Business or Professional Income — Montreal CPA Firm Near You: How to Calculate, Report, Deduct Expenses, and Stay Compliant

Business or professional income includes all income earned from self-employment, freelancing, consulting, professional services, and most unincorporated business activities. Whether you operate as a sole proprietor, independent contractor, gig worker, consultant, or run a professional practice, the CRA expects you to report business income accurately, maintain complete records, and calculate net business income using the proper rules and forms.

Understanding what counts as business income, how to calculate expenses, how capital cost allowance works, and how to select the right industry code is critical for staying compliant and avoiding costly CRA reviews. This guide provides a complete overview of business and professional income reporting, including how to use Form T2125, what qualifies as an expense, and what business credits you may claim.

Legal and Regulatory Framework

Business and professional income rules are governed by the Income Tax Act. Anyone earning income from business or professional activities—whether registered or not—must report:

• Gross income

• Cost of goods sold (if applicable)

• Business-related expenses

• Capital cost allowance

• Net income for tax purposes

Self-employed people must complete Form T2125 – Statement of Business or Professional Activities, which forms part of their T1 personal income tax return. This form requires details such as:

• Business activity and industry code

• Gross sales

• Cost of goods sold

• Professional fees

• Capital assets

• Vehicle and home-office expenses

• Business-use-of-home allocation

• Net income after allowable deductions

Provincial and territorial rules may also apply for sales tax (GST/QST/HST), payroll, and other specialized programs. Professionals such as doctors, lawyers, accountants, architects, and consultants may have additional regulatory requirements, including maintaining trust accounts and detailed client records.

Key Court Decisions

Courts have consistently ruled that business income must be reported according to accounting principles that clearly reflect profit. Key cases include:

• Canderel Ltd. v. Canada (SCC) — expenses must be deducted in a manner that reflects commercial reality.

• Hickman Motors Ltd. (SCC) — the taxpayer bears the burden of proof when CRA challenges deductions.

• Symes v. Canada (SCC) — personal vs. business expenses must be clearly separated; personal expenses cannot be deducted.

Courts have also reinforced the importance of proper record keeping. In numerous cases, deductions have been denied because receipts, mileage logs, invoices, or accounting records were missing or incomplete. The legal requirement is clear: if you claim it, you must be able to prove it.

Why CRA Targets This Issue

Business income is one of the most audited areas of personal tax in Canada. CRA pays close attention to:

• Under-reported income

• Overstated or personal expenses claimed as business deductions

• Missing receipts

• Large motor-vehicle or home-office claims

• Cash-based businesses

• Industries with high non-compliance (construction, restaurants, beauty, home services)

• Gig-economy workers (Uber, Airbnb hosts, Deliveroo, independent contractors)

• Sudden drops in income or spikes in expenses

• Unreported online sales

The CRA compares reported business income with electronic payment records, third-party slips, banking activity, GST/HST filings, industry averages, and lifestyle indicators.

Accurate reporting minimizes audit risk and helps ensure smooth business operation.

Mackisen Strategy

Mackisen helps business owners and professionals navigate CRA requirements and optimize deductions. Our strategy includes:

• Setting up proper bookkeeping systems

• Maintaining compliant record-keeping practices

• Reviewing business activities and industry codes for accurate reporting

• Ensuring Form T2125 is completed properly

• Separating personal and business expenses

• Maximizing allowable deductions

• Calculating vehicle, home-office, and capital cost allowance correctly

• Preparing GST/QST/HST filings

• Reviewing eligibility for federal and provincial business credits

• Ensuring compliance for partnerships and co-ventures

• Providing guidance on CRA audit-proof documentation

Whether you operate a small home-based business, a professional practice, or multiple income streams, Mackisen ensures your filings are accurate and tax-efficient.

Real Client Experience

A consultant reported only a portion of their income and faced a CRA review. Mackisen reviewed bank records, corrected income reporting, documented deductions, and successfully closed the CRA file without penalties.

A professional photographer missed eligible equipment deductions because assets were not categorized properly. We prepared a detailed capital cost allowance schedule, reducing their taxable income significantly.

A self-employed driver claimed motor-vehicle expenses without a mileage log. Mackisen helped reconstruct mileage evidence using calendars and GPS records, saving deductions that would otherwise have been denied.

A home-based wellness practitioner improperly mixed personal expenses with business expenses. Mackisen reorganized their records, calculated the correct business-use-of-home percentage, and improved their compliance and deductions.

Business or Professional Income Overview

Business income includes money you earn from activities such as:

• Consulting

• Freelancing

• Contracting

• Professional services

• Online sales

• Home-based businesses

• Independent gig work

• Fees paid for services

Professional income includes regulated professions such as:

• Lawyers

• Doctors

• Dentists

• Chiropractors

• Accountants

• Architects

• Engineers

Both types require reporting through Form T2125, with supporting books and records.

Industry Codes

When filing Form T2125, you must choose the correct industry code for your primary business activity. These codes help CRA compare your business to similar businesses for audit and statistical purposes.

Examples include:

• Retail trade

• Professional services

• Construction

• Transportation

• Food services

• Health and wellness

• Technology and IT services

• Real estate services

Selecting the correct industry code ensures CRA’s expectations align with your reporting.

Business or Professional Income Types

Beyond standard service income, you must report:

• Farming income

• Fishing income

• Rental income

• Partnership income

• Commission-based income

• Online and digital sales income

Partnerships require separate reporting of your share of partnership income using Form T5013 details.

Capital Cost Allowance (CCA)

CCA allows you to deduct the depreciation of business assets over time, including:

• Vehicles

• Equipment

• Computers

• Furniture

• Tools

• Buildings

Each asset is assigned to a CCA class, which determines the percentage you can claim annually. CCA is a powerful deduction but must be calculated according to CRA rules, including half-year rules and recapture provisions.

Business Expenses

Legitimate business expenses must be reasonable, necessary, and directly related to earning income. Examples include:

• Advertising

• Supplies

• Salaries and subcontractor payments

• Professional fees

• Insurance

• Office expenses

• Travel

• Meals (50% limit)

• Vehicle expenses

• Business-use-of-home expenses

You must keep detailed receipts, not just credit card statements.

Motor Vehicle Expenses

Requires a mileage log and tracking of fuel, repairs, insurance, registration, and financing or lease costs.

Business-Use-of-Home Expenses

Requires tracking total home expenses and calculating the percentage used regularly and exclusively for business.

Business Tax Credits

You may qualify for:

• Federal business tax credits

• Provincial or territorial tax credits

• Quebec small business credits

• Apprenticeship credits

• Clean technology credits

• Research and development credits

• Farmer and fishing industry credits

Credits reduce tax payable and require specific forms and documentation.

Record Keeping

CRA requires you to keep:

• Invoices and receipts

• Contracts

• Bank and credit card statements

• Mileage logs

• Payroll records (if applicable)

• Inventory records

• Digital sales reports

• Merchant and payment processor statements

Records must be kept for at least six years and must be complete, legible, and accessible.

Common Questions

Do I need a business license to file business income?
No. CRA requires reporting of business income even for unregistered or informal businesses.

Can I deduct my phone or Internet?
Yes, but only the business-use portion.

Do I need to charge GST/QST?
Only once you pass the small supplier threshold or voluntarily register.

Can I pay my children or spouse?
Yes, if payments are reasonable and correspond to real work performed.

Do I report cash income?
Yes—failure to report cash income is a major CRA audit trigger.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency, and protection from audit risk.

If you earn business or professional income, Mackisen can calculate net income, optimize deductions, prepare Form T2125, and protect you from CRA reviews.