Knowing what tax forms apply to which clients are an essential part of offering tax services as a professional accountant or bookkeeper. If a new client has decided to enlist your services, you will need to determine what income tax forms apply to their situation.
Operating a business in Canada means you must file income tax returns with the Canada Revenue Agency (CRA) every year. The type of business and business structure will dictate what tax forms must be filed and when.
This T2125 form guide will help professional accountants and bookkeepers generate and file their client’s small business income tax returns for the upcoming tax season.
What is T2125?
The T2125 Statement of Business or Professional Activities is an essential part of the CRA’s T1 income tax package that individuals use to file their personal income tax returns with the Canadian government. Both income and expenses of the client’s business are reported on the CRA T2125 return.
Form T2125 is part of the T1 General Return, which all individuals who have self-employed business or professional activities must complete and file with the CRA each tax season. As the pandemic has disrupted tax filing in the past year, it’s important to consider how COVID-19 affects tax filing for the future.
Who Must File A T2125 Form?
Only certain clients that run businesses will need you to file their T2125 form. Specifically, any of your individual clients that are an owner of a service-based business, and are either sole proprietors, or part of a partnership with less than five members, and earn a business income will need to report their personal income on form T2125.
Any client that earns a professional income from a business, even if that business is unregistered, must account for that income using the Statement of Business or Professional Activities form in the T1 tax return. Should the client operate two or more businesses, you will need to file a separate T2125 form for each business.
If your client does not fall under this category, then you will need to file their returns using other forms. Depending on the situation or their business structure, you could be filing a:
- T2 return for corporate business clients
- T5013 return for partnership clients with more than 5 members
If your client is self-employed, then they may have received a T4A slip from their business clients, which reports the income paid to them in the previous year. The information on the T4A form will be used on form T2125 of the client.
Is Form T2125 Required for Income Earned Outside of Canada?
If your client is a citizen of another country, whether American or international, you could also be required to fill out further Canadian income tax forms in order to reduce the possibility of taxation by multiple jurisdictions. Additionally, they may be required to file separate income tax forms for the other country involved.
If there is foreign income generated by the business, you will still need to file Form T2125 for the client, but the situation will also see you using other tax forms, such as Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for U.S. Tax Withholding.
How to Fill Out T2125
The client’s Statement of Business or Professional Activities return is a 7-page tax form that is segmented into 9 parts. Not every section will apply to your client, so some segments may be left blank.
Therefore, to fill out your client’s T2125 form, you will need to gather information pertaining to each section below:
This covers the basic information of the client and their business, including:
- Client’s name
- Client’s Social Insurance Number (SIN)
- Client’s business name, address, and business number
- Client’s business details including what the main products or services are, and corresponding industry code
2. Internet business activities
If the client operates a website that generates income, then this section will need to be filled in using:
- Relevant URLs
- Percentage of gross income earned per site
This applies to all business sites in which they sell goods or services, as well as auction and marketplace sites. Any advertising income generated through the sites must also be accounted for in this section, including income from advertising programs such as Google AdSense or Microsoft adCentre.
It is important to note that if your client has more than five websites that generate revenue, you should report the top five that garner the most internet income.
3. Business and professional income types
This section outlines the type of income your client will have generated throughout the tax year in question. Depending on their situation, they will have earned business income or professional income.
Business income covers any activity made by the client that has generated a profit, including sales, commissions, and fees. For example, any income generated by the client’s lawn mowing business, or Etsy side hustle would be accounted for here. Professional income is similar, but only covers any income generated by professional activities that possess a governing body, such as a professional lawyer, doctor, or engineer.
With this in mind, expect to fill in the four parts associated with income type:
- 3A – Business Income: Must be filled in for all clients that have earned a business income (not a professional income). This section will also have you enter in their GST/HST collected in the tax year.
- 3B – Professional Income: Must be filled for all clients that have earned a professional income. Corresponding GST/HST collected should be entered. If the client has not earned a professional income, leave this section blank.
- 3C – Gross Business or Professional Income: The adjusted gross totals calculated in 3A and 3B, including any reserves deducted in the previous year, and any other income, should be entered here.
- 3D – Costs of Goods Sold and Gross Profit: Fill in the client’s business income, minus any expenses, such as inventory, payroll, and any other costs directly connected to the selling of the client’s goods or services.
