Do Reimbursed Expenses Count as Income on Your T2125?

Reimbursed Expenses Create Real Tax Confusion

A common freelancer question is: if a client reimburses me for a business cost, do I include that money as income? Think of a photographer billing $2,000 for a shoot plus $300 for props, or a consultant charging a client back for airfare.

The safest general approach is simple: if the reimbursement appears on your invoice or lands in your account as part of what the client paid you, record it clearly in your books. Then record the matching business expense separately. That way your T2125 shows the full business activity without hiding either side of the transaction.

This is general information, not tax advice. If you handle large reimbursed amounts, client trust funds, or agency-style pass-through billing, ask an accountant.

The Clean Method: Income In, Expense Out

For most sole proprietors, the bookkeeping looks like this:

Example: you invoice $1,500 for design work plus $200 for stock photography bought for the project. Your gross revenue records show $1,700. Your expenses show $200, likely under advertising, supplies, or another reasonable category depending on the item. Net effect: only the $1,500 profit is taxed, but the audit trail is complete.

Why Not Just Leave It Off?

Some freelancers are tempted to ignore both the reimbursement and the expense because they cancel each other out. That can create problems:

The CRA says Form T2125 is used to report business income and expenses, and that deductible expenses are generally reasonable current expenses incurred to earn business income. Showing both sides usually creates the clearest record.

GST/HST: Be Extra Careful

If you are GST/HST registered, reimbursed expenses can be trickier. Whether you charge GST/HST on the reimbursement depends on what you are supplying and how the client agreement is structured. In many ordinary freelancer invoices, the reimbursement is part of the taxable supply to the client.

For your own expenses, the CRA notes that deductible expenses include GST/HST paid minus any input tax credit claimed. In practical terms: if you claim an ITC for GST/HST you paid, do not also deduct that same tax as an income-tax expense on the T2125.

What Category Should the Expense Use?

Use the category that matches the original cost, not a generic “reimbursement” bucket:

The description should mention the client or project: “Hotel reimbursed by ABC Co. for Vancouver workshop” is much stronger than “hotel.”

Records to Keep

For every reimbursed cost, keep:

Track Reimbursements Without Losing the Trail

ClaimHero helps Canadian sole proprietors log each reimbursed cost under the right T2125 category, add a business-purpose note, and keep year-end totals organized. Record the income in your invoicing or bookkeeping system, track the expense in ClaimHero, and tax time becomes much easier.