T2125 Line by Line: A Plain-English Guide for Sole Proprietors

What Is the T2125?

The T2125 — Statement of Business or Professional Activities — is the CRA form you attach to your T1 personal income tax return if you earned any self-employment income. It reports your gross business income, your deductible expenses by category, and your net business income (what you pay tax on).

This guide walks through every major section and line so you know exactly what goes where.

Part 1: Identification

Business name: Your operating name, if you have one. If you operate as yourself, your own name is fine.

Fiscal period: For most sole proprietors this is January 1 to December 31 — the calendar year. Using a non-calendar fiscal year is possible but uncommon and adds complexity.

Main product or service: A brief description of what your business does. "Freelance graphic design," "web development consulting," "copywriting services" — keep it accurate.

Business address: Where you primarily conduct business. For home-based businesses, your home address is correct.

Industry code: A six-digit NAICS code that categorizes your type of business. Look up the appropriate code on the CRA website or use a tax software lookup tool.

Part 2: Business Income

Gross revenue (Line 8000): Your total sales or professional fees invoiced and received during the fiscal year, before any deductions. Include all income from your business, including income for which you did not receive a T4A.

Returns and allowances (Line 8290): Credits or refunds you gave clients. Subtract these from gross revenue to arrive at net revenue.

Net revenue: Gross revenue minus returns and allowances. This is what flows into the expense calculation.

Part 3: Business Expenses

This is the heart of the T2125. Each line corresponds to a category of deductible business expense. You enter the total for each category for the year.

Line 8520 — Advertising: Online ads, print advertising, sponsored posts, promotional materials, business cards. Note: your website hosting and domain name also go here unless you prefer to include them in office expenses.

Line 8523 — Meals and entertainment (50%): Enter 50% of your actual meals and entertainment costs for the year. If you spent $2,000 on client meals, enter $1,000. The form reminds you of this — do not enter the full amount.

Line 8590 — Bad debts: Invoices from a prior year that you included in income but have determined are uncollectible. Keep documentation showing you made attempts to collect.

Line 8690 — Insurance: Business insurance premiums. Not personal life insurance unless it is required as a condition of a business loan.

Line 8710 — Interest and bank charges: Interest on business loans, credit lines used for business, and monthly fees on your business bank account.

Line 8760 — Business taxes, licences, and memberships: Business licences, municipal taxes related to business, professional association dues, and regulatory fees.

Line 8810 — Office expenses: Day-to-day supplies — pens, paper, printer ink, USB drives, postage, small office items. Not large equipment (that goes through CCA or Line 8811).

Line 8811 — Supplies: Materials consumed directly in providing your service or making your product. Distinct from general office expenses.

Line 8860 — Legal, accounting, and professional fees: Your accountant's fees, lawyer fees, business consultant fees, and tax preparation costs.

Line 8910 — Rent: Rent paid for an office, studio, or other business premises. Not your home office (that goes on Line 9945).

Line 9060 — Salaries, wages, and benefits: If you paid employees or subcontractors during the year. Subcontractor payments go here; T4 wages require payroll filings in addition.

Line 9200 — Travel: Flights, hotels, taxis, trains, and other transportation for business travel. Meals during travel follow the 50% rule.

Line 9220 — Telephone and utilities: Business phone plan, internet (business portion), and utilities for a dedicated business premises. Your home internet business portion may go here or in Line 9945 — pick one and be consistent.

Line 9281 — Motor vehicle expenses (not CCA): Insurance, licensing, fuel, maintenance, and parking for a vehicle used for business — multiplied by your business-use percentage. Requires a mileage log.

Line 9945 — Business-use-of-home expenses: The business proportion of your home costs — rent or mortgage interest, property taxes, utilities, insurance, and maintenance. Cannot create or increase a business loss; unused amounts carry forward.

Other expenses: Lines for additional deductions that do not fit elsewhere. Use this for legitimate expenses not covered by the standard categories.

Part 4: Net Income Calculation

Total expenses: Sum of all the expense lines above.

Net income before adjustments: Gross revenue minus total expenses. If this is negative, you have a business loss.

Business-use-of-home expenses (adjusted): Home office expenses are applied here, limited to net income before this deduction (cannot create a loss).

Net business income: The final figure. This flows into your T1 personal return as self-employment income and is taxed at your marginal rate. You also pay CPP contributions on it.

Part 5: Capital Cost Allowance (CCA)

Major asset purchases — computers over approximately $500, vehicles, office furniture, specialized equipment — are not fully expensed in the year of purchase. Instead, they are depreciated over time using CCA classes. Class 8 covers most equipment at a 20% declining-balance rate; Class 10 covers most vehicles at 30%.

Fill in the CCA schedule for each class of asset, calculate the allowable deduction for the year, and carry the total to the main expense section.

Common T2125 Mistakes

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