Bookkeeping App or Accounting Software for T2125 in Canada

Which app should I use to track business expenses and invoice clients for the T2125?

The CRA's record-keeping guidance names and approves no app, so choose by what the app must produce, not by brand. The CRA wants records with enough detail to determine your tax obligations, and it accepts a journal, a computer file or accounting software (CRA: Keeping records; CRA: Accounting for your earnings). The T2125 reports your business or professional income and expenses (CRA: Form T2125); the app only feeds it.

A case is not simple when you are registered for GST/HST, drive for work, invoice clients in US dollars, keep records on servers outside Canada, or have entries months behind. The sections below cover each, and US-dollar invoices are linked at the end. If the numbers no longer reconcile, a professional needs to look at them before a return is built on them.

Gather first: bank and card statements, sales invoices, receipts, and the odometer reading for each vehicle at the start of the year. To compare specific products on price and Canadian bank feeds, see accounting software for a small Canadian business; for the free option, see what a free accounting app does and does not cover. Which expense goes on which T2125 line is in self-employed expense lines, and a chart of accounts that maps to the return is in chart of accounts for the return.

What does the CRA require of my books, and does it say which app to use?

The CRA requires records that let it determine your tax obligations, and it does not say which tool to use. You must make all records, including computerized ones, available on request, and you stay responsible even if a bookkeeper or accountant keeps them (CRA: Keeping records).

Keep records for at least six years from the end of the last tax year they relate to; some cases need longer (CRA: where to keep records). The start date and the late-filing rule are in how long to keep business records.

Support expense claims with a sales invoice, agreement of purchase and sale, receipt or other voucher. Get a receipt for cash payments, and keep cancelled cheques as proof of payment (CRA: Business expenses).

A photo of a receipt in an app is a copy, not automatically a replacement. The electronic-records circular lets you dispose of imaged paper only if the imaging meets a national standard and its other conditions (paragraphs 25 to 29), so check those before you discard any paper (CRA: Electronic Record Keeping). The conditions are in scanned receipts for the CRA.

Do I need GST/HST tracking in the app?

Yes if you are registered, and registration becomes required when you stop being a small supplier. A small supplier is not required to register and may register voluntarily (CRA: GST/HST Memorandum 2-2; CRA: when to register).

The small-supplier limit is $30,000 of worldwide taxable sales, including zero-rated sales, from all your businesses and your associates, in a single calendar quarter or across four. Leave out financial services, sales of capital property and goodwill from selling a business, so the app needs those sales tagged apart (Excise Tax Act, s. 148). Once you cross it, you must register within 29 days of your effective date of registration. If you cross in a single quarter, tax applies to the sale that crossed it, so the app has to add tax to a sale you may already have invoiced (CRA: when to register). Until you register, the app should still show your taxable sales for the current quarter and the last four. Taxi operators and commercial ride-sharing drivers must register for that business whatever its revenue (CRA: Memorandum 2-2; CRA: GI-196). How the two tests work and when charging starts is in when to register for GST/HST.

Under the regular method, a registrant's net tax is the GST/HST charged on sales less the GST/HST paid on eligible business purchases (CRA: RC4022). Credits arise when the tax becomes payable or is paid, so unpaid bills matter too (Excise Tax Act, s. 169). So the app must store both amounts on every line, apart from the sale or cost itself, keep tax you cannot recover in the cost, and total them for your reporting period. Keep the supplier invoices that support your credits (CRA: GST/HST records). How often you file and when the return is due is in filing GST/HST and input tax credits. Setup is in recording GST/HST in your books; the simplified remittance method, which generally gives up credits for most purchases (CRA: RC4058), is in the Quick Method, and how it changes the books is in the Quick Method in the books.

How does tax charged differ by province, and what must the app separate?

The tax on an invoice depends on the province where the sale is treated as made, and the app must keep each tax in its own account. The provinces and territories fall into four groups in the CRA's rate table (CRA: GST/HST rates).

The CRA calls this the place of supply. For GST/HST on services, the general rule is the province of your client's Canadian address, but specific rules override it for work on real property, personal services and transportation; for goods, it is generally where they are delivered or sent. A client, or a job on property, in another province can therefore change the tax on the invoice (CRA: place of supply).

Whether PST or QST applies to what you sell, and whether you must register for it, is set by the province, not the CRA, which sends PST questions to each province's own website. In Quebec, Revenu Québec generally administers the GST/HST (CRA: RC4022). See charging GST, HST, PST and QST by province and, for services in BC, PST on services in BC.

What must a vehicle log record, and can the app keep it?

The CRA describes a trip-by-trip log, not a year-end estimate (CRA: Motor vehicle expenses). The app needs to hold:

• Each business trip: date, destination, purpose and kilometres driven.
• Each vehicle: the odometer reading at the start and end of the fiscal period, and a separate record of total and business kilometres.

The three-month sample for later years, and the rest of the rules, are in the CRA vehicle logbook.

The CRA's vehicle page does not say whether a logbook may be electronic. A log kept in an app is an electronic record, so the electronic-records rules apply: keep it in readable electronic form, keep an audit trail, and be able to give the CRA a usable copy (CRA: Electronic Record Keeping).

Where must my records be kept, and does it matter if the app stores them outside Canada?

It can matter. The CRA says to keep records at your place of business or residence in Canada, and records kept outside Canada and accessed electronically from Canada are not considered kept in Canada (CRA: where to keep records; CRA: IC78-10).

