How to Complete Form T2125 for a Sole Proprietor

Allan Madan, CA
 Dec 6, 2013
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With tax season rapidly approaching everyone wants to know the most efficient way to complete their taxes. While getting taxes done quickly is beneficial to most, you could miss out on important savings that may be available. Through this quick tax tutorial designed for business owners, one can expect to learn which form to complete and what benefits it offers an owner of their own business. Please download the accompanying slides.

Basic information about the T2125 form

Do you own your own business?

The Statement of business or professional activity form must be completed and filed by June 15 each year.

   Who must complete the T2125 form?
    a.) Sole proprietor
    b.) Partner in a partnership
    c.) Business person
    d.) A professional

Business and Professional Income

Business income that is realized during the normal course of one’s business that generates a profit must be declared in part 1 of the form. This includes:
a.) Sales
b.) Commissions
c.) Fees

Professional income includes all fees received for goods and services provided, whether you receive money or intend to receive it in the near future. As a professional your income will include Work-in-Process (WIP). If you have professional fees they must be included under part two of the T2125 form.

It is important to note that you cannot include business and professional income on the same form. Separate T2125 must be filled out if your business has both forms of income

Expenses

Entertaining clients can be 50% written off

What are my expenses and how do I calculate them? Just like in the income statement Part 5 will have a list of expenses the business might have incurred during the fiscal year. Examples of some expenses that you can expect to deduct are:
a.) Advertising
b.) Meals/entertainment
c.) Insurance
d.) Motor vehicle expenses
e.) Capital cost Allowance (CCA)
f.) Others

Deducting expenses and costs of goods sold from business or professional income, can determine net income for the year. It is important not to copy expenses directly from your company’s income statement. The format may look similar but CRA has different ways of calculating certain expenses.

Business-Use-of-Home Expense

If your business is run out of your home you are entitled to deduct expenses off income. To qualify you must meet one of the following conditions: a.) House is primary place of business
b.) Space used is only for purposes of earning business income, and is used on a regular basis to meet clients, customers, or patients.

If you meet these criteria then you can deduct part of the maintenance costs.

Example: Assume Jane is self employed, works from home, and wants to complete her business tax return. Jane works out of her home from 9:00 am to 7:00 pm (10 out of 24 hours). The business uses 30 square meters out of the 100 square meters in the house. Annual house expenses are $6,000.

Calculation’s as follows:

10/24 hours x 30/100 metres x $6,000 expenses = $750

If the business operates 5 days a week then:

750 x 5/7 = $535.71

Jane can deduct up to $535.71 off her income. This amount will be deducted in Part 6 right before calculating net income for tax purposes. On slide 10 you can see the amount we have deducted for the business use of home expenses for Jane.

Capital Cost Allowance

What is CCA? When acquiring depreciable property such as building furniture and equipment you cannot deduct the costs off net income. These properties become obsolete over time allowing you to deduct the costs over a period of time.

CCA rates allow you to see how much each depreciable property costs you can deduct each year. For a list of CCA rates, check out classes of depreciable property on CRA’s website. On slides 7 and 8 of the power point attachment, examples on potential CCA applications a business may encounter this year are provided.

Motor Vehicle Expense

As an owner of your own business you may want to know, “Can I deduct my car expenses?” The answer is yes. Your deduction is limited to the business uses of the vehicle. Therefore if you drive 50,000 km on the car during the year and 30,000 km was for business use, 60% of your car expenses can be deducted.

Do you use your car for business?

Car expenses include:
a. Gas and oil
b. Interest
c. Insurance
d. Licence and registration
e. Maintenance
f. Leasing (if applicable)

If you look at slide 9 it will give you an example on how to properly complete the motor vehicle expense section on the T2125 form.

