T2125 Form Explained: Step-by-Step Guide for Canadian Freelancers (2026)

The T2125 — Statement of Business or Professional Activities is the single most important tax form for Canadian freelancers. It's where you report all your self-employment income and claim your business expenses. Get it right, and you minimize your tax bill. Get it wrong, and you're either overpaying or risking a CRA audit.

This guide walks you through every section of the T2125 with plain-English explanations, real examples, and CPA tips to help you file confidently.

Who Needs to File a T2125?

You need to file a T2125 if you earned any self-employment income during the tax year. This includes:

• Freelancers — writers, designers, developers, consultants, photographers
• Gig workers — Uber drivers, DoorDash couriers, Airbnb hosts
• Sole proprietors — running any unincorporated business
• Independent contractors — anyone who receives payment without T4 deductions
• Professionals — doctors, lawyers, accountants, engineers in private practice

T2125 at a Glance: What Each Part Covers

Part 1: Business Identification

This section captures your basic business information. Here's what to fill in:

Industry Code (NAICS)

The CRA wants a 6-digit North American Industry Classification System (NAICS) code. This tells them what kind of work you do. Common codes for freelancers:

Fiscal Year End

For most freelancers (sole proprietors), your fiscal year end is December 31. You generally cannot choose a different date unless you incorporate.

Business Name & Address

If you operate under your own name, just put your legal name. If you registered a business name (e.g., "Maple Creative Studio"), use that. Your business address can be your home address if you work from home.

Part 2: Internet Business Activities

Simple yes/no questions about whether you earn income through the internet. If you're a freelancer who finds clients online, accepts payments digitally, or delivers work electronically — the answer is yes to most of these.

Questions include:

• Do you have a website? What's the URL?
• What percentage of revenue comes from online activities?
• Do you use the internet for advertising, sales, or service delivery?

This section is purely informational — it doesn't affect your tax calculation.

Part 3: Business Income

This is where you report your gross revenue — all the money your business earned before expenses.

What to Include

• All invoiced amounts — even if the client hasn't paid yet (accrual basis)
• Cash payments — yes, even e-Transfer and cash
• Barter income — if you traded services, report the fair market value
• Foreign income — converted to CAD at the exchange rate on the date received

Accrual vs. Cash Method

Most freelancers use the accrual method (report income when earned, not when received). However, if you're a sole proprietor with under $500K in gross revenue, you may be able to use the cash method (report income when actually received).

Part 4: Business Expenses (The Big One)

This section is where you reduce your taxable income. The T2125 has 22 expense categories. Here are the ones most relevant to freelancers:

Line 8521 — Advertising

Google Ads, Meta/Instagram ads, business cards, flyers, website hosting for promotional purposes. Must be targeted at the Canadian market to claim 100% — ads in foreign publications are limited to 50%.

Line 8590 — Bad Debts

If a client stiffed you and you've made reasonable efforts to collect, you can write off the unpaid invoice. Keep documentation of your collection attempts.

Line 8690 — Insurance

Professional liability (E&O) insurance, business insurance, cyber insurance. Not personal health insurance — that goes on your personal return.

Line 8710 — Interest & Bank Charges

Business bank account fees, credit card interest on business purchases, loan interest for business purposes. If you use a personal card, only the business portion is deductible.

Line 8810 — Office Expenses

Pens, paper, printer ink, postage, small items under ~$500 that you use up within the year. Larger items (computer, desk) go under CCA instead.

Line 8811 — Office Stationery & Supplies

Similar to office expenses but specifically for consumable supplies.

Line 8860 — Professional Fees

Accountant fees, legal fees, bookkeeping costs, professional membership dues. Tax preparation fees for your business return are 100% deductible.

Line 8871 — Management & Administration Fees

Virtual assistant costs, subcontractor management fees, payroll service fees.

Line 8910 — Travel

Business travel — flights, hotels, meals (50% limit on meals), conference registration. Must be primarily for business purposes. Keep detailed records of the business purpose of each trip.

Line 8990 — Telephone & Utilities

Business phone line, cell phone (business-use percentage), internet (business-use percentage). If you use your personal phone 60% for business, claim 60%.

Line 9060 — Subcontracts

Payments to other freelancers or contractors you hired to help deliver your work. This is fully deductible.

Line 9270 — Other Expenses

The catch-all. Software subscriptions (Adobe, Figma, Slack), cloud storage, domain names, course/training expenses related to your current business, professional development books.

Line 8960 — Meals & Entertainment

Business meals with clients, networking events. Only 50% deductible. You must record: date, who you met, business purpose, and amount. The CRA is strict about this category.

