T2125 - A Guide for Independent Contractors and Self Employed Individuals

​In Canada, an independent contractor is a self-employed individual who offers services to clients under terms specified in a contract or agreement. Unlike employees, contractors operate their own businesses, have control over how and when work is completed, and are responsible for their own taxes and benefits.

​

Tax Obligations for Independent Contractors

As an independent contractor, you are responsible for:

1. Reporting Income: All income earned from your services must be reported to the Canada Revenue Agency (CRA).​

2. Receiving T4A Slips: Clients who pay you more than $500 in a calendar year are required to issue a T4A slip, detailing the income paid to you (reference). However, even if you do not receive a T4A slip, you are still obligated to report all income earned. (reference)​ 

   • The legal foundation is in Section 5(1) and Section 3(a) of the Income Tax Act, which establish the requirement to include all income from all sources in computing taxable income:

     ITA – Section 3(a):

     "The income of a taxpayer for a taxation year for the purposes of this Part is the taxpayer’s income for the year from all sources, and shall be computed by determining the total of all amounts each of which is the taxpayer’s income for the year..."

     ITA – Section 5(1):

     "Subject to this Part, a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year."

3. Filing Taxes Using Form T2125: To report your business or professional income and related expenses, you must complete Form T2125, Statement of Business or Professional Activities, and submit it with your personal tax return (T1). ​

Completing Form T2125

Form T2125 helps calculate your gross and net income by detailing your income sources and deductible expenses. Key sections include:

• Part 1: Identification and Business Information: These are two separate sections that require your personal information, including business name and number, social insurance number, address, your name, CRA business number (GST/HST), and more. You can leave some parts blank if you don't have a registered business. The partnership information tab only appears if you indicate the business is a partnership, rather than a sole proprietorship. Most self-employed individuals use a fiscal year that starts on January 1 and ends on December 31. You’ll also describe your main product or service, choose your industry code, and indicate whether you use the method for accounting (cash or accrual). 
  
  

• Part 2: Internet business activities: If you earn income through websites or online platforms—such as selling products through Shopify, Etsy, or offering services on freelance platforms—you must report how many websites generate income, the main URLs, and what percentage of your income comes from the internet. It’s important to track your online earnings separately, especially if your business is hybrid (both physical and online).
  

• Part 3A-C: Income:
  This is split into two subsections: Part 3A is for business income, and Part 3B is for professional income. You only fill out one of these unless you have both types of work, in which case you fill out separate T2125 forms. Here you report your total gross sales or fees, including any GST/HST you collected. You also subtract any applicable returns, discounts, and GST/HST to calculate your actual net income from sales or services. If you’re using the Quick Method for GST/HST, you’ll also record certain calculations that adjust for government remittance rates.
  
  

  After calculating your income, Part 3C is a summary section that combines the adjusted income from Part 3A or 3B and includes other income such as government assistance or grants. The total from this section becomes your gross business or professional income.

  

   

  If you sell physical goods, you must complete Part 3D, which focuses on calculating your cost of goods sold (COGS). This includes the value of your opening and closing inventory, purchases of raw materials or products for resale, direct labour or subcontract costs, and other production-related costs. The purpose is to determine your gross profit by subtracting COGS from your revenue.

• Part 4: Net Income (Loss) Before Adjustments: Use this section to report your gross profit and expenses. You are required to keep records for your income and expenses, but you might not have these if you didn’t realize you were running a business. If you don’t have good records, you should be conservative in your estimates for income and only claim expenses that you can back up with receipts (credit card statements aren’t enough).
  Expenses include:

  • advertising,
  • meals and entertainment,
  • office supplies,
  • insurance (not your car insurance - that would normally go under Chart A - Motor Vehicle Expenses) ,
  • professional fees (like accounting or legal costs),
  • rent (not your main residence utilities - those go in Part 7 – Calculating business-use-of-home expenses),
  • utilities (not your main residence utilities - those go in Part 7 – Calculating business-use-of-home expenses),
  • travel, and
  • vehicle expenses.
  Not all expenses are fully deductible—for example, only 50% of meal and entertainment expenses are allowed. You can also claim depreciation on your assets through what’s called Capital Cost Allowance (CCA), which you calculate in a later section. It’s crucial to only include the business-use portion of any expense and to keep accurate receipts and documentation.
  
  

• Part 5: Your Net Income (loss): You begin with the net income from Part 4 and make additional adjustments if you are in a partnership, such as applying your share of income from the partnership or reporting any GST/HST rebates received. If you work from home, this is also where you’ll include your business-use-of-home deduction, which is calculated in Part 7. The result is your final net business income, which you then transfer to your personal tax return (T1).

