T2125 Form in Canada: Tax Guide for Self-Employed Canadians

The T2125 form determines how much tax you’ll pay on self-employment income in Canada. Every freelancer, contractor, and business owner must master this eight-page document. Missing deductions or filing incorrectly could cost you thousands in unnecessary taxes and potential CRA penalties.

Let’s explore everything you need to know about this essential form.

What is the T2125 Form?

The T2125 is a Statement of Business or Professional Activities that calculates your self-employment profit or loss. You attach it to your T1 personal tax return when you earn income outside traditional employment; it’s never filed independently.

The form serves three critical functions for the Canada Revenue Agency. First, it tracks self-employment income from unincorporated businesses. Second, it allows legitimate business expense deductions. Third, it determines your net business income for tax calculation.

That said, your completed form calculations establish either tax refunds owed to you or additional amounts payable to the CRA.

Who Needs to File a T2125 Form?

You must file a T2125 if you control when, where, and how you work. This applies to sole proprietors, partnerships with five or fewer partners, and anyone earning non-employment income. Even hobby income requires you to report if the CRA views it as a business venture.

The determining factor isn’t your business structure but your working relationship. Common examples include:

• Contract workers who set their own hours need the form.
• Uber drivers and food delivery personnel file it.
• Professional service providers like lawyers and accountants use it for their practice income.

If you operate as part of a partnership, each partner must file their own T2125 showing their percentage of income and expenses.

However, there are specific situations that require alternative forms:

• If partnerships have more than five members, use form T5013 instead.
• If your business is incorporated, you’ll need to file a T2 corporate return rather than a T2125.

How Do I Determine If I’m Self-Employed or an Employee?

The key difference between being self-employed and being an employee is the level of control you have over your work.

The CRA applies four tests to determine self-employment status as follows:

Test	Self-employed	Employee
Control	Refuse assignments and set their own methods, schedules, and service delivery.	Must follow employer-established procedures, hours, and quality standards.
Ownership of Tools	Uses own equipment, software, and workspace	Uses tools, systems, and space provided by the employer.
Chance of Profit/Risk of Loss	Absorb losses from bad decisions or market conditions	Receive steady paychecks regardless of company performance.
Integration	Works independently and is not part of the company’s main operations.	Duties are part of the organization’s core activities and daily functions.

It’s important to note that your contract alone doesn’t decide your status. The CRA looks at what actually happens, not just the wording. If you work only for one client, follow their schedule, and use their tools, you may be considered an employee even if your contract says otherwise.

What’s the Difference Between Business Income and Professional Income?

Both business and professional income appear on the T2125, but you report them in different sections based on whether you belong to a regulated profession.

Business income comes from selling products or general services. This includes people such as a web designer, retail shop owner, or consultant who earns business income. Most self-employed Canadians fall into this category. You report business income in Part 3A of the T2125.

On the other hand, professional income applies to regulated professions only, such as lawyers, doctors, engineers, and accountants. You must hold an active membership in a provincial or territorial professional association or regulatory body. Report professional income in Part 3B of the T2125.

The distinction matters for form completion, not taxation, as both income types face identical tax treatment and rates.

How to Fill Out the T2125 Form: Step-by-Step Guide

The T2125 has nine parts, though not everyone completes all sections. Filling out the T2125 form accurately is important because it affects both your tax amount and your chance of being audited.

Below is a breakdown of how to complete each part of the form:

Part 1: Identification

Start by entering your legal name, nine-digit Social Insurance Number, business operating name, business address, and CRA Business Number if GST/HST registered. Your Social Insurance Number links this form to your T1 return.

Also, enter the industry code to classify your business type using six-digit NAICS codes. Find yours on Statistics Canada’s website.

Most people use December 31 as their fiscal year-end unless you operate a sole proprietorship with a non-calendar year-end.

Part 2: Internet Business Activities

Complete this section only if your websites generate income directly. For example. affiliate marketing, online course sales, and e-commerce require reporting. If your website doesn’t make money, like information-only websites, you can skip this section.

You need to list each revenue-generating URL separately and calculate the percentage of gross income from each web property. Payment processors like PayPal or Stripe provide transaction reports to support these calculations.

Part 3: Income Types and Cost of Goods Sold

This section captures all revenue streams and direct costs. It’s divided into two sections depending on the type of income you earn:

Section 3A: Business Income

Report gross sales, commissions, or fees before any deductions. Add GST/HST collected if you’re a registrant.

• If you sell services only, report your gross sales.
• If you sell products, calculate your cost of goods sold here; the difference between revenue and costs becomes your gross profit.

Section 3B: Professional Income

Licensed professionals report gross professional fees here. This includes all consultation income, retainers, and service fees, as well as any GST/HST collected.

Don’t deduct professional dues here; claim them later under operating expenses (Part 4).

Part 4: Net Income Before Adjustments

List operating expenses by category using CRA’s predetermined line items. Each expense must relate directly to earning business income. If an expense is partly personal (like your phone bill), you can only claim the business portion.

