T2125 Records: What to Give Your Accountant at Year End

What do I give my accountant for the T2125 at year end?

Give the accountant proof of every dollar the business earned, spent or still owes for the year, normally January 1 to December 31, plus the figures behind any cost you share with your personal life. The T2125 is the CRA form, Statement of Business or Professional Activities, where a sole proprietor reports business income and expenses. The CRA says you are required by law to keep records of all your transactions that support your income and expense claims, and that self-employed individuals generally use a December 31 year-end. You do not send the records with your return; you keep them in case the CRA asks.

A year is simple when every row exists and the records cover the whole year. A year is not simple when books are months or years behind, there is no trip log or home-area figure, a CRA letter has arrived, earlier returns were never filed, or this is the first time anyone outside the business sees the records. Those cases need someone to decide what is missing and whether earlier years must be rebuilt before this return.

Where do I start if nothing is organized?

Start with the statements and the list of clients who paid you; add the rest as you find it.

1. List every account and card the business touched in the year, personal ones included, and download every month of the year's statements for each.
2. List every client and platform that paid you. Get each one's invoice list or payout report.
3. Collect every receipt you have. Do not throw away the ones you cannot place.
4. Write down the odometer reading today and the date. If you have no reading from the start of the year, say so.
5. Measure the workspace and the whole home.
6. Hand over copies with a short list of what you could not find, and keep the originals.

Tell the accountant if the business started or stopped during the year, or used a different year-end before. For the count and valuation of stock, see cost of goods sold for a sole proprietor.

Which income records do I need: invoices, bank deposits, payout reports or slips?

Keep an original document for every sale. The CRA says income records must show the date, amount and source of the income, supported by originals such as sales invoices, receipts, bank deposit slips, fee statements and contracts.

Deposits alone are not enough. A deposit can be net of platform fees, can bundle several invoices, can be your own money moved between accounts, and does not show an invoice that is still unpaid. That last point matters because most self-employed people must report income in the period they earn it, no matter when they receive it. Only farmers, fishers and commission agents may choose to report when paid. See cash or accrual for which year a sale belongs to. If you are registered for GST/HST, your sales include the tax you collected or are owed. Show any tax charged apart from your fees, and mark sales on which none was charged.

Platforms covered by the CRA's digital platform rules report your payouts to the CRA and give you a copy of what they reported each year. Bring it with your payout reports; see the digital platform reporting guide.

Which expense records does the CRA expect, and what if I have no receipt?

Keep a receipt or other voucher for every business purchase. The CRA says to always get receipts or other vouchers when you buy something for the business. A receipt should show the date, the name and address of the seller and a description of what you bought. Keep your duplicate deposit slips, bank statements and cancelled cheques as well (business records).

If a seller gives you no receipt, the CRA says to write the seller's name and address, the amount paid, the date you paid and the details of the transaction in your expense journal. A spreadsheet or notebook can be the journal. A statement line shows that money left, not what it bought, so write the purpose beside each business line. Expenses with no receipt are covered in business expenses without receipts.

Two traps:

• Personal-card spending mixed in. Include those statements and mark which lines are business. Only the business part is deductible.
• Meals and entertainment. Hand over the full receipts. The deduction is generally limited to 50% of the amount.

Which line each expense goes on is covered in self-employed expense lines, and whether a cost is accepted in business expenses the CRA accepts.

How long do I keep my records, and where?

Keep records for six years from the end of the last tax year they relate to, at your place of business or residence in Canada (CRA). The CRA lists exceptions:

Keep the records for unfiled GST/HST returns too, even when the periods ended more than six years ago (CRA).

Destroying records early needs the CRA's written permission on Form T137. Electronic records kept outside Canada also need permission. Give the accountant copies and keep the originals yourself: the duty to keep them is yours.

How do I split a cost I use for both business and personal, like a phone, internet or supplies?

Claim only the business part. The CRA says that because you cannot deduct personal expenses, you enter only the business part of expenses on the T2125. Use a reasonable basis you can explain, apply it the same way to every bill in the year, keep the working, and tell the accountant if your use changes.

What do I give for my car?

Give the total kilometres driven, the kilometres driven for business and the receipts for running the car. The CRA says to keep a record of total kilometres and the kilometres you drive to earn income, to list the date, destination, purpose and distance of each business trip, and to record the odometer reading at the start and end of the fiscal period. Motor vehicle expenses are deductible only when reasonable and supported by receipts. The business share is business kilometres divided by total kilometres.

If you use a three-month sample log instead of a full-year log, bring the full-year log it is based on as well. When a sample is allowed and what the log must show are in the CRA vehicle logbook guide.

If there is no log, tell the accountant and start one now. A log written afterwards from memory is a reconstruction, and the accountant needs to know which one is in the file. A car bought in the year also goes in the equipment section below.

What do I give for my home office?

