How to Prepare the T2125 if you are a Small or Self Employed Business Owner

What is a t2125?

If you are an unincorporated business owner doing your taxes, you are required to report the revenues/sales generated from your business activities and are entitled to claim business related expenses and deduct them against the income. These revenues and expenses are reported on a separate schedule that is an add-on to your regular tax return (referred to as the T1 or TP1 in Quebec). The name of the schedule is the T2125 – Statement of Business and Professional Activities.

What type of businesses are required to prepare a T2125?

Basically any type of activity from which you “earn”  income requires the inclusion of the T2125 as long as your business in unincorporated (corporations have different tax filing rules).  This includes:

While many of these terms are interchangeable it is important to note that if you receive income and did not pay any taxes on that income (as in the case of an employee who would receive a T4), you must determine if it should be shown as business income and requires inclusion in a T2125 . Some examples of this include:

• Selling goods, for a profit, on Ebay or Etsy in your spare time

• Selling your services on Fiverr, Upwork, Freelancer or any other similar type of service

• Earning Ad revenues from your blog or You Tube Channel

• Driving for Uber or Lyft

• Selling online courses

• Donations to your website

Note that sometimes you receive a T4A that shows other services on box 48. This should also be reported on the T2125 with this specific description (and removed from gross business sales if it is included in there). If not, CRA will often assess you for this amount.

What kind of documentation do you need ?

Essentially, the documentation that you require to support your business declaration is evidence of your income and expenses.   You are not required to enclose this with your tax return but will be asked for in case of audit. 

The type of documentation for income on a T2125 includes invoices to clients/customers for services and/or goods sold OR a statement from your customer (person or business)  to whom you are providing the service.  For example, while you don’t invoice google for ads, you can download a monthly statement reflecting the amount of ad  revenues that have been earned along with your bank statement showing the amount received.  Uber provides a tax summary at the end of the year as well as weekly breakdowns of earnings, which should be reconciled to the amount received in your bank account.  It should be noted that revenues are required to be shown in the month that you earn them rather than when you receive payment and is referred to as the accrual method. If you have invoiced someone in December, but were only paid in January, this would be considered to be income in December. 

For expenses that are deductible on a T2125 , you must keep the receipt or bill from the supplier along with the charge on your bank statement or credit card.  If you are using subcontractors or casual labour, it is very important to have them send you a bill as this will be required as proof that the expense was incurred.  If a bill is not available, other documentation such as an email confirmation indicating the amount and date paid might be sufficient. It is good practice to detail the business purpose on the bill or receipt particularly for items that might all be considered to be personal expenses such as meals or travel expenses.

Note that you can either save a hard copy of the documentation or you can scan/save the documents in a folder on your computer. See our article on CRA rules for electronic documents.

What type of  accounting  system should you use?

When you start your business or income earning activity, it is important know how you are going to document your income and expenses.  If you plan to do this yourself you usually have two choices – 1) you can either go the spreadsheet route or 2) you can use accounting software.   Businesses that are very small who only have a handful of expenses are usually fine with a spreadsheet (google docs or excel).  However, businesses that expect to grow and who require data analysis on an ongoing basis whether it be banking, customer data or year end financial reports (among numerous other types of reporting available) it is best to go with accounting software.  There are numerous options available for accounting software for small business including Quickbooks, Wave Accounting, Xero etc at various price points to suit your needs. You can usually start with the most inexpensive plan and upgrade if and when the need arises. In addition to the other features, two of the biggest advantages of a good accounting software is that you have access to the history of all of your transactions and it allows you to automate data entry thereby significantly reducing the amount of time you have to spend doing your accounting.

What Type of information do you need to complete the T2125?

Your accounting system, whether it is a spreadsheet or software, should be able to compile your information into a profit-loss statement which reflect total sales/revenues and lists the business expenses by category.    A pivot table or sub-totals by category can be used on a spreadsheet, while any accounting software will provide a profit-loss statement.

To see what the breakdown by category looks like, please refer to the actual T2125 form . Below is an excerpt of the expenses: