Canadians are taxable on a number of categories of income and a set of specifically designated types of property. Although the Income Tax Act makes income of any kind taxable, the courts have been hesitant to look beyond the listed categories when imposing income tax. The categories include salaries, wages, business income, and property income. Capital gains are taxable, but they are not considered income, which is why they were tax-free until 1972.
When a Canadian taxpayer earns business income or income from a profession, they must, in addition to reporting and paying tax on their profits, also complete a Form T2125 for each of their business or professional activities.
Who needs to file Form T2125?
The answer to this question begins by answering another: What is a business? The general definition is anything that occupies a person’s time and efforts in pursuit of profit. There doesn’t need to be a profit, and where you suffer a loss, you’re able to set off the loss against other income in the same year (or carry this loss back three years or forward 20 years).
Where a personal element is present in the business activity, an additional test applies. The business has to have a reasonable expectation of profit; otherwise, the losses are not deductible, and the income is not taxable. The Canada Revenue Agency sometimes takes the position that business losses result from non-business-related activity and that all non-employment income is generated from business activity. Reach out to us right away if this has happened to you.
Reporting Business or Professional Income and Expenses
Form T2125 is part of your reporting requirements, though you can also use other types of financial statements. It provides important information to the taxman that allows them to determine whether you are likely reporting your income correctly (and to determine whether you should be audited).
The form also helps you report your income and expenses for tax purposes. The information you must provide is relatively lengthy. The first section is used to identify you and your business or professional activities.
Part 1 of the form deals with business income; if you have professional income, you must fill out Part 2. Part 3 requires you to set out your gross business or professional income, which includes the inclusion of any reserves taken in the preceding tax year.
Parts 4, 5, 6, 7, and 8 allow you to deduct the cost of goods, expenses, and make certain other adjustments to determine your net income (there are a total of 19 parts, some or all of which may also apply to your circumstances). Most of your deductions will be expenses that are reported in Part 5. Expenses include items such as office expenses, supplies, legal fees, accounting fees, interest payments, insurance costs, and meal and entertainment expenses (this is not a complete list of allowable expenses).
Make sure to either fill out this form or provide consistent and accurate financial statements as part of your return to avoid the headache of having to deal with a CRA dispute. It is always best to have a tax professional assist you in preparing your financial statements to avoid unintended mistakes that could trigger an expensive audit.
Common Errors and Tips for Accurate Filing
Mistakes on this form are common and can lead to processing delays, audits, or incorrect assessments. Understanding where errors frequently occur and how to avoid them can improve the accuracy of your returns and reduce your financial risks.
1. Misclassifying Income or Expenses
One of the most frequent errors is entering amounts in the wrong categories. For example, some filers incorrectly report capital expenditures as current expenses. Always consult CRA definitions or a professional when allocating costs to ensure proper classification.
2. Omitting Business Use of Home or Vehicle Expenses
Eligible home office and vehicle expenses are often overlooked or underreported. These deductions require detailed recordkeeping, including square footage calculations and mileage logs. Failing to include them can result in paying more tax than you need to.
3. Neglecting to Separate Personal and Business Expenses
CRA expects a clear separation between personal and business costs. Combining these can skew your return and may trigger further scrutiny. Maintain distinct accounts and document the business portion of mixed-use items with reasonable calculations.
4. Using Estimates Instead of Actual Records
Rounded numbers or estimates are a red flag. All entries should be backed by invoices, receipts, or logs. Maintain source documents for six years in case the CRA requests them.
5. Inconsistent Information Across Returns
Information on Form T2125 must align with other areas of your return, such as reported GST/HST collected or partnership allocations. Inconsistencies often lead to reassessments or requests for review.
Tips for Accurate Filing:
- Use accounting software or a qualified tax professional to streamline reporting.
- Double-check calculations, especially for capital cost allowance (CCA) and expense totals.
- Review CRA guides and industry-specific benchmarks for reasonableness.
- File on time to avoid penalties, even if payment is not yet made.
By avoiding common pitfalls and following sound recordkeeping practices, you can improve the accuracy of your T2125 filings and minimize the risk of post-filing complications.
Where to Find Form T2125, Submission Methods & Deadlines
Form T2125 – Statement of Business or Professional Activities, is available through multiple channels. You can download it directly from the Canada Revenue Agency (CRA) website, access it through certified tax preparation software, or retrieve it via My Account or My Business Account if you’re registered with the CRA’s online services.
Once completed, Form T2125 must be filed as part of your personal income tax return (T1). If you use tax software that supports NETFILE, the form is automatically submitted with your return. Alternatively, you can file by mail, ensuring all relevant documentation is included in your package.
Deadlines are aligned with personal income tax return due dates. For self-employed individuals, the filing deadline is typically June 15. However, any balance owing is due by April 30. Late filing can result in penalties and interest, so it’s important to meet both timelines.
Related Forms and Additional Tax Considerations
When completing Form T2125, it’s important to account for additional tax obligations and supporting forms that may apply based on the nature and scale of your operations.
If you’re registered for the GST/HST, ensure you’re also tracking and filing your GST34 or RC159 returns, as required. For businesses with employees, payroll-related responsibilities such as T4 summaries and remittances to the CRA must be managed in parallel.
Certain sectors, such as construction, transportation, or digital services, may also trigger reporting requirements through industry-specific forms or deductions.
As experienced and licensed CPA tax consultants, we help our clients handle all tax and accounting issues. Give us a call today at 1 844 340 5771 to schedule an assessment.
Case Study
Instead of owing significant amount of taxes, Sam reduced it to zero. I highly recommend to hire Sam for this type of audits and any CRA problem.
