Being self-employed gives you countless gifts — the freedom to work for yourself, the possibility of increased income, and a way to express your creativity. But it also comes with certain not-so-exciting responsibilities — including accurately filling out your tax forms.

One of the most important tax forms for self-employed individuals in Canada is the T2125. This form allows you to report your business income and expenses, which can help you maximize deductions and reduce your overall tax burden.

In this guide, we’ll:

• Go through each step of completing the T2125 form accurately so you can confidently submit it to the Canadian Revenue Agency (CRA).
• Learn the essentials of what you can and can't claim on the T2125.
• Cover tools and software to help you track your expenses more easily.

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What is the T2125 tax form in Canada?

The T2125 form, also known as the "Statement of Business or Professional Activities," is a tax form used by self-employed individuals in Canada to report their professional or business income and expenses. 

Filing taxes as a self-employed individual requires precision to avoid missing out on valuable deductions. Accuracy is key to maximizing your benefits while complying with tax regulations.

Who files the T2125?

• Self-employed individuals: People who are sole proprietors or partners in a partnership must file the T2125 form.
• Sole proprietors: People who run a business independently without partners. This category includes freelancers, independent contractors, consultants, and other self-employed individuals.
• Unincorporated business: A business with revenue under $30,000 per year that is not registered as a corporation.

Business vs. professional income

The T2125 covers both professional and business expenses. How can you tell the difference? Here are some criteria:

• Business income is derived from activities that are not considered a profession, such as farming, fishing, or operating a small business.
• Professional income is earned by those who provide specialized services that require specific education or training, such as doctors, lawyers, or accountants.

What to know before filling out the T2125

Content and basic sections:

• Identification (basic business information)
• Income reporting
• Cost of goods sold (if applicable)
• Gross profit calculation
• Business expenses

One for each business

• If you have more than one self-employed business, you must complete a separate T2125 form for each endeavour. This also applies if you are both a sole proprietor and a partner in a partnership.
• Each business must be reported separately, even if they are similar in nature. This allows the CRA to assess each business's revenue and expenses accurately.

Keeping accurate records

• Keep detailed records of all financial transactions related to your self-employed business to ensure you can accurately report your income and expenses on the T2125 form.
• This includes receipts, invoices, bank statements, and any other relevant documents. These records will be necessary in case of an audit by the CRA.

Deadlines for filing the T2125 form and associated tax returns

• Since you or your spouse are self-employed, you have until June 15th to file your form.
• However, note that any taxes owed must also be paid by April 30th to avoid penalties and interest.

A step-by-step guide to completing the T2125 form

Now that you understand what the T2125 form is and who needs to complete it, let's dive into how to fill it out accurately. Here is a step-by-step guide:

0. Gather all necessary information and documents

Before starting on your T2125 form, ensure you have all relevant information and documents. This includes things like:

• Your Name and SIN: The proprietor’s name and social insurance number. (The business income is tied to your SIN for a sole proprietorship.)
• Business Name (or Professional Practice Name): The name under which you operate (if different from your personal name).
• Business Number (Program Account): If you have registered for a GST/HST account or other CRA program accounts, enter the 15-character Business Number here​. (This may be left blank if you are a new sole proprietor with no CRA program accounts.)
• Business Address: The physical location of your business (or your home address if home-based), including city and postal code.
• Main Product or Service: A brief description of the primary business activity (e.g., “freelance graphic design”, “retail sale of clothing”, “web consulting services”). This should align with the industry code you will choose.
• Industry Code: The six-digit NAICS code for your industry. The CRA instructs you to enter the code that best describes your main business activity​ — if your business spans multiple activities, choose the code for the primary activity (over 50% of your business). The NAICS code list is provided here​.
  
  • Example: A video game developer would use code 541515 for “video game design and development services” rather than a broader category​.
• Partnership Information: If your business is a partnership, indicate your percentage of the partnership (e.g., 50% if two equal partners) and the partnership’s business number (9 digits) if it has one​. You will also need to report each partner’s details later in the form. These fields are not applicable if you are a sole proprietor (no partners).

It is crucial to have accurate records of all this information to complete the T2125 form correctly.

1. Identification

The first part of the T2125 form requires you to provide personal information and business details.

• Provide personal info (Name, SIN).
• Business details (name, address, industry code).
• Clearly indicate your fiscal period (usually Jan 1 - Dec 31).

