Filling Out Canadian Income Tax Form T2125

The Answer Depends on Your Form of Business Ownership

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Question: Do I have to fill out income tax form T2125?

Answer:

In a word, yes, if you are running an unincorporated business.

So if you are operating a sole proprietorship or partnership, you need to complete Form T2125 when you are filling out your Canadian income tax T1 return.

The T2125 is used to report business income. Previously, there was a separate form T2124, the Statement of Business Activities Form and T2032, a separate Statement of Professional Activities Form and you used the form that best represented how you made your business income.

The new form combines the two previous forms, so if you have either business or professional income and your business is not incorporated, you'll fill out income tax Form T2125.

Like the previous forms it replaces, Form T2125 will be included in your T1 income tax form package.

Here's what Form T2125 looks like.

Form T2125 Records Your Business Income...

Note that Form T2125 is used to report any and all business income. 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 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 $1000 for the job and the massage therapist provides services valued at $1000 in exchange then you must include the $1000 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 $1000 worth of expenses in the form of repairs to his business premises, and you would be able to claim $1000 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.

For more information on what counts as business income in Canada, see my Business Income Definition.

Add Your Business Expenses

It's a safe bet that you won't mind completing the T2125, because this form is also where you claim your relevant business expenses, including your business-use-of-home expenses, if that's the case.

Meals and entertainment expenses, salaries, business licenses... whatever business expense you incurred that is eligible to be an income tax deduction goes here.

There's a separate Capital Cost Allowance section on the form for you 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 another separate section for motor vehicle expenses if you've been using a vehicle for business purposes.

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 T2125 will then be recorded on Line 135, 137 or 139 of your T1 return (depending on whether its 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. Learn more...)

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.

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