  

• Part 6 – Other amounts deductible from your share of net partnership income (loss): If you are not in a partnership you can leave this blank. If you’re in a partnership and incurred business expenses that the partnership did not reimburse, Part 6 is where you claim those unreimbursed costs. This ensures you’re not taxed on income that was partially offset by your own contributions.

• Part 7: Calculating business-use-of-home expenses: This part is dedicated to calculating the business-use-of-home expenses. If you work from home, you may deduct a portion of your home expenses like heat, electricity, rent or mortgage interest, property taxes, insurance, and maintenance. The amount you can claim is based on the percentage of your home used for business. For example, if your home office takes up 10% of your home’s square footage, you can deduct 10% of these eligible expenses. This section also includes CCA related to home office space, but only the business portion.
  
  
• Part 8: Details of other partners: If you are not in a partnership you can leave this blank. If you share the business with others but are not filing a formal partnership return, Part 8 asks you to list the names, addresses, and ownership shares of your business partners.
•  Part 9  Details of equity: This part provides a snapshot of the business's financial position by showing the amount of liabilities, capital contributions made during the year, and any personal drawings taken out of the business
• Capital Cost Allowance: Use this section to report your capital expenses. Capital expenses are expenditures for things that have a lasting benefit (like office furniture, a computer, or a camera). If you have a personal motor vehicle, don’t include it on the CCA tab; use the Motor Vehicle Expenses (your own vehicle) tab to claim both motor vehicle expenses and CCA for your vehicle.

CCA And Dispositions
The following sections, titled Areas A to G, are technical sections for calculating tax depreciation (CCA) on business assets. These include vehicles, office equipment, computers, buildings, and tools. You list each asset in the appropriate class (see CCA Classes), report its purchase cost, calculate depreciation, and deduct the eligible amount. Some assets are eligible for immediate expensing (see Immediate expensing eligibility) or accelerated write-offs under CRA rules (see Accelerated investment Incentive). Keep in mind that you can only depreciate the business-use portion of each asset.

Chart A - Motor Vehicle Expenses

There’s also a Motor Vehicle Expense Chart (Chart A) where you calculate deductible vehicle costs based on the proportion of business kilometres driven. You need to know your total kilometres driven during the year and how many were for business purposes. You’ll then apply that percentage to vehicle expenses like gas, insurance, maintenance, lease payments, and parking fees. Keeping a mileage logbook is essential for CRA compliance.

Chart B - Available interest expense for passenger vehicles and zero-emission passenger vehicles

This chart is used to calculate how much interest on a car loan you can deduct if you used the vehicle for business purposes. There’s a maximum allowable deduction, which is calculated based on the number of days in your fiscal year.

Key Fields in Chart B:

• Line 17: Total interest paid or payable on the car loan.

• Line 18: The CRA formula: $350÷30×numberofdaysvehiclewasfinanced\$350 ÷ 30 × number of days vehicle was financed$350÷30×numberofdaysvehiclewasfinanced.

• Line 19: Deduct the lesser of Line 17 or Line 18.

📌 Tip: Keep your vehicle loan agreement and interest statements from your lender.

Chart C – Eligible Leasing Cost for Passenger Vehicles

If you leased your vehicle, this chart calculates the portion of the lease that’s eligible for deduction. The CRA limits the lease deduction depending on the cost/value of the vehicle.

Key Fields in Chart C:

• Line 20: Lease payments made this year.

• Line 21: Lease payments from previous years (if lease started earlier).

• Line 22: Total number of days leased.

• Line 23: Manufacturer’s list price of the vehicle.

• Lines 24–28: CRA calculations to limit the deductible amount based on max thresholds (e.g. $43,529 + taxes in 2024).

📌 Tip: You can’t deduct more than CRA’s limits, even if your actual lease payments were higher.

For vehicles purchased after 2023, the max claimable interest is $350/month, prorated.

Example T2125:

Business Info: Name: Alex Rivera
Business Name: Rivera Web Creations
Industry Code: 541510 (Computer Systems Design)
Fiscal Year: Jan 1, 2025 to Dec 31, 2025
Accounting Method: Accrual

Income (Part 3A):

• Website design project for Client A: $2,000

• Consulting services for Client B: $1,500

• Total Gross Income: $3,500

Expenses (Part 4):

• Office Supplies (ink, paper): $45

• Travel (Uber to client meeting): $30

• Advertising (Google Ads): $100

• Total Expenses: $175

Net Income (Before Adjustments): $3,500 - $175 = $3,325

No partnership, no capital cost allowance claimed, and no home office expense in this example.

Net Income (Part 5): Final net income to report on Line 13500: $3,325

Filing Your Taxes

As a self-employed individual, your tax return is due by June 15. However, any taxes owed are due by April 30 to avoid interest charges. You can file your return electronically using NETFILE or through a professional tax preparer