What is Form T2125 and who needs to complete it?

Form T2125 (Statement of Business or Professional Activities) is the CRA form used to report self-employment income and deductible business expenses on your personal tax return (T1). You complete T2125 if you are: a sole proprietor running a business; a freelancer or independent contractor; a professional in private practice (lawyer, accountant, doctor, engineer, etc.); a direct seller or commission agent who is self-employed (not an employee). You attach T2125 to your T1 personal tax return. If you have multiple distinct businesses, you file a separate T2125 for each. Partnerships use T2125 for the individual''s share. Corporations file a separate T2 corporate tax return — T2125 is only for unincorporated self-employment. Net income from T2125 flows to Line 13500 (business income) or Line 13700 (professional income) of your T1.

What is the difference between business income and professional income on T2125?

CRA distinguishes between business income (selling goods or most services) and professional income (specific licensed professions). Business income on T2125: contractors, tradespeople, consultants, freelancers, retailers, service businesses that are not regulated professions. Professional income on T2125: lawyers, accountants, dentists, doctors, chiropractors, engineers, chiropodists, podiatrists, physiotherapists, psychologists, and other specifically listed regulated professions. The main practical difference: professionals must use the "accrual method" to report income (you report revenue when billed/earned, not when cash is received) — they cannot use cash-basis accounting. Business income earners can choose cash-basis or accrual for most industries. Check the "professional income" code on Part 1 of T2125 if you fall into a regulated profession. If unsure, use the NAICS business activity code that matches your industry.

Do I use cash-basis or accrual accounting on T2125?

CRA''s general position is that income must be reported on an accrual basis (when earned, not when received). However, for most small businesses, CRA accepts cash-basis reporting in practice if it is consistently applied and does not materially distort income. Exception: professionals (lawyers, doctors, accountants, engineers) must use accrual — they report accounts receivable as income even if not yet collected. Work in progress (WIP) for professionals must generally be included in income. For most freelancers and consultants who invoice and receive payment within the same tax year, the difference between cash and accrual is minimal. Where it matters: if you sent a large invoice in December 2026 but received payment in January 2027 — under accrual, it''s 2026 income; under cash, it''s 2027 income. For a business with significant December receivables, accrual timing can shift substantial income between tax years.

How do I complete the CCA schedule on T2125?

The CCA (Capital Cost Allowance) schedule appears in Part 8 of T2125. For each class of depreciable property: enter the Undepreciated Capital Cost (UCC) at the start of the year; add any acquisitions during the year; subtract any disposals; apply the half-year rule for acquisitions (50% CCA on net additions); calculate CCA at the class rate; subtract CCA claimed to arrive at UCC at year-end. You carry the year-end UCC forward to next year''s T2125 (it is NOT reset each year — it is a running balance). CCA is optional to claim fully — you can claim less than the maximum, and the unclaimed balance stays in your UCC for future years. If you disposed of an asset and the proceeds exceeded UCC for the class, you have recaptured CCA (taxable income). If your class goes to zero balance with proceeds less than cost, you may have a terminal loss (deductible).

What is the most common mistake people make on T2125?

The most common mistakes: (1) Mixing personal and business expenses — deducting 100% of expenses that have personal components (vehicle, phone, internet, home office) without the appropriate business-use allocation; (2) Not claiming CCA (leaving money on the table — forgetting to track assets purchased and their CCA class); (3) Not deducting health insurance premiums through a properly structured PHSP; (4) Claiming capital purchases as current expenses (e.g., deducting a $2,000 laptop as "supplies" instead of CCA Class 50 or Class 12); (5) Forgetting to carry forward unused home office expenses when they exceed business income; (6) Not calculating GST/HST paid on expenses as part of the cost (if not registered for GST/HST, the GST/HST paid IS part of your expense cost; if registered, you claim it separately as an ITC); (7) Not keeping receipts — CRA can deny any expense without supporting documentation.

