T2125 Expense Lines: Where Each Business Expense Goes

Filing a T2125 for the first time: which line does each expense go on?

The T2125 asks for each business cost once, on the Part 4 line named for it, and only the business part of a mixed cost. A line with nothing to report is left blank, and the CRA guide names no penalty for that. The CRA's Guide T4002 explains each line, and the T2125 form lists them in the order of the table below.

A case is not simple when your first year includes equipment, a vehicle, a home office or a T4A; when personal and business money share an account; when you sell goods; or when you filed before and now suspect a line was missed or put in the wrong place (see the section on changing a filed return). Gather bank and card statements sorted by category, receipts, a record of business kilometres if you drive, and your home's costs if you work there.

Bank charges appear twice: the form names 8710 "Interest and bank charges", and T4002 also lists them under 8871. Claim each charge once, on one line. Lines such as 8810 and 8811 add into the same total on 9368, so a close call between them changes where an amount shows, not the total. For whether a gift, course or club fee is deductible at all, see business expenses the CRA accepts.

These are federal lines from the latest T2125 the CRA has posted; check the form for the year you file.

Do I have to use every expense line, and is there a penalty for leaving some blank?

No. The form asks only for the business part of the expenses you had, so a line with nothing to report stays blank. T4002 names no penalty for an unused line.

T4002 does list penalties for other things (chapter 1): repeatedly failing to report income, inadequate records, and a false statement or omission made knowingly or through gross negligence. That last penalty is the greater of $100 or 50% of the understated tax and certain related amounts (Income Tax Act, section 163). The CRA may also disallow an expense you cannot support. Leaving a real expense off can mean paying more tax than needed, and a filed return can be changed (see below).

Which line do my phone, supplies and fees go on?

Phone bills go on 9220, supplies on 8810 or 8811, and fees on 8860 or 8871, depending on what the cost was.

• Phone: do not deduct the basic monthly rate of your home phone, but long-distance business calls on it are deductible. A separate line used only for business calls is deductible at its basic rate. For a cellphone, deduct the percentage of airtime you use to earn business income (T4002). The handset is equipment, not a 9220 cost.
• Supplies: 8810 is for small general items not tied to a workspace; 8811 is for items used up to provide your goods or services, which are usually tied to the workspace.
• Fees: accounting, legal and bookkeeping help goes on 8860, as does help preparing income tax and GST/HST returns. Fees to buy capital property are added to its cost instead. Management and administration fees go on 8871.
• Rent and travel: rent for business premises is 8910, never your home. Trips are 9200; running your own car is 9281.
• Subcontractors and helpers: Part 4 has no line named for them. The form's Subcontracts line (8360) is in Part 3D, for outside help with the goods you sell (T4002 chapter 2; see cost of goods sold). Where a services business reports such payments is worth confirming before you file.

Why is only part of my meals claim allowed?

You can claim at most 50% of what you spent on food, beverages and entertainment, or of a reasonable amount if that is less. Enter the limited amount on 8523 (T4002).

In most cases the same limit applies to meals on a business trip, even though the trip is on 9200. T4002 lists cases where the limit does not apply, such as a business that regularly serves meals to customers for payment, or a meal you bill to your client and show on the bill. It also sets different rules for eligible long-haul truck drivers and for foot and bicycle couriers. Keep meals in their own bookkeeping category at full cost so the limited amount is worked out once.

What goes on line 9270 (other expenses), and what must I list there?

Line 9270 holds costs of earning income that fit no other line and are not capital. T4002 says you must list these expenses on the form, and the line reads "Other expenses (specify)".

T4002 names a few examples: eligible disability-related modifications to a building, lease payments for property used in the business, and the cost of attending up to two business-related conventions a year, with any food or entertainment part limited as above. A terminal loss on depreciable property, where no property remains in the class, is also deducted on 9270 (T2125 endnote). A passenger-vehicle lease is not a 9270 cost: it goes through Chart C into Chart A and onto 9281. Equipment is not a 9270 cost: T4002 says the cost of a computer, cellphone, fax machine or similar equipment cannot be deducted.

The Part 4 list does not name every cost: a software subscription or a website, for example, has no line of its own. A cost that fits no named line goes on 9270 with a description.

Where do equipment, my car and my home office go?

Equipment, a vehicle and a home office are not claimed as plain purchases. Each runs through its own calculation before it reaches the form.

For CCA classes and first-year amounts, see capital cost allowance; for the home-office percentage, business use of home; for a car, the vehicle logbook.

Which year does an expense belong to?

Most self-employed people must use the accrual method: an expense belongs to the year you incur it, whether or not you have paid (T4002). T4002 lets farmers, fishers and self-employed commission agents use the cash method instead, where an expense belongs to the year you pay it. Part 1 of the form has a Cash or Accrual box.

Under the accrual method, a prepaid cost is claimed in the year or years in which you get the benefit. Under the cash method, you cannot deduct a prepayment that relates to a year two or more years after the year you paid it (T4002). For a sale invoiced in one year and paid in the next, see December sales paid in January.

How do I match my bookkeeping categories to the T2125 lines?

Give each expense category one T2125 line and put the line number in the category name, so the year-end totals are a sum and not a rebuild.

