Resources · Self-employment income
Self-employment income, deducted line by line.
Freelance, consult, run a trade or sell online? Your business income is taxable — but only on your net profit, after legitimate expenses. The trick is knowing which expenses count, and on which line they belong. Here’s a plain-language tour of every expense line on Form T2125, the CRA’s Statement of Business or Professional Activities, with real examples for each — plus the rules that trip up most sole proprietors.
The basics
You’re taxed on net profit, not revenue
Report your self-employment on Form T2125. Add up what you billed, subtract your deductible expenses, and the net figure is what gets taxed — at your full marginal rate, and it’s also what you pay CPP on. Net income flows to line 13500 (business) or line 13700 (professional) of your personal (T1) return.
Business or professional? Most people file the business side — trades, retail, e-commerce, contractors. Professional income is for fields like accounting, law, medicine and engineering, and mainly differs in how unbilled work-in-progress is handled. Either way the expense lines below are identical. And a natural question once the profit grows: would incorporating leave you better off? — our sole-proprietor-vs-incorporation calculator gives you a first read.
Rule #1 · two you can’t skip
The 50% meals rule & current vs. capital
Two rules quietly decide how much of a receipt you actually get. First, most business meals and entertainment are only 50% deductible — the dinner was $120, the deduction is $60. Second, the big one: is a purchase a current expense (off this year’s income) or a capital expense (written down slowly through CCA)? Same receipt, very different result.
| The test CRA applies | Current expense (deduct now) | Capital expense (write down over time) |
|---|
Lasting benefit?
Does it give an enduring advantage? |
Repainting your shop’s interior |
Building an addition onto the shop |
Maintain or improve?
Restore to working order, or make better? |
Servicing or repairing an existing machine |
Buying a newer, faster machine |
Consumed, or lasting kit?
Used up soon, or an asset you keep? |
Printer paper, stamps, supplies |
A laptop, desk or power tool |
Value vs. the business?
A tie-breaker when the above are unclear. |
A modest, ordinary running cost |
A large outlay that betters the business |
Fix / restore / consume → current
Buy a lasting asset → capital (CCA)
Meals & entertainment → usually 50%
Capital purchases aren’t lost — they’re deducted gradually as capital cost allowance. The mistake is writing a $2,500 laptop or a new machine off all at once. When it’s a close call — and it often is — let’s look at the receipt together.
A quick word on
Capital cost allowance (CCA)
When you buy something with lasting value — a laptop, tools, equipment, a work vehicle, furniture — you don’t deduct it all at once. Instead you claim CCA on line 9936, writing the cost down a little each year based on the asset’s class. It’s optional, and it comes with strings:
- CCA is generally optional and flexible. You can claim some, all, or none in a year — useful for smoothing income, but easy to leave value on the table if ignored.
- It can come back on sale. Sell an asset for more than its depreciated value and the CCA you claimed is “recaptured” into income that year.
- Different assets, different rates. A computer, a vehicle and a building each sit in their own class with its own rate — and vehicles carry extra cost limits.
CCA is a genuine planning tool in the right hands. Because the class rules, vehicle limits and recapture are easy to get wrong, it’s worth setting up with your CPA — ideally alongside a clean bookkeeping process so the asset records are right from day one.
Before you file
Three classic self-employment mistakes
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“Paying yourself” a salary
As a sole proprietor you can’t deduct a wage or draw to yourself — your pay is the net profit. (This is one thing that changes if you incorporate.)
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Deducting 100% of meals
Most business meals and entertainment are capped at 50%. Claiming the full amount on line 8523 is one of the most common reassessments.
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Expensing a big asset
A laptop, a machine or a work vehicle is capital — deducted through CCA, not written off all at once. See Rule #1.
From receipts to a return
Want your self-employment done right — and optimized?
Self-employment is where clean books and a few good judgment calls — current vs. capital, the home-office split, whether it’s time to incorporate — genuinely change your tax bill. That’s exactly what we sort out with clients, starting from a bookkeeping process you can trust.
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A conversation starter, not advice. This is a plain-language summary of Form T2125 based on current CRA guidance, written for general education. Line numbers, eligibility, the 50% meals limit and the current-vs-capital call all depend on your specific facts, and the rules change. Use it to frame your questions, then let’s look at your actual numbers before you file. See the CRA’s
Guide T4002 for the source rules.