2. Internet business activities

In this form section, you'll provide information about your Internet business activities. This includes any income earned from online sales, web consulting services, and other digital products or services. You will need to describe each activity and its corresponding NAICS code.

• Description of Internet business activities (e.g. graphic design, clothing retail).
• List the number of websites generating income and main URLs (up to 5).
• Estimate the percentage of your income from internet activities (including crypto and gig economy platforms).
• Associated NAICS code for each activity.

3. Business or professional income

In this section, you will need to report all of the revenue earned by your business throughout the tax year.

• Report all gross income earned (sales, services, commissions), including GST/HST collected.
• Deduct returns, discounts, and sales taxes on a separate line to calculate net sales.

3. Cost of Goods Sold (for sole proprietorship)

If you are a sole proprietor and have cost of goods sold (COGS), you must fill out this section to deduct those costs from your business income.

• Record the opening inventory (previous year-end inventory), purchases, direct costs, and closing inventory.
• Calculate COGS: Opening Inventory + Purchases – Closing Inventory.

4. Business expenses & Capital Cost Allowance

This is where you will report all of the costs associated with running your business. Make sure to keep detailed records and receipts for all of these expenses.

• List all eligible business expenses (advertising, supplies, rent, utilities, insurance, salaries, vehicle expenses, etc.).
• Deduct only the business-use portion, excluding personal expenses.
• Meals and entertainment are only 50% deductible in most cases.
• Capital purchases (such as equipment) are claimed separately as Capital Cost Allowances (CCAs), not regular expenses.

If you plan to claim depreciation on assets like vehicles, equipment, or furniture, have a list of those assets with their capital cost, the UCC (undepreciated capital cost) at the beginning of the year, and details of any additions or disposals during the year. The T2125 form includes a CCA calculation worksheet (Area A), where this information is needed to compute your CCA claim.

5. Net income and adjustments

Here, you will need to calculate things like net income, gross revenue, and the amount of tax you owe for the year.

• Calculate net income: total income minus allowable expenses and CCA.
• Subtract business-use-of-home expenses (calculated separately, cannot create/increase loss).
• Report final net income (or loss) on your T1 return (lines 13500 for business, 13700 for professional, 13900 for commission income).

6. Supplementary information

The last section of the T2125 form is where you can provide any additional information or explanations about your business income and expenses. This can be helpful if you have any unusual circumstances or deductions to report.

• Complete only if relevant (partnership details, internet business income, home office calculation).
• Calculations, especially the home office percentage, should be clearly documented. Remember that home office deductions cannot create or increase a loss.

Typical business expenses you can claim on the T2125 form

Claiming a business expense on the T2125 means you can deduct it from your business income, reducing the amount of tax you owe. That's why it's vital to keep accurate records of all your business expenses so as to claim them correctly on your T2125 form. 

Common business expenses that you can claim include:

• Office supplies
• Advertising and promotion expenses
• Office supplies and expenses
• Home office expenses (if applicable)
• Vehicle expenses (if applicable)
• Business insurance premiums
• Salaries and wages paid to employees
• Professional fees, such as accounting or legal fees
• Rent or lease payments for business premises or equipment
• Advertising and marketing costs
• Vehicle expenses (if used for business purposes)
• Travel expenses related to your business
• Professional fees (such as legal or accounting fees)
• Rent or lease payments for a business space

Many people fall into the trap of not claiming all the expenses they are entitled to, so make sure you keep careful records and consult with a tax professional if needed.

Tips for maximizing deductions on the T2125 form

Keep detailed records

• As mentioned before, it is crucial to keep accurate and organized records of all business expenses when completing the T2125 form.
• Record expenses throughout the year so that you can quickly and easily fill out the T2125 form when it comes time to file your taxes.  This includes keeping receipts, invoices, and other relevant documents proving the expense was related to your business.

Consider hiring a tax professional

• Filling out the T2125 form accurately can be challenging, especially if you are new to running a business.
• Hiring a tax professional who specializes in small businesses can help ensure that all eligible expenses are claimed correctly, maximizing deductions and minimizing potential errors that could lead to penalties or audits.The cost can range from a few hundred dollars to over a thousand, depending on the complexity of your file.
• There are some self-tax filing softwares that can provide you with different pricing options and guidance including TurboTax by Intuit, and WealthSimple Tax.