The CRA may give written permission, through your tax services office, to keep electronic records outside Canada. It may then accept true copies that are available to its officials in Canada in a format its software can read and that show enough detail to support your returns.

Using a provider does not move the duty. You must make records held by a third party available to the CRA (CRA: Keeping records), and the circular suggests having the provider give you an acceptable copy (CRA: Electronic Record Keeping). These documents were written for any provider and the retention circular is dated June 2010, so they do not decide whether one app's servers are acceptable. If the only copy of your records sits on servers outside Canada, the written-permission route is the one the CRA describes; whether your app's setup needs it is a question for the CRA or a professional. Ask the provider where it stores your data and whether it can give you a complete copy.

Cash or accrual: does the app need to track unpaid invoices?

Generally yes. The CRA says business income is generally reported on the accrual method: income in the period you earn it and expenses in the period you incur them, whether or not money has moved. Farmers, fishers and self-employed commissioned sales agents may use the cash method, but not a mix of both (CRA: Accounting for your earnings).

On the accrual method, the app needs to record an invoice when the work is earned, show it as unpaid until paid, and do the same for bills. A bank-deposit view alone leaves unpaid invoices out. Which method applies to you is in cash or accrual accounting.

Instalments: what should the app show me, and what is the threshold?

You generally pay income tax instalments when your net tax owing is more than $3,000 (more than $1,800 in Quebec) in the current year and in either of the two previous years. The CRA names self-employed people among those who may have to pay (CRA: Who pays instalments).

Net tax owing comes from the return, not the books alone. What the app can do is show year-to-date income, expenses and net profit, and, on the regular method, keep GST/HST collected out of income, so an early estimate is not inflated. Annual GST/HST filers can owe GST/HST instalments too. The CRA's page names net tax of $3,000 or more for the previous fiscal year (CRA: GST/HST instalments); the Act bases each instalment on the lesser of the current and previous years' net tax and treats a base under $3,000 as nil, so both years generally need to reach it (Excise Tax Act, s. 237). In Quebec, Revenu Québec generally administers the GST/HST (CRA: RC4022), so check its instalment rules for GST/HST, QST and your provincial income tax. See instalment reminders.

Can my accountant use it, and what do I do with the records if I switch apps?

Check that your accountant can reach transaction-level detail, by login or full export, not only a year-end summary. The audit trail must run from source documents to the summarized accounts with enough detail to support them (CRA: Electronic Record Keeping). What to hand over is in what to give your accountant.

Before you close an account with an app, export the full transaction history and the attached receipts, and confirm the file opens. Electronic records must stay readable for the whole retention period of six years from the end of the last tax year they relate to (CRA: Electronic Record Keeping). After a move, the circular requires a documented journal entry for any change to a recorded transaction, not overwriting (paragraph 40).

Example

These examples are illustrative and use Canadian dollars.

Ontario freelance designer, registered for HST

A designer on the regular method, with C$70,000 of revenue, invoices an Ontario client C$2,000 plus C$260 HST (13%). The app records C$2,000 as income and C$260 as HST collected. A C$500 software cost carries C$65 HST, recorded as HST paid. For the period, net tax is C$260 less C$65, or C$195, if the purchase is eligible. If the app books C$2,260 as income, the T2125 revenue is overstated and the HST return has no clean source.

Alberta courier using his own car

A courier with C$45,000 of revenue drives 20,000 business kilometres. His odometer reads 52,000 at the start of the year and 77,000 at the end, so 25,000 kilometres in total and 80% business use. The log needs date, destination, purpose and kilometres for each trip, not a year-end estimate. If all C$45,000 is taxable sales within four consecutive calendar quarters, he is over the C$30,000 small-supplier limit. If he is not yet registered, one quarter over the limit means charging GST on the sale that crossed it; a crossing spread across quarters ends small-supplier status at the end of the month after that quarter (when to register). Alberta has no PST.

Quebec tradesperson

A tradesperson registered for GST and QST, with C$90,000 of revenue from taxable jobs on buildings in Quebec, charges GST and QST on each job; a job on an Ontario building would carry Ontario HST instead. The app keeps two tax accounts, plus GST paid and QST paid on purchases. The federal instalment threshold is C$1,800 in Quebec, against C$3,000 elsewhere, so the app should show net profit and tax collected through the year rather than only at year-end.

Different for you?

• Your app does not separate tax charged from income, you are registered, you drive for work, or you are behind: the books need to feed the T2125 and the GST/HST return before either is filed, and whether to keep them yourself is a judgment call. Bring statements, invoices, receipts and the odometer log to bookkeeping help, or to help with your self-employed return for the T2125 built on them.
• You are close to the registration limit or already over it: read when to register for GST/HST before choosing a tax setup.
• You invoice clients in US dollars: see freelancer paid in USD: books and banking.
• Entries are months behind or balances do not match the bank: use catching up on overdue books or rebuilding books from bank statements. If they will not reconcile, bring them to bookkeeping help.
• The CRA has asked for your log or receipts: see rebuilding a logbook for a CRA review and business expenses without receipts, and bring the letter to help with your self-employed return.
• You drive for a ride-share or delivery platform: see rideshare and delivery driver expenses, or drivers who never registered for GST/HST.
• You are weighing doing it yourself against paying someone: see your own books or a bookkeeper.
• You have incorporated: the business files a T2, not a T2125. See books for a new corporation.