A T2125 form is a schedule that goes along with a tax return, and it lists income, and expenses where taxpayers operate certain types of businesses. The Canada Revenue Agency (CRA) requires all resident taxpayers who generate business income or losses in a given calendar year to complete and submit a separate T2125 for each respective source of business income. The T2125 form is a filing requirement for many Canadians each year—whether they know it or not!
What is a T2125 Statement of Business or Professional Activities?
The T2125 form is a versatile reporting tool that allows taxpayers to disclose many facets of their enterprise to the CRA including, but not limited to their business income, their purported capital cost allowances, and elections with respect to losses and work in-progress.
Who Needs to File a T2125 Form?
Anyone who has business income of any kind is required to fill out a T2125. This includes sole proprietors, members of a partnership, and even unincorporated individuals who have non-registered business income.
Even someone who partakes in an adventure or concern in the nature of trade must complete a Form T2125. For example, if a taxpayer starts making jewellery and selling it casually, that taxpayer must file a T2125 to record and report the income earned from “business”, even though the “business” may be somewhat disorganized and an inconsistent source of income. As another example, if you are an artist such as a painter, the non-registered income should be recorded and filed on a Form T2125.
Taxpayers who did not earn any Canadian income as a part of their business income still have to record and report their foreign income on their Form T2125. This income may subsequently be eligible for foreign tax credits.
Even if you did not accept financial consideration in exchange for the goods or services that you rendered, the value of what you received in return for your goods or services must be recorded on the T2125.
What if I have Different Sources of Income?
For each source of business income earned in a given taxation year, the taxpayer must fill out a separate T2125 form. Even if you operate in the same field or have the same type of revenue, if there are different business entities earning the income, there must be a separate Form T2125 filled out for each.
Why does the CRA require a T2125 Form?
The CRA primarily references T2125s when assessing the aggregate value of business income earned by the taxpayer in a given taxation year and the available losses for carry-forward or carry-back. The CRA also uses these forms to discern the allowable capital cost deductions for capital outlays incurred to produce income for the taxpayer’s taxation year.
Many businesses incur expenses that do not fall under the “Current Expense” category, and consequently cannot be deducted from the income of the taxpayer. Capital cost deductions are not just for businesses, many taxpayers who generate income from other sources, such as rental properties, may also be eligible for capital cost deductions in a given year. These taxpayers would have to record this information on their Form T2125.
If have questions about the T2125 form, if the CRA doesn’t agree with your income / expenses, or if you are being audited for failing to complete the form, call us today, we can help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.