How to Complete Form T2125 Canada 2026 — Statement of Business Activities

T2125 Overview — Form Structure

Part	What It Covers
Part 1	Identification (business name, address, fiscal year, main business activity, GST/HST number)
Part 2	Business income (gross revenues, partnership/joint venture income, GST/HST collected)
Part 3	Professional income (if applicable — lawyers, doctors, accountants, etc.)
Part 4	Vehicle expenses (if business vehicle used)
Part 5	Other business expenses (detailed lines for each expense type)
Part 6	Calculation of net income / loss
Part 7	Business use of home expenses
Part 8	Capital Cost Allowance (CCA) schedule

Part 1 — Identification

Field	What to Enter
Business name	Your trading name or “John Smith” if operating under your name
Main product/service	Describe in plain language (e.g., “software development services”)
Business number	Your CRA Business Number (if assigned)
Fiscal year-end	December 31 for most sole proprietors (calendar year)
NAICS code	Industry code from CRA’s NAICS list (e.g., 541511 = custom software development)
GST/HST registration number	If registered; leave blank if not

Part 2 — Business Income

Line	Description	Example
8000	Gross sales, fees, commissions (before HST)	$120,000
8290	Other income	$0
8299	Total gross business income	$120,000
Less: Purchases / cost of goods sold	Cost of inventory or direct costs (if applicable)	−$0 (service business)
Gross profit		$120,000

For a pure service business (consultant, designer, writer), there is typically no cost of goods sold — gross profit equals gross revenue.

Part 5 — Business Expenses (Major Lines)

Line	Expense	Example	Notes
8521	Advertising and promotion	$3,500	Website, paid ads, business cards
8523	Meals and entertainment	$880	50% of actual $1,760 business meals
8540	Insurance	$1,200	E&O insurance, business liability
8560	Legal and accounting	$4,000	Accountant + lawyer fees
8570	Office expenses	$1,800	Supplies, postage, small items
8590	Rent	$0	If renting external office
8600	Repairs and maintenance	$0	Equipment repairs
8620	Telephone and utilities	$1,400	Business phone + internet portion
9220	Other expenses	$2,000	Software subscriptions, professional dues
9270	Total business expenses before home office and CCA	$14,780

Note: If you claim vehicle expenses, they flow from Part 4 total to here.

Part 4 — Vehicle Expenses

Line	Field	Example
Logbook total km	24,000 km total
Business km	15,600 km
Business use %	65%
Fuel	$3,600 × 65%	$2,340
Insurance	$1,800 × 65%	$1,170
Maintenance	$600 × 65%	$390
License + registration	$200 × 65%	$130
Loan interest (to $300/month cap)	$2,400 × 65%	$1,560
Total vehicle expense		$5,590

Total from Part 4 flows to Part 5.

Part 7 — Business Use of Home

Line	Field	Example
A	Heat	$1,800
B	Electricity	$1,400
C	Water	$600
D	Maintenance	$1,500
E	Rent (if renting)	N/A
F	Property taxes	$5,500
G	Insurance	$2,000
H	Mortgage interest	$18,000
Total home expenses		$30,800
Business-use %	12.5%
Home office deduction		$3,850
Limited to net income from business (before home office)	If net income is $5,000, claim $3,850; if $3,000, claim $3,000 and carry forward $850

Part 8 — CCA Schedule Example

Class	Description	Opening UCC	Additions	Disposals	Net before CCA	Half-Year Rule	CCA Rate	CCA Claimed	Closing UCC
8	Office furniture	$1,600	$0	$0	$1,600	N/A	20%	$320	$1,280
10.1	Vehicle ($37K max)	$37,000	$0	$0	$37,000	N/A	30%	$5,550 (yr 1: half-year already applied in prior yr)	$31,450
50	Laptop computer	$0	$2,200	$0	$2,200	Half = $1,100	55%	$605	$1,595

CCA carried forward: Opening UCC for each class from prior year’s T2125 Part 8.

