T2125 form

Definition

A T2125, also known as the Statement of Business or Professional Activities, is a tax form used in Canada by self-employed individuals, sole proprietors, and partnerships to report income and expenses related to their business or professional activities.

What is a T2125 form?

A T2125 is part of the personal income tax return and is used to calculate the net income or loss from business or professional activities, which is then included in the taxpayer’s overall income for the year.

The T2125 form requires detailed information about the business, including the type of business, its address, and the main product or service provided. Taxpayers must report gross income from their business activities, which includes all revenue earned before any expenses are deducted.

The form also includes sections to list various business expenses, such as advertising, meals and entertainment, office supplies, salaries, and wages. These expenses are subtracted from the gross income to determine the net profit or loss. Additionally, the T2125 allows for the deduction of capital cost allowance (CCA) for depreciable assets used in the business, such as vehicles, equipment, and buildings.

The T2125 form helps the Canada Revenue Agency (CRA) make sure that self-employed individuals and business owners accurately report their income and claim only legitimate business expenses. Properly completing the T2125 is essential for complying with tax regulations and avoiding penalties for underreporting income or over-claiming expenses.

By using the T2125, taxpayers provide a clear and comprehensive account of their business activities, enabling the CRA to assess their tax liability accurately.

Example of a T2125 form

Suppose a sole proprietor uses a T2125 form as a freelance graphic designer. Throughout the year, the designer earns $60,000 from various clients. To complete the T2125, the designer reports this $60,000 as gross income.

The designer also incurs several business expenses, such as $2,000 for software subscriptions, $1,500 for advertising, $3,000 for office supplies, and $5,000 for a new computer. These expenses, totaling $11,500, are listed on the T2125 form and deducted from the gross income.

After deducting the expenses, the designer’s net income is $48,500. This net income is then included in their personal income tax return, helping to determine their overall tax liability.