Table of Contents
- Understanding Business Expenses on the T2125
- Advertising & Promotion Expenses
- 🥘 Meals & Entertainment Expenses for Self-Employed Canadians
- 💸 Claiming Bad Debt Expense on the T2125
- 🛡️ Insurance Expense Deduction on the T2125
- 💸 Deducting Interest Expense on the T2125
- Office Stationery & Supplies vs. Office Expenses
- Rent Expense on the T2125: Leased Premises & Equipment
- Utilities & Property Tax for Business-Owned Premises (T2125 Guide)
- Salaries & Wages Expense on the T2125
- ✅ Example: Reporting Salaries & Wages on Line 9060 (T2125)
- ✅ Review of Other Deductible Expenses & Common CRA Watch-Areas (T2125 Guide)
- 📂 “Other Expenses” on the T2125: When & How to Use It
Understanding Business Expenses on the T2125
Now that we understand how business income is reported, it’s time to begin looking at business expenses — the costs a self-employed individual can deduct to reduce their taxable income on the T2125 form.
This section will introduce how to approach business expenses as a tax-preparer — especially if you are just getting started.
What This Part of the Journey Is About
As you learn to prepare tax returns for self-employed individuals, you will:
✅ Review business expenses line-by-line
✅ Learn what belongs in each category
✅ Avoid common mistakes new preparers make
✅ Understand what the CRA commonly audits
✅ Prepare yourself to explain expenses to clients
Many people already have a basic idea of what a business expense is — but tax rules have structure, limits, and documentation requirements, and the CRA does review these items.
Why This Matters as a New Tax Preparer
The CRA increasingly asks for proof of business expenses. They may request:
- Receipts
- Mileage logs (for vehicle expenses)
- Invoices and bills
- Breakdown of specific expense categories (e.g., repairs, advertising, insurance)
Your job isn’t just to enter numbers — it’s to help ensure that expenses are:
✔️ Legitimate
✔️ Reasonable
✔️ Supported by documentation
✔️ Claimed in the correct category
This protects your client and you as a preparer.
How We Will Study Each Expense Category
For each line on the T2125, we will cover:
- What the expense category includes
- Common mistakes people make
- Situations where the CRA pays extra attention
- Tips for organizing and reviewing client receipts
- Industry considerations
(Certain industries have typical ranges — unusual claims can trigger CRA review)
We will also go deeper into the big topics new tax filers struggle with:
📌 Vehicle expenses
📌 Home-office expenses
📌 Capital Cost Allowance (CCA) / depreciation
These areas often require calculations and supporting documents.
What Triggers CRA Review in Real Life
CRA may pay closer attention when:
- Expense amounts look unusually high for the industry (they compare using NAICS industry codes)
- Categories like meals & entertainment, automobile expenses, or repairs look inflated
- There is no supporting documentation
- Personal expenses appear mixed with business expenses
Most reviews are simple — but being organized and accurate from the start helps prevent issues.
Your Role as a Tax-Preparer
Think of your task as a mix of:
🧾 Data reviewer — ensuring receipts match the numbers
🧠 Rule interpreter — applying CRA expense guidelines
🛡️ Risk-manager — keeping clients safe from preventable CRA issues
You’re not expected to memorize every rule day one — but by reviewing real-world receipts and understanding CRA expectations, your confidence grows quickly.
Next Step: Walking Through Each Expense Line
In the following lessons, we’ll go expense-by-expense through the T2125 form and learn:
- What goes in each box
- What doesn’t belong
- Documentation best-practices
- CRA red flags to avoid
- Simple examples to help you understand
This foundation will prepare you for the most common self-employment tax situations in Canada.
Advertising & Promotion Expenses
When a self-employed individual or small business advertises to attract customers, those costs can be claimed as Advertising & Promotion expenses on the T2125 (Statement of Business or Professional Activities).
This is one of the first expense categories on the form, and most business owners will use it at least once during the year.
✅ What Counts as Advertising & Promotion?
These are costs paid to promote the business and bring in clients. Common examples include:
| Eligible Advertising Costs |
|---|
| Newspaper, magazine, online ads |
| Social media ads (Facebook, Instagram, TikTok, Google, YouTube) |
| Business cards, flyers, brochures |
| Website design & hosting |
| Promotional signs and banners |
| Trade shows & marketing events |
| Sponsored content or influencers |
| Photography/videography for marketing |
If the primary purpose is to promote the business and generate income, it usually qualifies.