1. Name categories after the lines you use, such as "Advertising 8521".
2. Keep meals, vehicle costs, home costs and equipment in their own categories, because each is limited or calculated on its own chart.
3. These are not Part 4 expenses, so keep them out of expense categories: your own drawings (money you take out of the business; equity, shown in Part 9, not deductible), loan principal, personal spending, and GST/HST you claim back as an input tax credit.
4. Reconcile the categories to the allowed Part 4 amounts: apply the meals limit, the business share of mixed costs and the vehicle calculation; use the CCA claim, not the equipment purchase cost; keep home costs for Part 7 and line 9945. Those allowed amounts add up to total expenses on 9368.

The form says to leave GST/HST out of expenses when an input tax credit has been claimed or the tax has been remitted, and to include it when you use the Quick Method. T4002 says deductible expenses include the GST/HST you incur, less any input tax credit claimed (chapter 3), so if you are not registered and claim no credit, keep the tax in each expense. For the books side, see bookkeeping for the self-employed. A corporation maps to GIFI codes, not T2125 lines; see a chart of accounts for GIFI.

Can I write off expenses against my T4A income on the T2125?

Yes, if the T4A amount is self-employment income. It counts in the gross income you show in Part 3 of the T2125 (line 8000), and the costs of earning it go on the Part 4 lines above, whoever paid you. Your net income from line 9946 then goes on the matching line of your return (form). The T4A slip page sends a box 048 amount to the applicable self-employment line of your return and box 020 commissions to line 13899. Whether a given T4A is self-employment income, and what to do when it differs from your invoices, is covered in the fees-for-services slip.

I'm a partner: which lines do I use?

If the partnership files a partnership information return, you do not list its expenses again: enter the income amount from your T5013 slip at amount 5A in Part 5. If it does not have to file one, fill in the form's income and net-income-before-adjustments sections for the partnership first, then use your share at 5A. Costs you paid yourself that the partnership did not repay go in Part 6 and on 9943, including a personal vehicle used for partnership business. They cannot be claimed elsewhere on the form, and the limits described above, such as for meals and vehicles, still apply (form; T4002 chapter 2 and chapter 3). See a general partnership's first return.

I forgot expenses on a return I already filed: can I fix it?

You can ask the CRA to change a filed return to claim an expense, once you have your notice of assessment, in your CRA account under "Change my return" or by mail with Form T1-ADJ (CRA).

A refund cannot be issued for a request made more than 10 calendar years after the end of the tax year. A mailed request needs supporting documents for the entire amount, and a request for an earlier year goes in separately from your current return. Wait for a response to one request before sending another. Some returns cannot be changed online; the CRA page says which.

What proof do I keep for each line?

Keep a receipt or other voucher for every cost, plus bank statements and cancelled cheques (CRA: Business records). For what a receipt must show, see CRA receipt requirements. Keep records for six years from the end of the last tax year they relate to; for a return filed late, six years from the day it is filed (Income Tax Act, section 230). An objection, an appeal or a CRA demand can require longer; see how long to keep business records.

• Any line, no receipt: note the seller's name and address, the amount, the date and what it was for in your expense journal. See business expenses without receipts.
• Motor vehicle (9281): receipts, plus records showing the kilometres driven for business and in total.
• Cellphone (9220): receipts, plus how you worked out the business percentage.
• Equipment (9936): the purchase invoice, because CCA starts from its cost.
• Other expenses (9270): the description you list on the form.

What to hand an accountant is in what to give your accountant.

Example

These examples are illustrative and in Canadian dollars.

A consultant using five lines

A consultant spends C$800 on advertising (8521), C$600 on liability insurance (8690), C$500 on bookkeeping fees (8860), and C$1,200 on a cellphone plan used half for business (C$600 on 9220). Client meals cost C$400; with the 50% limit, C$200 goes on 8523. Total expenses on 9368 are C$2,700, and every other line stays blank.

An online seller who skipped categories

An online craft seller uses five expense lines and leaves the rest blank, and T4002 names no penalty for that. After the notice of assessment arrives, she finds C$900 of advertising she left out. She asks the CRA to change the return and adds C$900 to 8521. Any refund depends on her tax figures and on the request falling within the time limit.

A laptop and a box of paper

A C$2,000 laptop is equipment. It does not go on 8810; it is listed in Area B and its allowance is claimed on 9936, in an amount up to the maximum the CCA rules give for that year. A C$40 box of printer paper is a small office item and goes on 8810.

Different for you?

• Your first year includes equipment, a car, a home office and a T4A, or you filed before and suspect missed or wrong lines: which line each cost takes, what is capital and whether earlier years should be changed depend on your records and the rules for your year. See individual tax help and, if the books are not set up by line, bookkeeping help.
• You sell goods or hold inventory: see cost of goods sold on the T2125.
• You are registered for GST/HST or use the Quick Method: see Quick Method in the books and GST/HST collected as income.
• Your business is a corporation: use a chart of accounts for GIFI; a corporation has no T2125.
• You earn in US dollars, or you are a US citizen with a Canadian business: see a freelancer paid in USD and Schedule C from Canadian business books.
• You live in Quebec: a Quebec resident should also check Revenu Québec's own business statement, which this page does not cover.
• Several years of returns or books are missing: see catching up on unfiled returns and rebuilding books from bank statements, and get bookkeeping help.
• The CRA has asked for your receipts or car records: see business expenses without receipts and the vehicle logbook, then get individual tax help.