What Is Form T2125?
If you earned self-employment income in 2025 — as a sole proprietor, freelancer, contractor, or gig worker — you report it on Form T2125 (Statement of Business or Professional Activities). This form is where you claim all eligible business deductions, reducing your net business income and the tax you owe.
Unlike employees who can only claim specific employment expenses, self-employed Canadians can deduct almost any reasonable expense incurred to earn business income. The key test: the expense must be incurred for the purpose of earning income.
📌 Quick Rule: The "Reasonable Business Purpose" Test
An expense is deductible if it was incurred primarily for the purpose of earning income from your business. Personal expenses — even if they have some business connection — are generally not fully deductible unless the business portion can be clearly separated and documented.
Home Office Deduction
If you use part of your home regularly and exclusively for business, you can deduct a proportional share of your home expenses. Calculate the business-use percentage by dividing the area used for business by the total home area.
Eligible Home Office Expenses
- Rent (proportional to business area)
- Mortgage interest (not principal)
- Property taxes (proportional)
- Home insurance (proportional)
- Heating and utilities
- Internet (business proportion)
- Cleaning and maintenance
- Minor repairs to home office space
⚠️ Home Office Limitation
Home office expenses cannot be used to create or increase a business loss. They can only reduce income to zero — any unused amount is carried forward to the following year.
Vehicle and Travel Expenses
If you use a vehicle for business purposes, you can deduct the business-use portion of vehicle costs. Keep a mileage log tracking business vs. personal use throughout the year — the CRA commonly audits this expense.
| Expense Type | Deductible? | Notes |
|---|---|---|
| Fuel and oil | Business portion | Based on km log |
| Insurance | Business portion | Annual percentage |
| Lease payments | Up to $1,050/month | 2025 prescribed limit; business use % applies |
| Repairs and maintenance | Business portion | Keep all receipts |
| Capital cost allowance (CCA) | Business portion | Class 10 (30%) or Class 10.1 for luxury vehicles |
| Parking | 100% if business | Not commuting from home to regular office |
| License and registration | Business portion | Proportional to business use |
Equipment, Tools & Technology
Business equipment can be deducted in one of two ways: as a current expense if it's low value or short-lived, or as capital cost allowance (CCA) for assets with a useful life beyond one year.
Commonly Deductible Items
- Laptop, desktop computer
- Monitors, keyboards, peripherals
- Smartphone (business portion)
- Camera and photography equipment
- Industry-specific tools and equipment
- Software subscriptions (SaaS)
- Office furniture (desk, chair)
- Printers and scanners
Assets over approximately $500 with a useful life of more than one year are typically added to a CCA class rather than fully expensed in the year of purchase.
Professional and Business Services
- Accounting and bookkeeping fees
- Tax preparation fees
- Legal fees (business-related)
- Business consulting fees
- Payroll processing services
- Bank fees and charges
- Credit card processing fees
- Business insurance premiums
Advertising & Marketing
- Website design and hosting
- Digital advertising (Google, Meta)
- Print advertising and business cards
- Logo and branding design
- Email marketing subscriptions
- Social media tools
- Trade show booth and materials
- Promotional products
Meals & Entertainment
Business meals and entertainment expenses are deductible at 50% of the actual cost, provided the meal was for a legitimate business purpose (meeting a client, discussing a business matter, etc.).
Always note on the receipt: the business purpose and names of attendees. Holiday parties for staff (fewer than 6 per year) may be fully deductible.
Training & Education
Courses, workshops, books, and professional development that maintain or improve skills directly related to your current business are deductible. Pre-career education or training for a new occupation is generally not deductible as a business expense.
Other Common Deductions
| Deduction | Notes |
|---|---|
| Business portion of cell phone | Keep usage log; deduct business % |
| Business portion of internet | Separate from home office if not claimed there |
| Salaries & wages paid to employees | Including CPP/EI employer portions |
| Subcontractor fees | Must issue T4A if over $500 |
| Office supplies (paper, ink, etc.) | 100% if used for business |
| Business start-up costs | Costs before earning income may be deductible |
| Professional memberships & dues | If required for your profession |
| Interest on business loans | 100% deductible if borrowed for business use |
| Bad debts | Uncollectable amounts previously included in income |
| RRSP contributions | Claimed on T1, not T2125 — but reduces total tax |
Record Keeping Requirements
The CRA requires you to keep all business records for a minimum of 6 years from the end of the tax year they relate to. This includes receipts, invoices, bank statements, mileage logs, and contracts.
📁 Best Practice: Go Digital
Use apps like Dext, Hubdoc, or even a designated phone folder to photograph receipts immediately. Digital copies are accepted by the CRA. Organize by month and category. A well-maintained record file is your best protection in an audit.