Income tax for Canadian freelancers: T2125 Declaration of business or professional activities

Updated for the 2020 tax year

How do you declare freelance income?

I covered allowable deductions for freelancers and small business owners in part 1. Here’s some help with filling in the T2125: Statement of business or professional activities.

Do you run a business? Are you self-employed?

If you are carrying on an activity that you intend to make a profit with, then you have a business. The simplest form of business is a sole proprietorship. This means you are not incorporated or in a partnership with anyone. You can run a sole proprietorship business without registering the business, registering a business name, or getting a business license.

The T2125 form: Statement of business or professional activities

If you’re earning money as a sole proprietorship, you simply fill in the T2125 form in addition to your basic personal income tax form. Whatever electronic income tax filing system you use can probably handle this just fine. The T2125 is available electronically; if you do your taxes on paper, you can print out a copy and deliver it along with your general income tax package.

• Where to get it: the General income tax and benefit package for 2020 doesn’t seem to be available yet (January 7, 2021), but should be soon.
• The 2020 version of the T2125 is available, but the last update is from January of last year. It doesn’t seem to be specific to the year.
• How many do you need? Similar business activities can go on the same form, but very different activities (writing and pottery) would have to go on two separate forms. I recommend phoning the CRA if you’re not sure whether two activities can go on the same form.

Sections of the form

Part 1: Identification

• Was this your last year of business? If you closed down the business during this tax year, say “yes” here. This lets the CRA know that they shouldn’t expect any more tax reports for this business.
• Main product or service and Industry code: The industry code lets the CRA know what kinds of deductions they can expect to see on the rest of the form. Editors should use the NAICS code or industry code 561410: Document Preparation Services. This code includes “editing service,” “proofreading service,” and “desktop publishing service.”

Part 2: Internet business activities

If you use your website to promoting your business, I wouldn’t consider this to apply.

Part 3: Business Income or Professional Income?

Freelance editors should choose “professional income.” (In general, “business income” applies to selling physical goods and “professional income” applies to selling your expertise.) Fill out 3B and C and ignore 3A and D.

Part 4

This is where you fill in the deductions that you’ve been tracking throughout the year.

• Rent: this refers to the rent on a purely commercial property. The rent for your living space should go into the “Calculation of business-use-of-home expenses” section in Part 7.
• Property taxes: same thing here. Put your home property taxes under business use of home.
• Other expenses: this is where many of your deductions will go: professional development, subcontractors, etc.

Other tax information

See also:

• Part 1: Allowable deductions for freelancers and small business owners
• Change to GST for BC freelancers