Separate personal and business expenses

• It is crucial to keep your personal and business expenses separate, both in terms of finances and record-keeping.
• Mixing the two can make it challenging to accurately track and claim eligible deductions on the T2125 form.

Keep track of home office expenses

• If you run your business from a home office, you can claim some of your home-related expenses as business expenses on the T2125 form. This includes rent or mortgage payments, utilities, and maintenance costs.
• However, specific requirements must be met for these expenses to be eligible for deduction — keep this in mind as you archive your records.

Don't forget about start-up costs

• The T2125 form also allows for the claim of business expenses incurred during the start-up phase, including costs such as market research, advertising, and incorporation fees.
• Keeping all receipts and documentation related to these expenses is crucial, as they may be deductible in future tax years if not fully claimed in the current year.

Tools & software for tracking income and expenses

QuickBooks Self-Employed

QuickBooks Self-Employed is designed specifically for freelancers, contractors, and self-employed individuals. It offers features tailored for T2125 preparation, including:

• Automatic expense tracking and categorization
• Receipt scanning and storage
• Mileage tracking using GPS
• Invoice creation and sending
• Tax deduction maximization

Pricing:

• $20 per month

Zoho Expense

Zoho Expense provides comprehensive expense tracking capabilities suitable for self-employed individuals:

• Receipt scanning and automatic data extraction
• Mileage tracking with GPS
• Policy management for budgeting
• Credit card transaction matching
• Tax calculation and reporting
• Customer and project expense tracking

Pricing:

• Free plan available with basic features
• Standard plan: Billed monthly or annually per user (pricing not specified)
• Premium plan: Billed monthly or annually per user (pricing not specified)

Spendee

Spendee is a user-friendly expense tracker that can help self-employed individuals manage their finances:

• Bank account and credit card integration
• Expense categorization
• Budgeting tools
• Financial insights and reports

Pricing:

• Basic plan: Free
• Plus plan: $1.99 per month or $14.99 per year
• Premium plan: $2.99 per month or $22.99 per year

These tools can help streamline expense tracking and simplify T2125 preparation by automatically categorizing expenses, storing receipts, and generating reports needed for tax filing.

Lotly can help you run your business with peace of mind

Let's go over some of our key takeaways:

• Master each T2125 step so you don’t miss any claimable expenses. Accurately track everything from your gross income to the cost of goods sold and home office deductions.
• Separate personal and professional finances for maximum deductions. Detailed record-keeping and clean bookkeeping prevent errors and keep you audit-proof.
• Automate expense tracking with tools like QuickBooks or Zoho to simplify tax time. They handle receipt scanning, mileage logging, and generate real-time insights for smoother T2125 filing.

Running a business on your own can be tricky enough as it is — hopefully, this guide has made it easier for you to navigate the world of self-employment taxes and T2125 forms. Staying organized and on top of your finances is key to maximizing deductions and minimizing tax stress.

Best of luck with your business endeavors! If you ever need more financial assistance to expand your business, Lotly may have what you need.

Lotly works with over 50 lenders nationwide to find you fair, stable home equity-based loans and lines of credit that offer better rates than other business and personal loans. We aim to find the best financial product for you so you can focus on your business — book a free consultation today to see how we can help.

Frequently Asked Questions

How do I categorize my business expenses?

One way to categorize your business expenses is by using the Canada Revenue Agency's (CRA) categories, which include advertising and promotion, meals and entertainment, rent or lease payments, office supplies, etc. You can also create your own categories that align with your specific business needs.

Do I need to keep physical receipts for all my business expenses?

The CRA requires that you keep supporting documents for at least six years from the end of the tax year they relate to. This can include physical receipts as well as electronic copies. It's important to record all expenses accurately in case of a potential audit.

Can I claim home office deductions if I work from home?

Yes, you can claim certain home office expenses if you meet the CRA's eligibility criteria. This includes having a designated workspace in your home that is used regularly and exclusively for work purposes. Keep track of expenses related to this space, such as utilities and mortgage interest.

What are some common mistakes to avoid when filing self-employment taxes?

One common mistake is not keeping accurate records of income and expenses throughout the year. Doing so can lead to missed deductions or incorrect reporting on tax forms. It's also important to file your taxes on time and pay any amounts owing by the deadline to avoid penalties and interest charges.

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