4. Net income before adjustments
All expenses incurred in running the client’s business will need to be reported at this time. Expenses should be entered by categories, such as advertising and marketing costs, payroll and wages, business insurance, meals and entertainment, travel expenses, and office expenses such as rent and utilities.
Listing all business expenses here is part of the process of claiming tax deductions from those operating costs. It’s essential to gather as much information from your clients at this time to ensure the proper classification and deductions of business expenses.
For example, to write off vehicle expenses, you will need specific details from your client, such as the mileage on their motor vehicle that was used for business purposes versus personal use. This will help you calculate the amounts for the expense categories with the corresponding deductions.
It is also important to note the capital cost allowance section, including buildings, furniture, and office equipment used for the business or professional services that will depreciate over time. You can claim a percentage of depreciation on these assets as a deductible expense for your client each year by calculating the capital cost allowance of these depreciable assets.
For example, should you buy a computer and you use it to conduct both your personal and business activities, you will need to apportion what is appropriate between the two activities to determine what is reasonable to deduct against the gross income one derives from their business activities.
5. Net income
This section is where you calculate your client’s final net income or loss for the tax year. This calculation should include their appropriate business-use-of-home expenses, which will also be accounted for in section 7.
If the client is part of a partnership with fewer than five members, now is the time to report partnership income. However, if the client has structured their business as a sole proprietorship, you can leave the partnership section blank.
6. Other deductible amounts from the client’s share of the net partnership income
Expenses that do not fit into section 4 or 5 should be entered at this time. If the client is part of a partnership with less than five members, it is in this section that the partnership comes into play. It is in this section that the other amounts deductible from the client’s share of the net partnership income (loss) should be accounted for.
This section of T2125 tax return deals with expenses incurred by the separate Partner but is NOT reimbursed by the Partnership.
For example, a Partner in a technology services partnership takes a new technology class in order to provide better services to his clients but the partnership does NOT reimburse the partner for this expense. The partner, your client, can include this “separately incurred” expense as a business expense that can be used to offset their share of the partnership income allocated to them (see Part 6 of the form).
7. Business-use-of-home expenses
For the business-use-of-home expenses, there are special rules that allow you to account for and deduct some of the expenses associated with your client’s home office (see line 9945 included in Part 5 of the form and Part 7).
Pay close attention to the current credits and deductions associated with these home office expenses. For a detailed walkthrough of this section, learn how to deduct home office expenses for your client.
8. Details of other partners
Again, if the client is not in a partnership but rather is a sole proprietor, this section of the T2125 can be left blank. Otherwise, now is the time to report all personal and contact information of the other partners included in the partnership business.
9. Details of equity
To complete this section of the CRA’s T2125 form, your client should provide you with all information concerning the debts owed by the business at the end of the tax year. On top of reporting these debts, you should also enter in any personal contributions or withdrawals the client has made to or from their business.
Learn more about helping your clients through the 2021 tax filing season.
Filing Form T2125
When filing your clients’ T2125 tax form, you have the option to submit by mail or online to the CRA. Filing online is easy with cloud-based tax software that integrates seamlessly with your accounting software.
Pro Tax is built into QuickBooks Online Accountant so accounting professionals have one place to manage the books and file T2125 forms with the T1 return for their self-employed clients. What makes using QuickBooks Online Accountant and Pro Tax stand out when it comes to filing T2125 forms is our new self-employed tax mapping feature.
This feature allows you to map all of your accounts to the T2125 self-employed tax buckets and synchronize that data seamlessly into your return in Pro Tax, without going across systems or wasting time moving data from one place to another.
Cloud-based tax software can help you come tax season. With Pro Tax built into QuickBooks Online Accountant, you have one place to manage the books, prepare year-end workpapers and file tax returns for all of your clients. Sign in to QuickBooks Online Accountant to try Pro Tax for free and improve your tax filing for the future.
This content is for educational and information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Tax laws and regulations change frequently and can vary widely based upon the specific facts and circumstances involved. The content on this site is “as is” and carries no warranties. Intuit does not warrant or guarantee the accuracy, reliability, and completeness of the content on this site. We provide third-party links as a convenience and for informational purposes only. Intuit accepts no responsibility for the accuracy, legality, or content on these sites.