⚠️ Special Areas to Pay Attention To
The concept is simple — but there are areas where new tax preparers need to be careful.
1. Paying family members for “social media work”
Some business owners pay their children or relatives to manage social media accounts.
✔️ Allowed if real work is done and documented
✖️ CRA may deny it if it looks like income-splitting without real services
Tips:
- Ensure there is proof of work (content calendar, posts, messages)
- Payment should be reasonable for the work performed
- Payment should go to the person actually doing the work
If it looks like a tax trick rather than real business help, CRA may question it.
2. Sponsoring sports teams / community events
Sponsorships are allowed if the business receives exposure, such as:
- Logo on jerseys or banners
- Business name in programs or on team websites
However:
🚫 Sponsoring a team with no realistic business benefit may be denied.
Example:
A contractor in Ontario sponsors a relative’s hockey team in Nova Scotia. The CRA may argue the business will not gain customers there.
3. Donations vs Advertising
Sometimes business owners treat donations as advertising — especially when their business name appears as a donor.
However:
- Donations to registered charities should not be claimed here.
- They are claimed separately on Schedule 9 for a donation tax credit.
💡 Donation tax credits are often more beneficial than claiming the amount as an expense.
🚨 Avoid double-claiming the same amount as both a donation and advertising — that is not allowed.
4. Staff appreciation events
If a business takes employees out or hosts a company event, it might sometimes fall under promotion.
But this area overlaps with meals & entertainment rules, which have different deduction limits.
For now:
- Small staff events may be eligible
- Large or frequent events may need further review
- Some events could create taxable benefits for employees
You will learn more about this when studying Meals & Entertainment expenses.
🧾 Documentation Tips for Advertising Expenses
Good habits for tax preparers:
✅ Ask clients to keep receipts and invoices
✅ Note the purpose of each advertising expense
✅ Ensure payments are made to real service providers
✅ Watch for large or unusual sponsorship expenses
✅ Be mindful of payments to relatives — document work done
These habits help avoid problems if the CRA asks questions later.
🎯 Key Takeaways
| Concept | Summary |
|---|---|
| Advertising is deductible | Yes — if its purpose is business promotion |
| Family payments | Allowed with proof & reasonable amounts |
| Sponsorships | Must have realistic business benefit |
| Donations | Claim separately on Schedule 9, not here |
| Staff events | Possible, but be cautious and document well |
🥘 Meals & Entertainment Expenses for Self-Employed Canadians
(T2125 – Line 8523)
When you run a business in Canada, you may sometimes spend money on meals or entertainment to help earn business income — for example, taking a client out to lunch or attending a business-related event. These expenses can be claimed on your tax return, but with special rules.
✅ The 50% Rule — Only Half Is Deductible
Most meals and entertainment expenses are only 50% deductible.
Example:
You spent $200 on business lunches this year.
You can deduct $100 (50%) as a business expense.
This applies whether the meal is:
- With a client or customer
- With a potential business partner
- A meal during a business meeting
✅ What Counts as Meals & Entertainment?
Common deductible expenses (50% rule applies):
| Expense | Deductible Rate |
|---|---|
| Meals with clients | 50% |
| Restaurant or café meeting for business | 50% |
| Entertainment event with a client (hockey game, concert, theatre) | 50% |
| Private box or suite at events | 50% |
| Tips & gratuities on eligible meals | 50% |
Tip: Always record who you met and why. Example note: Lunch with client to discuss website project.
⚠️ Reasonableness Matters
The CRA expects expenses to make sense for the type of business.
Example:
A real estate agent might have many client lunches.
A dentist likely would not have many, since they don’t usually take patients out.
If meal expenses seem unusually high for a business, the CRA may ask questions.
❌ Expenses You Cannot Deduct
Some costs do NOT qualify, even partially:
| Not allowed | Why |
|---|---|
| Gym membership or recreational club fees | Personal in nature |
| Golf club membership | Not deductible |
| Season tickets (sports, concerts) | Usually personal unless you can prove business use |
| Meals on personal vacations | Personal expense |
| Meals not related to earning business income | Not deductible |
If you truly use season tickets for business and want to claim them, you must keep detailed records of who attended and the business purpose — otherwise CRA will deny it.
🧾 Keep Good Records
To support your meal & entertainment claims, keep:
- Receipts
- Date of the expense
- Who you met with
- Business purpose (short note)
Example record:
Jan 14 — lunch with Sarah (client) — discussed website redesign.
