Do You Need to Fill Out Form T2125 on Your Personal Income Tax Return?
The Answer Depends on Whether or Not You Have Business Income
Question: Do I have to fill out income tax form CRA T2125 on my T1 personal income tax return?
The T1 personal income tax return is the return that is used by all businesses that are not incorporated including professional businesses, which is why form CRA T2125, Statement of Business or Professional activities, is included in the personal income tax return package.
Not realizing you have to fill out form CRA T2125 is a common problem. Sometimes, people don't realize that you don't have to officially register a business in Canada to be running one in most provinces if that business is a sole proprietorship. (See Do You Need to Register Your Business Name in Canada?)
Here's what Form T2125 looks like.
Form CRA T2125 Records All Your Business Income...
The other thing that people often don't realize about form T2125 is that it is used to report any and all business income. It is not unusual for people to have both employment and self-employment (business) income. You may have made money freelancing on the side, money from a hobby, or money from selling a few things online. Even if you haven't registered a business, you still have to fill out Form T2125 when you're completing your T1 Canadian income tax return if you have any business income at all—and that includes income from other countries.
Note that in addition to monetary payments received for your labour, or the goods or services you provide, business income also includes barter payments or payments received in alternate forms of currency such as Bitcoin.
For example, suppose you are a painter and you agree to paint the office of a massage therapist in exchange for massage treatments. If you normally would have charged $1,000 for the job and the massage therapist provides services valued at $1,000 in exchange, then you must include the $1,000 in your business income. The value of the painting services you provide is the same as it would be if you received cash for the service.
Note that the barter service is also valued the same way from an expense perspective—the massage therapist can claim $1,000 worth of expenses in the form of repairs to his business premises, and you would be able to claim $1,000 in medical expenses.
Revenue from sales outside of Canada must also be included. Products and services sold to individuals and companies in other countries counts as business income.
Filling Out Form CRA T2125
The T2125 form is designed to lead you through the process of calculating your "true" business income—that is, what's left when you've taken away your business expenses from the original amount you made. Note that if you are engaged in several different business activities or have more than one business, you will need to fill out a separate form T2125 for each.
Throughout the form, if something doesn't apply to you, just leave it blank.
For instance, in the first section of the form (Identification), if your business is not a partnership, you will leave the space for partnership business number and for your percentage of the partnership blank. Do the same with the tax shelter identification number if you don't have one. (Remember, if you are declaring business income you have made "on the side," you are a sole proprietorship by default.)
Likewise with the internet business activities section, if none of your business income is derived from these sorts of activities.
Business and Professional Income
On page 2 of the form, you will enter your gross business income on the appropriate line in either the business income box or the professional income box, including GST/HST collected or collectible. Then, if your business collects GST/HST (i.e., you are not a small supplier), follow the instructions on the form regarding GST/HST and add the amount of GST/HST to your gross sales or fees to calculate your adjusted gross sales or adjusted professional fees.
Enter this number into line 16 in Part 3 of form CRA T2125, and then deduct your reserves deducted last year and other income, if any. Add them all together to arrive at your total gross business or professional income. This is the number you will be deducting your business expenses from.
Add Your Business Expenses
Expenses such as inventory, wage costs and subcontracts are entered in Part 4, Cost of goods sold and gross profit. All other expenses get entered under Part 5, Net income (loss) before adjustments on the appropriate lines.
There's a separate capital cost allowance section on the form to calculate the proper percentages you're allowed to write off each year for assets such as property and equipment your business has acquired, and a separate section for motor vehicle expenses if you've been using a vehicle for business purposes.
Remember that whatever expenses you are claiming, you can only claim the business portion of the expense.
To Reveal the Bottom Line
Once all your expenses are tallied up, you will deduct the total from your total business income, and the resulting profit or loss from form CRA T2125 will then be recorded on Line 135, 137, or 139 of your T1 return—depending on whether it's business, professional or commission income. This is your allowable claim which will ultimately be added to or subtracted from your other income, if any.
Remember, if you had no business income during the tax year, you can still claim your business expenses. However, you might not want to claim them that particular year.
If you are involved in a partnership, the T2125 is also where you will record the names of your partners, their percentage(s) of the partnership, and their share(s) of net income or loss.
Note, too, that if you have more than one business or professional activity, you need to complete a separate Form T2125 for each one.