The Canada Revenue Agency (CRA) considers you self-employed if you obtain commercial or professional income from an unincorporated enterprise. This also applies when you are employed by someone else while simultaneously operating a side business. You are required to annually fill out and submit the T2125 Form as part of your T1 income tax return, which is the same form used for your income tax filing. T2125 is also referred to as the Statement of Business or Professional Activities. In this article, we have delved into the T2125 Form in Canada.
Read More: Are you planning to incorporate your company?
What is the T2125 Form?
The T2125 Form is a type of form included in the T1 income tax package issued by the Canadian government. It allows the Canada Revenue Agency (CRA) to accurately determine how much money you earned from your business or profession. It also displays the costs you incurred.
This form is designed to help you determine your total earnings and final income (or deficit), which is essential when completing your T1 Federal Income Tax and Benefit Return. The information you supply might affect your tax refund or the money you must pay in company taxes.
Ways to File T2125 Form
There are different ways to submit the T2125 Form in Canada:
- By NETFILE
- By Mail
- Via a Tax Professional
How to Fill out the T2125 Form
Filling out the T2125 will be a little bit tricky process if you perform it for the first time. The T2125 Form consists of nine sections and spans seven pages, and you can obtain it either through the CRA website or by requesting it from your accountant.
Identification
- Your entire name and Social Insurance Number (SIN) are included. You have to provide your company name, address, and CRA business number.
- Enter the necessary personal and business information.
- Identifying information regarding the company must also be filled out. Examples involve your industry code and the type of goods or services you provide.
Internet business activities
Only fill out this field if your company has a website or web pages that generate revenue. You must enter each relevant URL as well as the proportion of gross money collected from each.
Types of income and cost of products sold
This section is designed for you to document your earnings and expenditures. The complexity of this task may vary depending on your business type. It comprises four components.
3A Business income: Only accomplished if you have company income rather than professional income.
3B Professional income: Only finish if you have professional earnings.
3C Gross business or professional income: This is the gross total that you calculated in 3A or 3B.
3D Cost of goods sold and gross profit:
To calculate your total business revenue, subtract certain expenses like initial inventory and payroll costs.
Net income (loss) before adjustments
Report any costs incurred during the year and categorize them. You can deduct office expenses, insurance costs, travel expenses, license and membership fees, advertising and marketing expenses, capital cost allowance (CCA), motor vehicle expenses (excluding CCA), property taxes, and bad debts. The CRA includes a complete list of deductible costs as well as instructions for completing this part.
Your net income (loss)
This step allows you to compute your annual net income or loss. More information regarding this part may be found on the CRA website.
Other amounts deductible from your share of the net partnership income (loss)
If you have any extra business costs that did not fit into Parts 4 or 5 of the form, you will claim them here. You are not permitted to duplicate expenditures anywhere in the form.
Calculating business use of home expenses
If you work from your home, you have the opportunity to deduct specific expenses related to the operation of your business, including heating, electricity, and mortgage interest.
Details of other partners
This section is just for persons who have formed a business partnership. Provide your partners’ contact information, names and addresses, and percentages of their shares.
Details of Equity
Report any debts owed by the firm, as well as any personal donations or withdrawals made for the business. This includes any initial funds you needed to establish the firm as well as any savings you utilized to run it.
Business Entities Required for T2125 Form
The list of business entities required for T2125 is as follows:
- Sole Proprietorship
- Unincorporated Partnership
- Freelancers
- Home-based Business
- Real Estate Rental
- Small Trade Businesses
Documents required for T2125 Form
The list of documents required for the T2125 Form are:
- Business Income records
- Capital Cost Allowances (CCA) Records
- Business Expense Records
- Financial Statements
- GST/HST Records
- Records of Business Assets
Conclusion
The T2125 form is an essential document for self-employed individuals and sole proprietors in Canada. It plays a vital role in reporting their business income and expenses to the Canada Revenue Agency (CRA). Ensuring the accurate and timely completion of this form is crucial to adhering to tax regulations and determining the business’s tax obligations.
The T2125 form allows taxpayers to deduct eligible business expenses from their gross income, ultimately reducing their taxable income and, consequently, their tax liability. It is important for business owners to maintain detailed records of their financial transactions and keep supporting documentation to substantiate the figures reported on this form in case of a CRA audit.
At OnDemand International, Our expert will provide you assistance with any query regarding the T2125 Form in Canada.
FAQs
Who needs to fill out the T2125 form?
Anyone who operates a business as a sole proprietor in Canada must fill out the T2125 form to report their business income and expenses. This includes freelancers, contractors, and self-employed individuals.
What information is required on the T2125 form?
You will need to provide details about your business income, expenses, and other related information. This includes income from sales, commissions, fees, and any other sources related to your business. You’ll also need to list all eligible business expenses.
How do I calculate my net income on the T2125 form?
To calculate your net income, subtract your total business expenses from your gross business income. The resulting figure is your net income, which is used to determine your tax liability.
What expenses can I deduct from the T2125 form?
You can deduct legitimate business expenses necessary for running your business. This may include rent, utilities, office supplies, advertising costs, professional fees, and more. Be sure to keep accurate records and receipts for all deductible expenses.
Can I claim a home office deduction on the T2125 form?
Yes, if you have a dedicated space in your home used exclusively for your business, you can claim a portion of your home-related expenses, such as rent or mortgage interest, property taxes, and utilities. The Canada Revenue Agency (CRA) has specific rules for calculating this deduction.
When is the deadline for filing the T2125 form?
The deadline for filing your T2125 form is the same as the deadline for your personal income tax return, which is typically April 30th. If April 30th falls on a weekend or holiday, the deadline may be extended to the next business day.
