Everything you need to know about T2125

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Are you a freelancer juggling multiple clients for your burgeoning custom cat video company? Then the T2125 is for you (as well as for any other types of self-employment, even if they’re less exciting than creating cat videos).

What is a T2125 Form?

T2125 is a Canadian taxpayer's form for reporting self-employment and professional income taxes. Most sole proprietorships fill the T2125 every year, along with the T1 annual personal income tax. You must fill the T2125 with the T1, which covers income from regular employment. Essentially, you need the T2125 form to calculate the tax for your self-employment and professional income, which you then include in the T1 form.

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Who Should Fill Out a T2125?

The T2125 form is filled by anyone with self-employed income or anyone who generates income from a small business. You must fill the T2125 even if the business isn't registered or is outside Canada. The income should also include monetary payments for your goods and services, as well as barter payments and cryptocurrency. However, self-employment income from fishing and farming requires form T2121 and T2042, respectively.

How to Calculate Gross and Net Self-Employment Income?

Gross and net incomes are the important sections you will have to fill out in the T2125 form. The simple definition of gross income is the total income you earn from the business. Net income refers to the profit left after you deduct all expenses and allowable deductions. 

To calculate your self-employment gross income, take your total sales revenue, subtract the cost of goods sold and any refunds, and then add interests on loans you have given out. Net income is the final profit you get when all expenses are deducted from the gross revenue.

T2125 Breakdown

The T2125 taxpayer form is available online via the CRA website. You can download, print and complete Wealthsimple Tax it for filling. If you feel overwhelmed, a tax filing software like Wealthsimple Tax can help you file your T2125 efficiently and quickly. The nine-page document has various sections, but here are some of the key areas to note:

Identification and Partnership InformationThese are two separate sections that require your personal information, including business name and number, SIN, address, your name, CRA business number (GST/HST) and more. You can leave some parts blank if you don't have a registered business. The partnership information tab only appears if you indicate the business is a partnership, rather than a sole proprietorship.
Income and ExpensesUse this section to report your income and expenses. You are required to keep records for your income and expenses, but you might not have these if you didn’t realize you were running a business. If you don’t have good records, you should be conservative in your estimates for income and only claim expenses that you can back up with receipts (credit card statements aren’t enough).
Capital Cost Allowance (CCA)Use this section to report your capital expenses. Capital expenses are expenditures for things that have a lasting benefit (like office furniture, a computer, or camera). If you have a personal motor vehicle, don’t include it on the CCA tab; use the Motor Vehicle Expenses (your own vehicle) tab to claim both motor vehicle expenses and CCA for your vehicle.
Business use-of-home expensesIf you work from home, you can use this section to claim expenses related to your home. You can deduct use-of-home expenses if your home is your principal place of business or if you use the space to earn your business income and you use it on a regular and ongoing basis to meet your clients, customers, or patients.
Motor vehicle expenses:Use this tab to claim the cost of your car if you use it for your business. If you didn’t keep a detailed log book and receipts you might not want to claim this amount. The CRA is known to often request records for motor vehicle claims. Here’s more information from the CRA on how to complete this section.
OtherUse this section to provide further information about your self-employment businesses. You can add your tax shelter number where applicable, T1139 information, liabilities, capital contributions and different balance sheet details. You can also add website information if you have a site that earns you income.

You can find a more detailed list of deductible expenses on the CRA website here.

E-filing and Mailing Form T2125

You can file T2125 online or hire a tax preparer or a tax filing software to complete the task through CRA's EFILE service. The form is due when you file the T1, so you should aim to file it before the April 30th deadline. However, if you have business income, you can file the T2125 before June 15th, provided you pay the tax by April 30th.

These dates are different in 2020, so you can file the form by June 1and have until September 30th to make payments. The filling office depends on where you live in Canada, so you should check the CRA website to determine your T2125 forms' mailing offices. This is only essential if you choose to mail the document. The easiest way is to fill and submit your form online.

Wealthsimple Tax is a simple way to file your taxes. File your return with confidence it’s done right, and pay what you want—there’s no catch.

Last Updated January 21, 2021

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