🎯 Key Takeaways
- Most meals & entertainment = 50% deductible
- Expense must directly relate to earning business income
- Must be reasonable for your industry
- Some expenses are fully disallowed (e.g., club memberships)
- Keep receipts + brief meeting notes
💸 Claiming Bad Debt Expense on the T2125
When customers don’t pay — What self-employed Canadians need to know
In business, not every customer pays their bill. When you run a business as a sole proprietor or partnership, and you report your income on the T2125 (Statement of Business or Professional Activities), you may be able to claim a bad debt expense for income you were never able to collect.
This helps make sure you only pay tax on money you actually earned — not money you hoped to earn but never received.
✅ What Is a Bad Debt?
A bad debt is an amount your customer owed you for completed work or delivered goods, but you cannot collect — for example, if:
- The customer goes bankrupt
- They disappear or refuse to pay
- All collection efforts fail
✅ When Can You Deduct a Bad Debt?
You can only claim a bad debt if the unpaid amount was previously included in your business income.
In other words, you must have reported the sale as income in:
- The current tax year, or
- A previous tax year
If you never recorded the income, there is no tax deduction — because you never paid tax on it.
📌 Example: Bad Debt Deduction
| Situation | Amount |
|---|---|
| Business reported total income for the year | $107,000 |
| One customer never paid | $5,000 |
| Bad debt expense allowed | $5,000 |
You deduct $5,000 because it was already included in the $107,000 revenue.
❌ Watch Out: No Double-Counting
A common mistake for beginners:
Some business owners delete the unpaid invoice from their books instead of keeping it and recording it as a bad debt.
If you remove the sale and claim a bad debt deduction, you would be subtracting it twice — and that is not allowed.
✅ Correct: Record sale → Customer doesn’t pay → Claim bad debt
❌ Wrong: Delete sale → Claim bad debt again
🔁 What If You Later Receive the Money?
Sometimes you may collect part of the money later — for example, if a bankruptcy trustee pays out a portion.
Example:
| Year | Event | Tax Treatment |
|---|---|---|
| 2024 | You write off $5,000 as bad debt | Deduct $5,000 |
| 2025 | You recover $3,000 | Report $3,000 as business income |
You do not go back and change the old return — you simply report the recovered amount in the year you receive it.
🧾 Record-Keeping Tips
To support a bad debt claim, keep:
- Customer name & invoice number
- Amount owing
- Date work/service was completed
- Proof invoice was included in income
- Notes or attempts to collect payment (emails, letters, etc.)
Good documentation helps if the CRA ever asks questions.
🎯 Key Takeaways
- You can deduct unpaid receivables as a bad debt expense.
- The income must have been previously reported.
- Don’t delete the unpaid invoice — or you’ll lose the deduction.
- If you recover some money later, report it as income when received.
🛡️ Insurance Expense Deduction on the T2125
Understanding What You Can (and Can’t) Deduct
When you’re self-employed in Canada and reporting your income on the T2125 (Statement of Business or Professional Activities), one of the allowable business expenses you may claim is insurance. But not all insurance qualifies — and this is a common area where beginners make mistakes.
This guide breaks down what belongs on the Insurance expense line (Line 8690) and what should not be claimed here.
✅ What Insurance Can You Deduct?
Only business-related insurance premiums should be included.
Examples of deductible insurance:
| Type of Insurance | Why It’s Allowed |
|---|---|
| General business liability insurance | Protects your business operations |
| Commercial property insurance | Covers business assets/buildings |
| Professional liability (E&O) insurance | Required for many professionals |
| Key person / commercial life policies owned by business for business purposes | Protects business revenue stability |
| Employee group health & dental insurance | Benefits provided to employees (can be here or on wage expense line) |
If your business owns a building and you insure it, that insurance goes here as well.
❗ Insurance That Should Not Be Claimed Here
Some insurance may be related to your business activity but does not belong on Line 8690 because it’s deducted elsewhere or not deductible at all.
❌ Do NOT include:
| Type | Where it belongs / Why not allowed |
|---|---|
| Home office mortgage insurance | Claim under Home Office Expenses, not here |
| Auto insurance | Claim under Vehicle expenses, prorated for business use |
| Personal life insurance | Not deductible — personal expense |
| Personal disability insurance | Not deductible — personal expense |
| Gym/recreational club insurance | Personal / non-business |
A key point: Personal insurance is never deductible, even if you’re self-employed.