Deductible expenses must pass CRA’s three tests: incurred to earn income, reasonable in circumstances, and properly documented. Common deductible expenses on T2125 with specific line numbers:

Expense Category	Line Number	Examples	Special Rules
Advertising	8521	Online ads, print media, promotional materials	Must promote business
Meals and Entertainment	8523	Client meals, business entertainment	Only 50% deductible
Bad Debts	8590	Uncollectable customer accounts	Accrual method only
Insurance	8690	Liability, property, professional indemnity	Business coverage only
Interest	8710	Business loans, credit cards	Business portion only
Office Expenses	8810	Supplies, software, small equipment	Items under $500
Professional Fees	8860	Legal, accounting, consulting	Business-related only
Rent	8910	Office space, equipment rentals	Exclude home office
Salaries	9060	Employee wages, benefits	Include CPP/EI portions
Supplies	8811	Materials consumed in operations	Not for resale

Part 5: Your Net Income (Loss)

Subtract total expenses from gross profit to calculate net income.

• If the result is positive, it adds to your taxable income.
• If it’s a loss, you may be able to use it to reduce other income, but only if your business shows a real intent to make a profit.

For partnerships, adjust for your percentage share.

Part 6: Other Deductible Amounts

This section is for expenses that don’t fit into other categories. For example, management fees paid to related parties or international transaction fees for foreign sales qualify. Be careful not to claim the same expense in more than one section.

Part 7: Business-Use-of-Home Expenses

Home offices must serve as principal business places or regular client meeting spaces. To calculate the claim, divide the area of your workspace by the total area of your home, and only spaces used exclusively for business count.

Part 8: Partnership Details

If you’re in a partnership, list each partner’s name, SIN, and share of profit or loss. Make sure these details match your partnership agreement.

All partners must use the same fiscal year and reporting methods. If not, CRA may audit the entire partnership.

Part 9: Equity Details

This section covers your business loans and personal funds you’ve invested or withdrawn. It helps CRA understand how your business is financed.

Personal credit cards used for business create shareholder loans, so you should document these carefully to avoid benefit assessments. You can also deduct interest paid on money borrowed to invest in your business.

How to File Your T2125 Form

The T2125 accompanies your T1 personal tax return through three filing methods: NETFILE using certified tax software, EFILE through tax professionals, or paper filing mailed to your provincial tax centre.

NETFILE (online filing)

Electronic filing offers the fastest processing. This method provides instant confirmation receipts and processes within two weeks. The software incorporates the T2125 form, walking you through each section with prompts. It calculates totals and transfers amounts automatically.

EFILE (through tax professional)

An accountant or tax preparer completes your return, including the T2125, and submits it electronically using EFILE.

They know how to handle complex situations and can give you helpful advice for different business activities. This costs more than self-filing but provides expert review.

Paper filing (mail)

You can still use Paper filing, but it is slower. Processing takes 6-8 weeks, typically.

You can download and print the T2125 from the CRA website, complete it by hand or type into the PDF form, print your completed T1 return and attach the T2125.

Mail both documents to your regional tax centre. Please note that addresses vary by province and are listed on the CRA website.

When is the T2125 Form Due?

Self-employed individuals file by June 15, not the standard April 30 deadline. This extra time helps because calculating business income can take longer. However, any balance owing must be paid by April 30 to avoid interest charges starting May 1.

Late filing triggers automatic penalties of 5% of your balance owing plus 1% monthly for up to 12 months. If you’ve filed late before, these penalties can double. The CRA also charges interest on both the unpaid tax and accumulated penalties. (Source)

What Records Do I Need to Keep?

CRA requires six years of record retention from the tax year-end. You can store them electronically as long as you can reproduce them when needed. Using cloud storage is a good way to protect your files from computer problems.

Essential records to keep include:

• Sales invoices and contracts documenting income
• Purchase receipts with vendor details and GST numbers
• Bank statements showing payment flows
• Vehicle logbooks detailing business usage
• Home office calculations and supporting bills
• Asset purchase documents for CCA claims

Normally, you keep records for six years after filing your return. However, if you appeal or are reassessed, keep them until the issue is fully resolved. For capital property, keep records for six years after you sell or dispose of it. Even if you close your business, you still need to keep your records for the required period.

CRA may request records anytime within the limitation periods. So, make sure you’re able to provide them quickly, as missing documents risk expense denial and gross negligence penalties.

Four Common Mistakes to Avoid When Filing T2125

Here are the four most common mistakes you should avoid. Avoiding them is the best way to prevent problems before they start.

Mistake #1: Mixing Business with Personal Expenses

The CRA requires a clear separation between your business finances and your personal life. Claiming personal expenses, even accidentally, can undermine the credibility of all your deductions.

Mistake #2: The “I’ll Find the Receipt Later” Trap

During an audit, your claims are just claims until you back them up with proof. A deduction without a receipt is just a donation to the government you didn’t have to make.

Mistake #3: Simple Math, Big Problems

It might sound basic, but small calculation errors are a leading cause of adjustments by the CRA. Transposing two numbers in a total or misplacing a decimal point can change your tax liability significantly and flag your return for a closer look.

Mistake #4: Confusing Filing and Payment Deadlines

For the self-employed, there isn’t just one tax deadline to remember. Confusing them can lead to late-filing penalties.

Many business owners know their filing deadline is June 15th. However, they often forget that their tax payment deadline is still April 30th. Filing on time but paying late will result in interest charges on your outstanding balance.

The bottom line

T2125 mastery determines your self-employment tax burden. Every missed deduction costs real money. Each filing error risks CRA scrutiny. Understanding the form’s requirements protects your business income.

Stay organized from the start. Use digital tools to store receipts, keep clear logs for your vehicle and home office, and review your records every quarter to stay on top of your taxes.

FAQs about T2125 Form

Article Sources

• T2125 Tax Form: Declare Income and Expenses from a Business or Profession – turbotax.intuit.ca
• T2125: Comprehensive Guide and Insights – finally.com