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Statement of Business Activities: T2125 – What You Should Know Before Filing 2023

T2125 Statement of Business Activities for Small Business

Estimated reading time: 4 minutes

The Statement of Business Activities: T2125 is a very important document for self-employed individuals. It forms the basis of taxable income, and is also a key document requested by financial institutions for lending purposes.

Statement of Business Activities: What is it?

In Canada, the T2125 form is used for reporting business and professional income as part of an individual’s personal income tax return. It is also known as the “Statement of Business or Professional Activities.” Individuals who operate a sole proprietorship or are self-employed are required to complete the T2125 form to report their business income and expenses.

The T2125 form includes sections where you can provide details about your business income, business expenses, and other relevant information. It helps the Canada Revenue Agency (CRA) assess your taxable income from your self-employed activities.

Common types of businesses that may use the T2125 form include freelancers, consultants, sole proprietors, and other self-employed individuals. It is essential to accurately fill out the T2125 form to ensure compliance with tax regulations and to maximize eligible deductions, ultimately affecting the amount of income subject to taxation.

Small Business: Business Use of a Home

The T2125 form for business use of a home in Canada allows individuals to deduct expenses associated with using a workspace in their home for business purposes. To qualify for these deductions, one of the following conditions must be met:

  1. The home is the principal place of business.
  2. A space in the home is used solely to earn business income, and it is regularly and consistently used to meet clients, customers, or patients.

Deductible expenses include maintenance costs such as heating, home insurance, electricity, and cleaning materials. Additionally, part of property taxes, mortgage interest, and capital cost allowance (CCA) can be deducted. The deduction calculation involves using a reasonable basis, like the area of the workspace divided by the total home area.

If the space serves both business and personal purposes, the deduction is determined by calculating the percentage of time the rooms are used for business. This is done by dividing the hours used for business by 24. The result is then multiplied by the business portion of total home expenses. If the business operates only part-time during the week or year, the claim is adjusted accordingly. These measures ensure accurate and fair deductions for the business use of a home.

It is usually tax advantageous to have a dedicated space in the home for Business Purposes, rather than a mixed used (personal / business) space.

Statement of Business Activities T2125: Impact on Mortgage or Other Financing

With Interest Rates rising, many mortgages will be coming up for renewal in 2024. Make sure you consider this before you file your 2023 taxes. Lenders often request personal income tax returns, including the T2125, to verify your income and assess your ability to repay a mortgage. The net income reported on the T2125 can be a significant factor in this assessment.

Here’s how the T2125 might indirectly influence mortgage qualification:

  1. Income Verification: Lenders may use the net income reported on the T2125 to verify your income as a self-employed individual.
  2. Stability of Income: The T2125 can demonstrate the stability and consistency of your business income, which can be important for mortgage approval.
  3. Taxable Income: Lenders often consider the taxable income reported on the T2125 when evaluating your debt-to-income ratio, a key factor in mortgage qualification.

Before Filing Your T2125 contact Lambda CPA to make sure you consider your overall financial and tax scenario.

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Lambda CPA

268 Martin Drive
Ilderton, ON N0M2A0
Phone: (226) 797-6820
Email: jeff.runnalls@lambdacpa.com

Leadership

Jeff Runnalls, CPA, CA studied Accounting and Economics at Western University, graduating in 2005. Beginning his career and earning his CPA, CA designation at a Big Four International Accounting Firm, providing Taxation, Accounting and Auditing services, including multiple International secondments.

Jeff then left Public Accounting working in Public and Private Firms in the Technology, Healthcare, Finance and Property Verticals.

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