🚫 Why Personal Life & Disability Insurance Aren’t Deductible
You might think:
“I’m self-employed — can’t I deduct my personal insurance because it protects my income?”
No — here’s why:
- Personal life and disability insurance are personal benefits
- Deducting the premiums would make future payouts taxable
- To keep payouts tax-free, premiums must not be deducted
The tax system is structured so you either deduct the premiums OR receive tax-free benefits — not both.
👥 What About Owners Covered Under Employee Plans?
If the business has an employee group health plan and the business owner participates in that same plan:
✅ This is allowed.
The premiums can be deducted as part of the business’s employee benefits program.
🎯 Key Takeaways
| Rule | Summary |
|---|---|
| Only business insurance goes here | Liability, commercial building, E&O, employee plans |
| Home office mortgage insurance | Claim under Home Office expenses |
| Vehicle insurance | Claim under Vehicle expenses (prorated) |
| Personal insurance | Not deductible |
| If owner participates in employee group plan | Deductible |
📝 Tips for New Tax Preparers
- Ask the client what each insurance policy covers
- Never assume — clarify whether it’s business or personal
- Maintain proper documentation (policy statements, invoices)
- Ensure vehicle & home-office insurance are allocated correctly
Proper classification prevents errors and reduces CRA audit concerns.
💸 Deducting Interest Expense on the T2125
What New Tax Preparers Need to Know
When a self-employed individual files a T2125 to report business income, they may be able to deduct interest expenses related to the business. This deduction appears in the Interest and Bank Charges section (line dedicated to interest on business loans).
This guide explains what interest is deductible, what isn’t, and how to handle mixed-use loans, in simple terms.
✅ What Interest Is Deductible?
Interest is deductible when it is:
- Directly related to earning business income, and
- Actually paid or payable regarding a loan used for the business
Common deductible examples:
| Type of Loan / Interest | Why It’s Deductible |
|---|---|
| Bank business loans | Used to fund business operations or purchase equipment |
| Business line of credit | Helps with business cash flow |
| Interest on financed business equipment | Used to earn business income |
| Credit card interest (business credit card) | If the card is used for business purchases only |
So if a business borrows money from a bank to buy tools, inventory, or office equipment — the interest on that loan is deductible.
❗Important Rule: Purpose of the Loan Matters
It does not matter what the loan is secured against —
it matters how the money was used.
Example:
A business owner uses a home-equity line of credit (HELOC) to borrow $20,000 for business equipment → deductible interest (business portion).
But if part of the same loan is used for personal reasons → that portion is not deductible.
🚫 Interest That Cannot Be Claimed Here
Some interest relates to business activity but gets deducted elsewhere:
| Type of Interest | Where It Belongs |
|---|---|
| Mortgage interest for home office | Use Home-Office Expense section |
| Vehicle loan interest | Report under Vehicle Expenses and prorate for personal use |
| Investment-related interest | Deduct on Carrying Charges (Line 22100 on personal return) |
And some interest is just not deductible at all:
| Not Deductible | Reason |
|---|---|
| Personal debt interest (e.g., personal credit cards, personal loans) | Not related to business income |
🧠 Mixed-Use Loans — A Common Beginner Pitfall
Many small business owners use one loan or line of credit for multiple purposes (business, investments, personal use).
In this case, you must prorate the interest based on how the borrowed funds were used.
Example:
A $100,000 line of credit used as follows:
| Use | Amount | % of Total |
|---|---|---|
| Business purposes | $25,000 | 25% |
| Investments | $25,000 | 25% |
| Personal | $50,000 | 50% |
If $6,000 interest was paid that year:
| Category | Deductible Amount |
|---|---|
| Business interest | $1,500 (25% of $6,000) |
| Investment interest (carrying charges) | $1,500 (25% of $6,000) |
| Personal | $0 |
✅ Always ask the client how the funds were used
✅ Keep supporting documentation (bank statements, loan records)
📇 Credit Card Interest
Credit card interest can be deductible — but only if the credit card is used for business expenses.
| Card Type | Deduction Rule |
|---|---|
| Business-only card | Deduct 100% of the interest |
| Mixed personal + business card | Must prorate based on business use |
| Personal-only card | Not deductible |
🌟 Key Takeaways
| Rule | Summary |
|---|---|
| Interest must relate to earning business income | Otherwise not deductible |
| Personal interest is never deductible | Even if mixed with business activity |
| Home office mortgage interest | Deduct through home-office section, not here |
| Car loan interest | Claim under vehicle expenses & prorate |
| Mixed-use credit/line of credit | Allocate interest based on business use |
📝 Pro Tip for New Tax Preparers
Always ask clients:
“Was the loan/credit used entirely for business purposes?”
