When you’re filing your tax return as a self-employed individual, the process is much different than that for those who are traditionally employed. This is because you don’t pay income taxes throughout the year and have to pay your taxes by the due date during tax season. While this can be difficult to calculate, form T2125 can help you calculate your net business income. Even if you choose to use tax software to file your taxes, these forms will be used. 

Where to find Form T2125?

If you’re self-employed, then your taxes are a little more tedious than for those who are employed. This is because your taxes aren’t paid throughout the year, so you have to claim how much self-employment income you earned as well as what expenses you incurred related to your business. This is done with form T2125 Statement of Business or Professional Activities. 

What is form T2125? The T2125 form is a combination of the old forms T2124 Statement of Business Activities and T2032 Statement of Professional Activities. It’s used to report business or professional income expenses. However, you do have to get it first to file this form. You can do this by downloading the printable or fillable version from the CRA’s website. 

How to Fill it Out

This form can be difficult to complete. For this reason, there’s actually a guide available to help you fill it out properly. This guide is called the T4002 Self-Employed Business, Professional, Commission, Farming and Fishing Income. It helps you complete the form correctly and calculate your business income, including your total gross business income earned and your final net income, for the tax year.

Depending on whether or not you earn business income, professional income, or business and professional income, you may have to fill out more than one T2125. Either way, though, when you fill out this form, you’re including all of your business income and expenses which means that having a copy of all of your financial statements can make this process a lot easier. 

Identification

When you begin to fill out this form, you do so by starting out with your identification and other basic information. This is the 15-digit program account number that was given to you by the CRA (Canada Revenue Agency), also referred to as your business number. You’ll also want to include your business name. 

You have to enter the period of time your business year covered as well as the industry code that best describes your activity. However, if your business covers more than one activity, then you choose the code that covers the main activity of the business. 

While you’re filling out your identifying information for your business, you may also need to enter your tax shelter identification number if you have one. If you aren’t sure where to find it, it can be found on your T5013 slip if you’re in a business partnership. You can also find the partnership number on the same slip as long as you have a business owned by a partner. 

How to Claim on T2125

Once you’ve entered all of your identifying information, then it’s time to start claiming your income. You’ll start in part 2, which includes documenting any website or webpage income that you earn, also referred to as internet business activities.

It’s important to note that this doesn’t just include income from items that you sell, though. It also includes income from affiliate programs, static advertisements, advertising costs and traffic programs. Essentially anything that is used for business purposes. 

Part 3 is where you add in your business income if you have any. This includes sales, commissions and fees in gross amounts. These should be included whether the income you received was money or goods that have a bartering or monetary value.

Part 3A is where you include the total with GST/HST (Goods and Services Tax/Harmonized Sales Tax), and part 3B is where you include any GST/HST,  provincial sales tax, returns, allowances, discounts and GST/HST adjustments. There are also some more parts that may be relevant to you that you need to fill out. 

Professional Income

If you don’t have business income, then you should skip this section and fill in the professional income sections. While business income and professional income are similar, professional income means that you get paid as a member of a fully recognized profession that has a governing body.

There are many different sections to this part, and not all of them may be relative to you. You should only fill out the ones that are relative. These different sections include:

• Professional Fees
• Gross Business or Professional Income
• Cost of Goods Sold and Gross Profit
• Opening and Closing Inventory
• Purchases During the Year
• Direct Wage Costs
• Subcontracts
• Gross Profit ( Gross Income Generated)

After this, the sections on farming income and fishing income come next. 

T2125 Expenses

Once you have completed the income sections of the form, then it’s time to start calculating all of the expenses, also known as business costs, in the expenses section. Depending on the type of business expenses that you’re calculating, there are current expenses as well as capital expenses (funds used to buy capital property). Let’s go over the differences and how to claim expenses. 

Current Expenses

When it comes to current expenses, one of the defining features is that it’s an expense that recurs after a short period of time. It can also be an expense that brings something, such as a property, back to its original condition. This includes an integral part of the property, which can also be a current expense ( electrical or plumbing). 

The cost of the expense doesn’t factor into whether or not the expense is considered current or capital. A current expense, however, is also considered for things like the upkeep of the business property as well as if a repair was made for a sale, but the repair would have had to be done anyway. 

