FORM T2125 LINE BY LINE

Form T2125, Statement of Business or Professional Activities, is the schedule on which a sole proprietor calculates business income for the T1 return. A separate T2125 is filed for each business. This page walks through the form part by part and line by line, explaining what goes where and which figures carry to the T1. Capital cost allowance (Areas A to F) and business-use-of-home expenses have their own pages and are only referred to here.

PART 1: IDENTIFICATION

• Fiscal period: the start and end dates of the business year. For a sole proprietor this is normally January 1 to December 31; a new business starts on the day it began operating.

• Main product or service and industry code: a short description and the six-digit industry code from the appendix of Guide T4002, based on the North American Industry Classification System. The code is used by the CRA to compare the business with others in the same industry.

• Business number: required only if the business has one, for example because it is registered for GST/HST or has a payroll account.

• Last year of business: ticked if the business ended during the year, which affects how inventory, reserves and capital property are treated.

PART 2: INTERNET BUSINESS ACTIVITIES

A business that earns income from web pages or websites lists up to five addresses and states the percentage of gross income that came from them. This includes sales through online platforms and an owner's own website.

PART 3A: BUSINESS INCOME

• Gross sales, commissions or fees (3A): all amounts earned in the year, including GST/HST and provincial sales tax if they were included in the amounts charged.

• Sales tax collected (3B): the GST/HST, QST and PST included in 3A is removed here, because sales tax collected for the government is not business income.

• Returns, allowances and discounts: refunds and price reductions given to customers reduce gross sales.

• Adjusted gross sales (3G): the result, carried to line 8000.

PART 3B: PROFESSIONAL INCOME

• Professional fees: fees for services by a professional, such as an accountant, lawyer, engineer or consultant, net of sales tax.

• Work in progress (WIP): since the phase-out of billed-basis accounting (completed in 2021), professionals such as accountants, lawyers, dentists, doctors, veterinarians and chiropractors must include the value of unbilled work in progress at year end. The opening WIP is deducted and the closing WIP is added.

• Adjusted professional fees (3O): the result, carried to line 8000.

PART 3C: GROSS BUSINESS OR PROFESSIONAL INCOME

• Line 8000: adjusted gross sales or adjusted professional fees.

• Line 8290, reserves deducted last year: any reserve deducted in the prior year, for example for goods or services not yet delivered, must be added back this year.

• Line 8230, other income: amounts such as recovered bad debts previously deducted, insurance proceeds for lost business income, and most government grants or subsidies related to the business.

• Line 8299, gross income: line 8000 plus other income. It is reported on the T1 at line 13499 for business income, 13699 for professional income or 13899 for commission income.

PART 3D: COST OF GOODS SOLD

Completed only by businesses that sell goods. Inventory is valued consistently at either the lower of cost and fair market value, or entirely at fair market value.

• Line 8300, opening inventory: must equal the closing inventory of the previous year.

• Line 8320, purchases: goods bought for resale or for use in manufacturing, net of returns and discounts.

• Line 8340, direct wage costs: wages of employees who make the product. Other wages go on line 9060.

• Line 8360, subcontracts: amounts paid to contractors who produce goods for the business.

• Line 8450, other costs: freight-in, containers and other direct costs of the goods.

• Line 8500, closing inventory: the value of goods on hand at year end, subtracted from the total.

• Line 8518 and line 8519: cost of goods sold, and gross profit (line 8299 minus line 8518).

PART 4: EXPENSES

Only the business part of each expense is entered. Line numbers matter because the CRA compares claims on each line with other businesses using the same industry code.

• Line 8521, advertising: ads in Canadian media aimed mainly at the Canadian market, online advertising, business cards and promotional materials.

• Line 8523, meals and entertainment: the deductible portion only, normally 50%.

• Line 8590, bad debts: amounts previously included in income that have become uncollectible.

• Line 8690, insurance: business insurance on buildings, equipment and liability. Home and vehicle insurance belong on lines 9945 and 9281.

• Line 8710, interest and bank charges: interest on money borrowed for the business and bank service charges.

• Line 8760, business taxes, licences and memberships: annual business licences, trade association dues and subscriptions.

• Line 8810, office expenses and line 8811, office stationery and supplies: small items consumed in running the office, such as stamps, pens and printer cartridges.

• Line 8860, professional fees: legal and accounting fees, including fees for preparing the return.

• Line 8871, management and administration fees: fees paid to a third party to manage the business.

• Line 8910, rent: rent for business premises and equipment.

• Line 8960, repairs and maintenance: ordinary repairs. Improvements that extend useful life are capital and go through CCA.

• Line 9060, salaries, wages and benefits: amounts paid to employees, including the employer share of CPP and EI. The owner's own drawings are never deductible.

• Line 9180, property taxes: on business property other than the home.

• Line 9200, travel: transportation, accommodation and 50% of meals on business trips.

• Line 9220, utilities and line 9224, fuel (except motor vehicles): for business premises other than the home.

• Line 9275, delivery, freight and express: shipping costs other than freight-in on inventory.

• Line 9281, motor vehicle expenses: the business part of fuel, insurance, repairs and licence fees, excluding CCA.

• Line 9936, capital cost allowance: the total CCA claim from Area A, excluding any CCA on the home.

• Line 9270, other expenses: deductible expenses that fit no other line, each described.

• Lines 9368 and 9369: total expenses, and net income before adjustments.

PART 5: NET INCOME AFTER ADJUSTMENTS

• Amount 5A: for a sole proprietor, this is simply line 9369. The partnership lines that follow (9974 and 9943) do not apply.

• Line 9945, business-use-of-home expenses: the allowable claim from Part 7, limited so that it cannot create or increase a loss.

• Line 9946, net income (loss): the final figure, reported on the T1 at line 13500, 13700 or 13900. It is also the net self-employment earnings used for CPP on Schedule 8.

DETAILS OF EQUITY

• Line 9931, total business liabilities: the debts of the business at year end.

• Line 9932, drawings: money and property the owner took out of the business during the year.

• Line 9933, capital contributions: money and property the owner put into the business during the year.

COMMON ERRORS

• Sales tax in income: leaving GST/HST collected in gross sales overstates income.

• Owner's pay as an expense: drawings and the owner's own CPP are not business expenses.

• Capital items expensed: equipment lasting more than a year must go through CCA, not line 8810 or 9270.

• Opening inventory mismatch: line 8300 must agree with last year's line 8500.

• Overuse of line 9270: large unexplained "other expenses" draw attention; use the specific line wherever one exists.

SOURCES

• Canada Revenue Agency: Form T2125, Statement of Business or Professional Activities.

• Canada Revenue Agency: Guide T4002, Chapters 2 and 3, Income and Expenses.