Give the area of the workspace, the area of the whole home and the year's home bills. If the space is also personal, add the hours a day it is used for business, and say if the business ran for only part of the week or year; the CRA says to reduce the claim accordingly. The CRA allows the claim when the space is your principal place of business, or when you use it only to earn business income and regularly meet clients, customers or patients there. The business part uses a reasonable basis, such as the workspace area divided by the total area of the home.

Bring the bills for heat, electricity, home insurance and cleaning materials, plus property tax and mortgage interest, or your rent. The claim cannot be more than the business's net income before these expenses and cannot create or increase a loss. The CRA also lists capital cost allowance on the business part of a home you own, but says the capital gain and recapture rules apply if you deduct it and later sell the home. Tell the accountant if you own the home, so this is decided before anything is claimed. The full claim and its limits are in business use of home for self-employed.

What do I give for equipment and other big purchases?

Give a purchase invoice for each item and tell the accountant what you sold. The CRA says you cannot deduct the cost of capital property when you buy it; you claim capital cost allowance instead. It also says to keep a record of the properties you bought and sold, showing who sold you the property, the cost and the date you bought it.

If you also use the item personally, only the business part counts. The CRA's example splits a car's allowance by business kilometres over total kilometres. Last year's return supplies the opening balance. See capital cost allowance and buying equipment before year-end.

What do I give for GST/HST and for slips like the T4A?

If you are registered for GST/HST, give the sales and purchase invoices, the working copies of your returns and the supplier invoices that support your input tax credits. The CRA lists these as records to keep, usually for six years. If you are not sure whether you are registered, say so, because it changes the work; see when to register for GST/HST.

Give every slip you received. On a T4A, the payer reports fees for services in box 048 and self-employed commissions in box 020, without GST/HST or provincial sales tax. A slip can therefore be lower than your invoices. Under CRA administrative policy a payer generally issues one when tax was deducted or when payments in the calendar year pass $500, so a small client may send none. The CRA says you must report all your income, so every client belongs in your records either way. A slip that does not match your invoices is covered in the fees-for-services slip on your business statement.

How do I let my accountant see my CRA account?

Authorize the accountant as a representative. For your personal account, sign in to My Account, open Profile and add a representative under authorized representatives (CRA). For a business account, use My Business Account; you need a business number first.

An accountant with a representative ID (RepID) can instead send a request in Represent a Client, and you confirm or deny it in your account. You choose the level: level 1 is information only; level 2 adds certain account changes. For offline access, sign Form AUT-01 and send it to the CRA tax centre listed on the form within six months of signing. It lets the accountant deal with the CRA by phone, mail, fax or in person, with no online access. Whether to hire help at all is covered in when you need a tax accountant.

Example

These examples use Canadian dollars and round numbers.

Home office

A freelance writer uses a 15 m² room only for business, all year, in her 90 m² home, and it is her main workspace. She pays C$6,000 a year in heat, electricity, insurance and property tax. The workspace is one sixth of the home, so about C$1,000 is the business share, before the income limit. She brings the area figures and the bills.

Car

A contractor drives 15,000 km in the year, 12,000 of it for business. He spends C$6,000 on fuel, insurance and repairs. Business use is 80%, so C$4,800 is the business share. He brings the odometer readings from the start and end of the year and his trip log.

Deposits that do not match invoices

A designer invoiced C$60,000. Her deposits total C$50,000, because one client still owes C$8,000 and a platform kept C$2,000 in fees. She brings the invoice list, the payout reports and the bank statements so the accountant can tie the three together.

Different for you?

• Your records cover several years, or nothing is organized: see catching up on overdue books and rebuilding books from bank statements. Get help rebuilding the books, and help deciding whether earlier years must be done first.
• This is the first time anyone outside the business sees your records, or you have no trip log or home-area figures: use the CRA vehicle logbook guide and business use of home, then get help deciding how each mixed-use cost is split.
• A CRA letter asks for your records: read what to do when the CRA sends a review or audit letter and business expenses without receipts, and get help before you reply.
• Earlier returns were never filed: see catching up on unfiled returns and get help filing the missing returns.
• You would rather not gather all this every year: see doing your own books or hiring a bookkeeper, then get bookkeeping help.
• You also have rental income or a partner: see rental income or partnership or corporation. Bring separate rental records and, for a partnership, its financial statements and any T5013 slip; the accountant checks which forms apply.
• You now have a corporation: see books after incorporating a sole proprietorship and get corporate tax help.
• You invoice clients in US dollars, or you are a US citizen: see US-dollar sales and marketplace payouts or US self-employment tax or CPP for Americans in Canada, and get cross-border tax help.
• You live in Quebec: this page covers federal records. Quebec administers its own tax laws, so residents may have to file a separate provincial return, and a business physically in Quebec files GST/HST with Revenu Québec. See when you need a tax accountant.
• You want to know what an accountant costs: see accountant cost for a self-employed return.