Completing Form T2125 — Montreal CPA Firm Near You: How to Report Business Income, Deduct Expenses, and File Self-Employment Taxes Properly

Form T2125, Statement of Business or Professional Activities, is the foundation of tax reporting for self-employed individuals, sole proprietors, independent contractors, and professionals in Canada. Whether you earn business income, professional income, gig-economy income, or commission-based income, Form T2125 determines your gross income, net income (loss), capital cost allowance, and eligible deductions.

This form is one of the most frequently scrutinized by the CRA because it contains high-risk items such as vehicle expenses, home office deductions, capital cost allowance, subcontractor costs, business income sources, and industry codes. Completing it properly protects you from penalties, reassessments, and audits.

This guide explains what Form T2125 includes, how to fill it out accurately, when you must complete multiple forms, common errors to avoid, and how to structure business reporting for maximum compliance and tax efficiency.

Legal and Regulatory Framework

Form T2125 is required for anyone reporting business, professional, commission, farming, or fishing income on their T1 Income Tax and Benefit Return. Under the Income Tax Act, individuals earning self-employment income must calculate:

• Gross income

• Cost of goods sold

• Net business or professional income

• Allowable expenses

• Capital cost allowance

• Business-use-of-home expenses

• Motor vehicle expenses

• GST/QST adjustments

• Recapture amounts

• Industry code information

This form integrates directly with your personal income tax return. The numbers calculated on Form T2125 flow into your T1 return and determine your taxable income, CPP contributions, and GST/QST reporting obligations.

CRA’s Guide T4002 – Self-Employed Business, Professional, Commission, Farming, and Fishing Income provides additional instructions and examples for completing the form. For professionals operating more than one business, Interpretation Bulletin IT-206 (Separate Businesses) outlines when multiple T2125 forms are required.

Key Court Decisions

Courts have repeatedly upheld CRA’s right to deny deductions on Form T2125 where:

• No receipts or supporting documentation were kept

• Vehicle logs were incomplete

• Expenses lacked a clear connection to earning income

• Multiple businesses were improperly grouped together

• Capital cost allowance was miscalculated or unsupported

• Gross revenue was inconsistent with banking records

Judges consistently reiterate the principle: the burden of proof is on the taxpayer to justify every deduction claimed.

Cases involving self-employed professionals also confirm that revenue must be reported when earned—not simply when received—unless the business qualifies for cash-basis reporting.

Why CRA Targets T2125 Filings

Form T2125 is one of the most audited components of personal returns because it includes:

• Motor vehicle expenses

• Business-use-of-home expenses

• Meals and entertainment

• Subcontractor fees

• Capital cost allowance

• GST/QST reporting adjustments

• Personal expenses claimed as business expenses

• Multiple income streams

CRA often compares Form T2125 against:

• Industry averages

• Merchant terminal reports

• Payment processor records

• GST/QST filings

• Bank deposits

• Third-party slips

• Lifestyle indicators

Accurate, defensible reporting reduces audit risk.

Mackisen Strategy

Mackisen helps business owners, professionals, and gig workers complete Form T2125 accurately by:

• Reviewing business structure and activity

• Selecting the correct industry code

• Calculating gross revenue and reconciling deposits

• Identifying allowable expenses

• Allocating personal vs. business expenses

• Calculating capital cost allowance correctly

• Determining business-use-of-home and vehicle allocations

• Preparing T2125 for multiple businesses

• Implementing strong record-keeping systems

• Keeping CRA-ready documentation

We ensure the form is complete, compliant, and optimized for maximum deductions.

Real Client Experience

A consultant used Form T2125 incorrectly for multiple businesses. Mackisen separated each business, recalculated expenses, and avoided CRA penalties.

A contractor overstated motor vehicle expense claims based on estimates. We reconstructed mileage logs and preserved legitimate deductions.

A professional with a home office deducted excessive personal expenses. Mackisen redid the T2125 calculation using reasonable allocation and prevented an audit escalation.

A gig worker had inconsistent income reporting across banking and GST filings. We reconciled records and filed corrected T2125 forms.

Business or Professional Income Overview in Form T2125

Form T2125 reports:

• Gross sales, commissions, or professional fees

• GST/HST/QST adjustments

• Returns, allowances, and discounts

• Inventory and cost of goods sold

• Other income (subsidies, grants, bad-debt recoveries, rentals)

Proper classification ensures accurate net-income calculations and avoids mismatches in CRA systems.

When You Must File Multiple T2125 Forms

The CRA requires separate T2125 forms when:

• You carry on both business and professional income

• You operate multiple businesses

• Your businesses are distinct in nature, clients, or operations

• Your activities are considered separate businesses under IT-206

Examples:

• A consultant who also runs an online e-commerce store must complete two T2125s

• A dentist with a professional practice and rental income from chair rentals may need separate forms

• A contractor with a side business repairing vehicles must separate them

Each activity must have its own industry code, revenue, and expenses.

Key Parts of Form T2125

1. Business Identification Section

Includes:

• Business name

• Industry code

• Fiscal period

• Address

• GST/QST registration

This establishes business identity and classification.

2. Business Income Section

Reports:

• Gross sales or fees

• GST/HST collected (if applicable)

• Adjustments for discounts and returns

• Cost of goods sold

All amounts must align with bank deposits and sales records.

3. Business or Professional Expenses

Includes:

• Advertising

• Meals and entertainment

• Office supplies

• Legal and accounting fees

• Salaries and subcontractor payments

• Travel

• Repairs and maintenance

• Insurance

• Property taxes and interest (for home office)

• Utilities

• Motor vehicle expenses

• Professional dues

Expenses must be reasonable and connected to earning income.

4. Capital Cost Allowance (CCA)

CCA is claimed for depreciable assets such as:

• Equipment

• Tools

• Computers

• Vehicles

• Furniture

• Buildings

CCA classes and rates must be applied correctly.

5. Business-Use-of-Home Expenses

Reported in Part 7, including:

• Utilities

• Heating

• Mortgage interest

• Rent

• Property taxes

• Maintenance

You can only claim these amounts if conditions are met and they cannot create or increase a business loss.

6. GST/QST Adjustments

If registered, you must adjust expenses for input tax credits or refunds.

7. Net Income Calculation

The final step determines net business or professional income that flows to your T1 return and affects CPP contributions and total taxable income.

Common Errors on Form T2125

• Combining multiple businesses in one form

• No industry code or wrong industry code

• Missing cost-of-goods-sold details

• Claiming 100% of vehicle expenses

• No mileage logbook

• Overstating home-office expenses

• Claiming personal expenses

• Incorrect CCA claims

• Failing to reconcile with GST/QST filings

• Missing receipts

Correcting these avoids CRA reassessments.

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 completing Form T2125 for multiple business activities, our expert team ensures precision, transparency, and protection from audit risk.

If you are self-employed, a contractor, or a professional, Mackisen can complete your T2125 accurately, maximize allowable deductions, and reduce your CRA audit risks.