Net Income Calculation — Part 6

Line	Item	Amount
Gross profit		$120,000
Less total expenses (Part 5)		−$14,780
Less vehicle expenses (Part 4)		−$5,590
Less CCA (Part 8)		−$6,475
Less home office (Part 7)		−$3,850
Net business income		$89,305

This amount flows to Line 13500 of your T1 personal income tax return.

Common CCA Mistakes

Mistake	Correct Approach
Forget to claim CCA	Set a recurring reminder to review CCA schedule each year
Deduct full purchase price as expense	Capital property goes to CCA schedule, not line 8570
Reset UCC to zero each year	UCC is a running balance — carry forward every year
Claim CCA beyond business-use %	Vehicle CCA must be pro-rated by business-use %
Dispose of asset without recording	Disposition reduces UCC; recapture may result if proceeds > UCC

Who Must File T2125

Situation	File T2125?
Freelancer/contractor	Yes
Side hustle income	Yes
Gig economy (Uber, DoorDash)	Yes
Professional practice (lawyer, doctor)	Yes
Online business	Yes
Rental income	No (use T776)
Employee with T4 only	No (may need T777 for employment expenses)

Common Business Expenses Explained

Advertising (Line 8520)

Deductible	Not Deductible
Online ads (Google, Facebook)	Advertising to foreign audiences (limited)
Business cards	—
Website hosting	—
SEO services	—

Meals and Entertainment (Line 8523)

Rule	Amount
General meals/entertainment	50% deductible
Long-haul truckers	80% deductible
Meals while traveling overnight	50%

Keep receipts with: date, location, business purpose, and attendees.

Vehicle Expenses (Line 9281)

Calculate your business-use percentage: Business km ÷ Total km = Business-use %. Keep a mileage log with date, destination, purpose, and km driven.

CPP on Self-Employment Income

Self-employed individuals pay both the employee and employer portions of CPP:

2026 CPP	Rate
Employee portion	5.95%
Employer portion	5.95%
Total	11.9%
Max pensionable earnings	$74,600
Maximum CPP	$8,460.90

Plus CPP2 on earnings $74,600–$85,000:

Rate: 8% (4% × 2)
Maximum CPP2: $832

CPP is calculated on Schedule 8 and filed with your T1 return.

GST/HST Considerations for Self-Employed

Situation	GST/HST Registration
Income under $30,000	Optional (small supplier exemption)
Income over $30,000	Mandatory — register within 29 days
Taxi/rideshare	Mandatory from first dollar

If registered, you collect GST/HST on invoices, claim Input Tax Credits (ITCs) to recover GST/HST paid on business expenses, and file GST/HST returns (annually, quarterly, or monthly). The Quick Method simplifies accounting: you keep all GST/HST collected and pay a reduced rate (varies by province) with no ITCs claimed.

Business Loss on T2125

Situation	Treatment
Loss this year	Can offset other income (employment, investment)
Reasonable expectation of profit	Required for CRA to allow loss claims
Home office in loss year	Cannot create or increase a business loss
Capital losses	Different rules — reported on Schedule 3

Business losses reduce your total taxable income from all sources, but CRA may challenge persistent losses if there is no reasonable expectation of profit.

Example T2125 Calculation

Freelance graphic designer:

Item	Amount
Gross income (Line 8000)	$85,000
Expenses:
Advertising	$2,000
Software subscriptions	$1,500
Computer (CCA)	$800
Office supplies	$500
Professional fees (accountant)	$1,200
Internet (60% business)	$720
Phone (50% business)	$600
Total expenses	$7,320
Home office:
Rent ($24,000 × 15%)	$3,600
Utilities ($2,400 × 15%)	$360
Total home office	$3,960
Net business income	$73,720

Then pay:

Income tax on $73,720 at your marginal rate
CPP of ~$8,460 (calculated on Schedule 8)
No EI (unless opted in)