In Canada, many people is self-employed. To reduce your tax burden during filing, it’s crucial to understand the deductions available on the T2125 Statement of Business or Professional Activities form. This guide provides a detailed explanation of the main deduction categories to help you maximize your tax savings.
The deductions on the T2125 form are divided into three main categories: Business Expenses, Home Office Expenses, and Automobile Expenses.
Business Expenses
Business expenses include various day-to-day costs directly related to your operations, such as:
- Advertising and marketing costs
- Meals and entertainment expenses
- Insurance premiums
- Bank charges
- Professional membership fees and licenses
- Office supplies and stationery
- Legal and accounting fees
- Office rent and property taxes
- Business travel expenses
- Utilities and communication costs
Important Notes:
- Expenses must be reasonable and business-related:For example, if your business primarily involves online operations, but your meals and entertainment expenses are unusually high, CRA (Canada Revenue Agency) may question the legitimacy of the claim. As long as the expenses are genuinely incurred and related to your business, you can claim them without fear.
- Keep original receipts:CRA may not accept bank statements alone as proof of expenses. Retain detailed receipts showing the date, location, and amount. Consider writing the reason for the expense on the back of receipts to avoid forgetting later.
Home Office Expenses
Home office expenses are costs associated with using a portion of your home for business purposes. These are calculated by multiplying the total expense by the percentage of your home’s area used for business. A reasonable proportion is generally around 10%, while for apartments, 15%-20% is often acceptable. CRA may require a floor plan to verify the proportion.
Deductible Expenses:
- Utilities (e.g., electricity, water, heating)
- Home insurance premiums
- Maintenance costs (limited to repairs that maintain the original condition, not renovations or upgrades)
- Mortgage interest
- Property taxes
- Rent or other related expenses
Important Notes:
Reasonable area proportion:Claiming 10%-20% for your home office is typically considered reasonable. For apartments, this range is more likely to be accepted by CRA.
Automobile Expenses
If your vehicle is used for business purposes, you can claim expenses based on the percentage of business use. Consider using a mileage tracking app to log the purpose and distance of each trip.
Deductible Expenses:
- Fuel costs
- Loan interest
- Insurance premiums
- Licensing and registration fees
- Maintenance costs
- Other expenses (e.g., car washes)
Important Notes:Track usage proportion:Keep accurate mileage records to substantiate the business-use percentage of your vehicle.
By appropriately claiming these deductions, you can significantly reduce your tax liability. Always ensure that all expenses are genuine and reasonable, and retain all necessary documentation to prepare for potential CRA review.