Capital Expenses

Capital expenses are generally expenses that expose themselves beyond their original condition and/or give the property a lasting benefit. Also, a separate asset that can be purchased for the business is considered a capital expense. 

While the cost of the expense usually doesn’t make a big difference, if the cost is much larger than the cost of the business property, then it’s likely, but not always, a capital expense. Plus, any repairs that are made in preparation for selling the property are also a capital expense.

Raw Expenses 

On line 8300 of this form is where you enter your opening inventory and closing inventory amounts in the expenses section. This amount refers to things like raw materials, goods in process and finished goods.  

Reporting Methods For Tax Purposes

If you’re self-employed, there are a two different accounting methods that you can use to report your income. However, how you earn your money with self employment will determine which methods you can use. If you’re a farmer, fisher or self-employmed commission agent, then you can use either of these methods. However, any other form of self-employment, small business owners and other self-employed individuals must use the accrual method. 

Accrual Method

When you use this method, you report the income you earned in the fiscal period where you earned it. It doesn’t matter if they were paid in this fiscal period or not. The same is for when you deduct expenses, you must claim them for the fiscal period you incur them, not when you paid them. 

When you’re using this method, you have to calculte the values of all of your inventory. If you’re a farmer or a fisher it includes everything such as livestock, crops, feed, fertilizers and all other necessary supplies. This inventory list will then be calcuted for the end of the fiscal period. However, it’s important to not that there are 3 different methods that you can use to value your inventory. These include:

• Fair Market Value: This is the amount you would purchase or sell the item for. 
• Cost or FMV: For this you would choose the value which is less. 
• Unit Price Base: This is for farmers valuing livestock.

It’s important to keep in mind though that one you pick a method to value your inventory you should stick to the same one. This is becasue the value you have at the end of the previous year will be the value for the start of the next year.. 

When you use this method, it’s important to note that it’s only for your business income. If you incurred any other income or are looking to claim other assets not related to your business, these will be done on a separate form. 

Cash Method

Using the cash method is a little different than the accrual method. For this method, you report income in the fiscal period in which it is receive and any expenses in the period where they’re paid. For this method, you also don’t include any inventory when you’re finding your income for the fiscal period. That said you may be the exception to this so it’s important to make sure you fill it our properly. A tax professional can help you with this. 

Other Expenses That You Claim

When it comes to expenses, there are actually quite a few deductible expenses that you can claim on your taxes as a self-employed business owner or sole proprietor. These include:

• Net Income Loss Before Adjustments
• Advertising Expenses
• Meals and Entertainment Expenses
• Bad Debts
• Insurance Costs
• Interest Charges and Bank Charges
• Business Taxes, Licenses and Memberships
• Office Expenses and Home Expenses
• Office Stationary and Supplies
• Professional Fees
• Management and Administration Fees
• Rental Costs and Rental Income
• Repairs and Maintenance Costs
• Salary, Benefits and Wages Paid
• Crew Shares
• Property Taxes
• Travel Expenses
• Utilities
• Fuel Costs
• Motor Vehicle Expenses (including passenger vehicles)
• Capital Cost Allowance (CCA)
• Business Use of Vehicle (includes car insurance)
• General Operating Expenses (Operating Costs)
• Mortgage interest
• If you own equipment for the business
• Net Partnership Income
• Net Partnership Income Loss
• Capital Contributions
• Legal Fees

Depending on your profession, there could be other business expenses that you could claim as well. If you’re a fisherman or a farmer, there are specific expenses that you’re allowed to claim as well. If you own multiple businesses, your expenses could also be much different for everyone. Also, there’s no maximum amount you can claim for most expenses you can can claim the full cost which can significantly impact your total tax cost. 

The Difference Between T4A and T2125

Whether or not you receive a T4A or have to fill out a T2125 depends on how you earn your income. With a T4A, you can claim any self-employed commissions that you’ve earned, as well as RESP educational assistance payments. Most who receive T4A’s earn regular employment income as well as commissions. However, the commissions aren’t taxed, so they will need to be calculated when you file. 

With a T2125, this is usually filled out when you earn income from your business or a sole proprietorship. While commission earnings are also claimed on this form, your employment income is usually already calculated, so not as many calculations are needed. Also, the T2125 is a long form that ranges from 6 to 9 pages. A T4A is just one page.