Conclusion

Through this tutorial designed for self-employed business owners, you have learned how to complete the T2125 form by yourself. Being your own manager allows you to take advantage of tax savings such as the home office deduction and motor vehicle expenses. The power point presentation provided will give you a step by step process on how to complete each section. If you have any further questions on how to complete the T2125 form either speak to a CRA representative or read the T2125 official guide. Also check out this the differences between sole proprietors versus a corporation and how you could save more taxes.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 17

  1. Hello, I recently started driving with Uber and was wondering if I would be able to deduct any expenses for that. Would I have to register myself as a business to make deductions?

    1. Hi Steve,

      You do not need to register your business with the CRA to claim deductions from income that you earned as an Uber driver. Fill out form T2125 (Statement of Business Activities) and report your income and expenses on this form. Attach this form to your personal tax return.

  2. Hi, I am Uber driver, I have claimed all expenses fuel, insurance, repairs, can I also claim depreciation on my vehicle as deductible expenses from Uber income ?

  3. Good day!

    I am planning to sell some stuff on Amazon in Canada. Amazon doesn’t require to be registered as a corporation. My sales will definitely be less than 30K per year. The question is, should I register myself as a sole proprietorship in Ontario or I can do it without being registered and then claim my income under T2125?

    Thank you very much for the help.

  4. Hi – what is considered ‘Business Taxes’ that are deductible on line 8760 of T2125? I was thinking these were the taxes I paid on my income from the business the previous year? Is that correct?

  5. Hi,
    I have T4 income as well as I drive uber eats, I am not sure how do I file my tax return? As you mentioned earlier I don’t see this form T2125 in my tax filling software. I am using GenuTax software from CRA website.
    Please advise…

    Thank You!.

  6. Hey, I worked online with a tutoring company (private contractor). Do I list this income, do I list this as commission, professional or other type of business? on a T2125? Also, should I fill out the business statement form as well?

  7. 1. Do I report this income on my T2125 on my T1? Does it make a difference that I am selling on the US Amazon website? Do I have to pay sales tax in the US?

    2. I can claim home expenses for my amazon business? I don’t have a business number, do I need one?

    3. Most of my income and expenses are in USD like Sales, Advertising, COGS etc.. When I report the income and expenses on my T2125, I convert to CAD I am assuming?

    4. Since I am under 30K in sales, I don’t pay sales tax through Canada?

  8. Hello,

    I am here in Canada and started selling on Amazon US in November 2018 as a Sole Proprietor, so I have 2 months of income under 30K. I have several questions below:

    1. Do I report this income on my T2125 on my T1? Does it make a difference that I am selling on the US Amazon website? Do I have to pay sales tax in the US?

    2. I can claim home expenses for my amazon business? I don’t have a business number, do I need one?

    3. Most of my income and expenses are in USD like Sales, Advertising, COGS etc.. When I report the income and expenses on my T2125, I convert to CAD I am assuming?

    4. Since I am under 30K in sales, I don’t pay sales tax through Canada?

    1. Hi Gurjit,

      -Report all income from self-employment on form T2125 if you are a sole proprietor (i.e. not an incorporated business). This includes sales made to US customers through Amazon.com
      -You may have to pay sales tax in the US if you have nexus in the US. An Amazon Fulfillment Center through which you distribute goods can create nexus in a particular state.
      -Report all income and expenses on form T2125 in Canadian dollars. Amounts in US dollars should be converted into Canadian dollars by using the average foreign exchange rate for the year.
      -Since you total sales are below $30,000, you do not have to register for GST/HST and you do not have to charge GST/HST to Canadian customers.

  9. Hi,

    I am a sole proprieter of a small food service. I hired an employee last year. I filed a T4 for the employee. I understand I can deduct wages (income, CPP, and EI) on the T2125 (Line 9060), however, where do I claim the income tax withheld and submitted for the employee?

    1. Hi Paul,
      Do not report the income tax withheld and employee portion of CPP and EI. Instead, report the gross wages plus the employer portion of CPP and EI on form T2125, salaries/wages.

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