Part 5: Calculating Net Income

This is straightforward math:

Net Business Income = Gross Revenue − Total Expenses − CCA

This net income flows to your T1 personal tax return (line 13500 for business income, or line 13700 for professional income). It's subject to:

• Federal and provincial income tax at your marginal rate
• CPP contributions — both the employee and employer portions (totaling 11.9% in 2026 up to the maximum)

Part 6: Business-Use-of-Home Expenses

If you use part of your home regularly and exclusively for business, you can claim a portion of your household expenses.

How to Calculate Your Percentage

The simplest method: square footage of your office ÷ total square footage of your home.

Example: Your home office is 120 sq ft and your home is 1,200 sq ft → 10% business use.

Expenses You Can Claim (at your %):

• Rent (if renting)
• Utilities — heat, electricity, water
• Internet (can also use a higher % if internet is primarily for business)
• Home insurance
• Property taxes (if owning)
• Mortgage interest (not principal — if owning)
• Maintenance & repairs (proportional)

Part 7: Motor Vehicle Expenses

If you use your personal vehicle for business (client meetings, deliveries, site visits), you can claim a portion of vehicle expenses.

What You Need: A Mileage Log

The CRA is very strict about vehicle expense claims. You need a logbook showing:

• Date of each business trip
• Destination and purpose
• Kilometres driven (business vs. personal)
• Odometer readings at start and end of year

Claimable Vehicle Expenses:

• Gas/fuel
• Insurance
• Maintenance & repairs
• License & registration
• Lease payments (subject to limits — max ~$950/month for 2026)
• CCA on purchase price (subject to limits — max ~$37,000 for Class 10.1)
• Parking (100% if for business)

Calculation: Total vehicle expenses × (business km ÷ total km) = deductible amount

Example: $6,000 total vehicle costs, 15,000 km total, 6,000 km business = 40% → $2,400 deduction.

Part 8: Capital Cost Allowance (CCA)

CCA is how you depreciate expensive business assets over time instead of deducting them all at once. Common assets for freelancers:

5 Common T2125 Mistakes to Avoid

1. Mixing personal and business expenses. Keep separate bank accounts and credit cards. If the CRA audits you and can't distinguish business from personal, they may deny deductions entirely.
2. Forgetting to claim all expenses. Many freelancers miss software subscriptions, professional development, bank fees, and home office expenses. Review your bank statements monthly.
3. Not keeping receipts. The CRA requires you to retain records for 6 years. Digital scans are acceptable — use a folder on your phone or cloud storage.
4. Claiming 100% of mixed-use expenses. Your cell phone and internet are both personal and business. Claim only the business percentage and document how you calculated it.
5. Ignoring the T2125 because you use tax software. Tax software fills in the form, but you provide the numbers. Garbage in = garbage out. Understanding the form means better inputs and a lower tax bill.

How to File Your T2125

1. Track expenses year-round — don't scramble in April
2. Organize by T2125 category — match expenses to the line numbers above
3. Use tax software — TurboTax, Wealthsimple Tax, or StudioTax will generate the T2125 automatically from your inputs
4. NETFILE your return — electronic filing is fastest and confirms CRA receipt
5. Keep all records for 6 years — receipts, invoices, contracts, bank statements, mileage logs

Key Deadlines for 2026 (Tax Year 2025)

FAQ

What is the T2125 form in Canada?

The T2125 is the Statement of Business or Professional Activities. It's required by the CRA for anyone who earns self-employment income in Canada. You attach it to your T1 personal tax return to report your business revenue and expenses.

Do I need to file a T2125 if I only freelance part-time?

Yes. If you earn any self-employment income — even as a side hustle — you must report it on a T2125. There is no minimum income threshold.

Can I claim expenses on the T2125 without receipts?

The CRA requires supporting documents for all claimed expenses. You don't submit receipts with your return, but you must keep them for at least 6 years. Bank statements can supplement but generally don't replace original receipts.

How many T2125 forms do I need to file?

One per distinct business you operate. If you do freelance design AND run an online store, that's two T2125 forms.

What's the difference between T2125 and T2042?

T2125 is for business and professional activities (freelancers, consultants). T2042 is specifically for farming. If you're a freelancer, use the T2125.

What is the deadline for filing the T2125?

It's part of your T1 return. Self-employed filing deadline is June 15, but taxes owed are due April 30. File early to avoid interest.

Bottom Line

The T2125 is your most powerful tool for reducing your tax bill as a Canadian freelancer. Every legitimate expense you track and claim is money back in your pocket. The key is consistent tracking throughout the year — not a frantic scramble during tax season.

Start with our free Tax Deduction Checklist to make sure you're not leaving money on the table, then use the Expense Tracker to organize everything by T2125 category automatically.