do on the T2125 form?
It is used to report any and all business income. It is designed to help you calculate your gross and net income after deducting all your business expenses, such as advertising, meals and entertainment, license and membership fees, rent, home office and motor vehicle expenses, to name a few.
It is not unusual for people to have both employment and self-employment (business) income. You may have made money freelancing on the side, money from a hobby, or money from selling a few things online. Even if you have not officially registered a business with the provincial or federal governments, you may still need to complete Form T2125 when filing your T1 individual income tax return, if you have any business income at all, including income from other countries. Revenue from sales outside of Canada must also be included. Products and services sold to individuals and companies in other countries count as business income.
Note that in addition to monetary payments received for your labour, or the goods or services you provide, business income also includes barter payments or payments received in alternate forms of currency such as Bitcoin or Litecoin.
Who needs to complete a T2125 with their individual income tax return?
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 (individual income tax return). If you run an incorporated business, you should file a T2 to report your income instead. The CRA requires all resident taxpayers who generate business income or losses in a given calendar year to complete and submit a separate T2125 for each respective source of business income.
Business income is any income earned outside of regular employment (or in addition to it). You can earn business income through self-employment, freelancing on the side, or even selling things online for fun. You must report business income even if you have not registered as a business, and even if you also earned employment income that year. Anyone who has business income of any kind is required to complete and file a T2125, with their individual income tax return.
Even someone who partakes in an ‘adventure or concern in the nature of trade’ must complete a Form T2125. For example, if a taxpayer starts making jewelry and selling it casually, that taxpayer must complete a T2125 to record and report the income earned from their “business,” even if the taxpayer has an inconsistent source of income and may actually be incurring a loss, instead of turning a profit. Taxpayers who did not earn any Canadian income as a part of their business income may still need to complete a T2125 with their individual income tax returns and claim a lost against other income.
What if I have Different Sources of Income?
For each source of business income earned in a given taxation year, the taxpayer must complete a separate T2125 form. Even if you operate in the same field or have the same type of revenue, if there are different business entities earning the income, there must be a separate Form T2125 completed for each. Simply put, if you have more than one business, for example, if you run a web design practice by day and an event promotion company by night, you need to complete a separate T2125 for each business.
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.
It is beneficial to recall, the law does not consider sole proprietorships or partnerships to be individual legal entities, so they are not taxed as such. Instead, sole proprietors and partners report their income on their individual income tax return.
This question can get tricky if you are working for someone under a contract and are not sure whether you are 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
- Financial risk
- Opportunity for profit
If your employer sets your hours of work, decides when and where you have to work, controls how your work is completed, sets your salary and supervises you, you are an employee, and you should not use T2125 to report your income.
If you control your own 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 incur a profit or a loss, you are a sole proprietor or partner, and you should use T2125.
How do I complete a T2125?
The T2125 form is designed to lead you through the process of calculating your “true” business income, in that, what is left when you have taken away your business expenses from the original (gross) amount you made. The point of the T2125 is to take all of the business income you earned and subtract all of your relevant business expenses, in order to come up with your net business income (or loss).
What is Business Income vs Professional Income?
You have business income when you do an activity for profit. It includes selling a product and providing a service. Business income includes sales, commissions or fees. You may or may not get a T-slip indicating that income.
It is the same as business income, except that you are paid as a member of an officially recognized profession that has a governing body (i.e. engineer, health professional, lawyer, accountant, etc)
Once you have recorded your business and/or professional income, you would then need to calculate and report any relevant business expenses. A few examples of these include, but are not limited to:
The cost of goods sold: This includes any inventory costs, returns, allowances, and discounts, wages paid to employees, any money paid to subcontractors, and any other purchases directly associated with selling 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 utilized for car insurance, maintenance or repair, and money spent on home insurance, mortgage, utilities, etc.
Your capital cost allowance: The equipment, furniture, tools and buildings used while operating your business depreciate over time. You can claim some of that depreciation on your taxes using the capital cost allowance.
T2125 filing deadline
T1 tax returns for self-employed individuals (including form T2125) must be filed by June 15th. However, most tax professionals would recommend individuals file their tax returns before the regular April 30th deadline, as you will be charged interest on any taxes you owe starting April 30th.
Whether you’re starting or growing your business, or you need assistance in fighting for your interests against the CRA – We’re Here to Help TM . Call Kalfa Law and one of our lawyers will be happy to discuss with you.
– Baber Rahim, J.D. Candidate and Tax Clerk
© Kalfa Law 2020