Filling Out the T2125 Business Schedule – A Complete Guide by a Montreal CPA Firm Near You

Introduction
For every self-employed Canadian—freelancers, contractors, gig workers, consultants,
tradespeople, and online sellers—the T2125 Statement of Business or Professional
Activities is the most important tax form you will file. It determines how much business
income you report, which expenses you can deduct, and how CRA calculates your
taxable income and CPP contributions. Errors on the T2125 are one of the biggest
causes of CRA reviews and reassessments for sole proprietors. Many first-time
business owners struggle with this form because it contains unfamiliar terminology,
complex rules, and multiple sections requiring detailed records. This guide provides a

clear, structured, line-by-line explanation of how to fill out the T2125 form correctly and
avoid costly mistakes.
Legal and Regulatory Framework
Form T2125 is governed by the Income Tax Act, primarily under:
• Section 9 – reporting business income
• Sections 18 & 67 – eligibility and reasonableness of expenses
• Section 18(12) – workspace-in-home rules
• Motor Vehicle Expense Regulations – documenting business travel
• Recordkeeping Requirements (section 230) – retaining receipts, logs, and
supporting documents
Self-employed individuals must complete the T2125 with:
• gross business income
• cost of goods sold (if applicable)
• detailed business expenses
• vehicle expenses
• home office expenses
• capital cost allowance (CCA)
• net profit or loss
• GST/HST adjustments (if registered)
The T2125 is then integrated into the T1 personal tax return, determining taxable
income and CPP contributions. These laws create the regulatory foundation for filing the
T2125 in Canada.
Key Court Decisions
Court rulings reinforce CRA’s strict expectations for T2125 reporting.
In Sowrey v. Canada, expenses were denied due to lack of receipts, confirming that
proper documentation is mandatory.
In Black v. Canada, reconstructed estimates were rejected; the court insisted on
contemporaneous records.
In McKeown v. Canada, vehicle deductions were disallowed due to missing mileage
logs.
In Symes v. Canada, personal expenses disguised as business deductions were
denied.
These cases highlight that accurate recordkeeping, proper classification, and full
compliance with T2125 rules are essential for defending against CRA challenges.
Why CRA Targets This Issue
CRA frequently selects T2125 filers for review because:

• home office expenses are often overstated
• vehicle expenses are claimed without mileage logs
• subcontractor or advertising claims appear high vs revenue
• personal expenses are mixed with business expenses
• revenue reported does not match bank deposits
• GST/HST adjustments are missing
• expenses lack proper receipts
CRA uses industry benchmarking and data-matching tools (payment processors,
platform income, T4As, bank deposits) to identify inconsistencies. Incomplete or
incorrect T2125 filings are a major audit trigger.
Mackisen Strategy
At Mackisen CPA Montreal, we help self-employed individuals file flawless T2125 forms
by using a proven, structured system:

1. Income Reporting
   • We reconcile all bank deposits, e-transfer payments, platform payouts, and cash
   receipts.
   • We ensure income matches GST/HST filings (if registered).

2. Cost of Goods Sold
   • For product-based businesses, we track beginning inventory, purchases, and ending
   inventory, ensuring accurate gross profit calculation.

3. Operating Expenses
   • We classify each expense correctly using CRA-approved categories (advertising,
   office expenses, supplies, travel, meals, insurance, etc.).
   • We apply the 50% rule for meals and entertainment.
   • We remove high-risk or non-deductible items.

4. Vehicle Expenses
   • We calculate business-use percentage based on mileage logs.
   • We apply CRA limits on lease and interest deductions.

5. Home Office Expenses
   • We measure workspace area and document eligibility.
   • We calculate allowable rent, utilities, insurance, condo fees, repairs, and mortgage
   interest.

6. Capital Cost Allowance (CCA)

• We categorize assets into correct CCA classes.
• We determine whether claiming CCA increases CRA risk or is beneficial.
7. Final Review
• We ensure the T2125 integrates correctly into your T1 return.
• We prepare audit-ready documentation for the entire year.
This structured approach ensures accuracy, maximizes deductions, and minimizes CRA
risk.
Real Client Experience
A contractor incorrectly reported business income because he relied only on e-transfer
notifications. CRA reassessed him after reviewing bank deposits. We corrected his
T2125, reconstructed income records, and set up a proper bookkeeping routine.
Another client claimed 100% of home internet and vehicle expenses. CRA denied most
deductions. We recalculated the correct business-use percentages and protected him
from future audits.
A freelancer attempted to deduct capital equipment incorrectly. CRA flagged the T2125.
We reclassified assets, applied proper CCA classes, and resolved the review.
Common Questions
Self-employed taxpayers often ask whether they can estimate expenses. No—CRA
requires receipts.
Others ask whether they can claim personal clothing or grooming. No—those are
personal expenses.
Some ask whether T2125 losses can offset employment income. Yes—if the business is
real, with a reasonable expectation of profit.
Another question: Do I need a separate bank account? Strongly recommended for CRA
compliance.
Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps
freelancers and small business owners prepare accurate, audit-proof T2125 filings.
Whether your business is simple or complex, our expert team ensures precision,
transparency, and full CRA protection.