If the answer is no — prorate it.
This shows good due-diligence, reduces audit risk, and ensures proper reporting.
Office Stationery & Supplies vs. Office Expenses
Understanding Line 8810 and Line 8811 on the T2125
When you prepare a Canadian small-business tax return using Form T2125 (Statement of Business or Professional Activities), you will come across two very similar-sounding expense categories:
- Office Stationery & Supplies (Line 8811)
- Office Expenses (Line 8810)
At first glance they look the same — but they are used for different types of costs. Knowing the difference helps you organize records properly and avoid mix-ups that may trigger CRA questions.
Office Stationery & Supplies (Line 8811)
Think of this as items you use up in your day-to-day work, typically small and consumed while running your business.
Examples include:
| Examples of Office Stationery & Supplies |
|---|
| Pens, pencils, paper, envelopes |
| Folders, labels, notebooks |
| Printer paper and ink/toner |
| Desk supplies (staples, sticky notes) |
| Small office tools (calculators, scissors) |
This line also covers business supplies not limited to office use. For example:
| Business Type | Example Supply |
|---|---|
| Cleaning company | Cleaning products, rags |
| Veterinarian | Pet medication, syringes, medical supplies |
| Real estate agent | Lawn signs for listings |
| Hair stylist | Hair coloring products, gloves |
In other words, if it’s a consumable item used to operate the business, and not a major expense, it belongs here.
Office Expenses (Line 8810)
Office expenses are general costs related to operating your workspace but are not specifically stationery or consumables.
They are more like “miscellaneous office-related costs.”
Examples include:
| Examples of Office Expenses |
|---|
| Office cleaning services |
| IT support / computer network maintenance |
| Small online software subscriptions (unless classified under “software” or “internet”) |
| General office supplies that don’t fit a specific category |
This category is a catch-all for office-related costs that don’t logically fit under another expense line on the T2125.
Key Differences to Remember
| Office Stationery & Supplies | Office Expenses |
|---|---|
| Consumable items | General office operating costs |
| Used regularly and run out | Not typically “used up” |
| Pens, paper, printer ink | Cleaning services, IT support |
Why This Matters for CRA Reviews
As tax enforcement becomes more detailed, the CRA sometimes reviews specific expense lines. Being organized and consistent makes your filing stronger.
Tips for beginners:
✅ Keep receipts organized by category
✅ Be consistent each year — don’t switch categories randomly
✅ Make sure expenses match what’s typical for the business industry
✅ If unsure, place it under Office Expenses and keep notes for support
Industry example:
A doctor or veterinarian is expected to have high supplies costs (medical items).
A consultant might have minimal supplies, but more small software or office-related costs.
When You’re Not Sure Where to Put Something
Ask yourself:
- Is it consumed or used up? → Stationery & Supplies
- Is it a service or general office cost? → Office Expense
- Still unsure?
- Choose the most reasonable category
- Stay consistent year-to-year
- Keep documentation in case CRA ever asks
Final Thought
These two lines may seem similar, but separating them correctly helps reflect a clear financial picture — and keeps CRA questions to a minimum. Over time, you’ll naturally recognize where each type of expense belongs.
Rent Expense on the T2125: Leased Premises & Equipment
When reporting business income on the T2125 (Statement of Business or Professional Activities), one common deduction you’ll encounter is rent expense. This category applies to many small businesses, whether they operate from a commercial space or lease equipment needed to run their business.
This section explains what qualifies as rent, where to report it, and why consistency matters.
What Counts as Rent Expense?
Rent expense includes:
✔️ Monthly rent paid for commercial or leased business space
✔️ Amounts paid under a rental or lease agreement for office premises
✔️ Rent paid for using someone else’s business premises
This is straightforward — for example, if you run a salon and lease a storefront or rent a chair in an existing salon, that cost is reported here.
What About Leased Equipment?
In addition to physical workspace, this line can also include equipment rentals, for example:
| Business Type | Example of Leased Equipment |
|---|---|
| Law or accounting firm | Photocopier lease |
| Construction business | Excavator or skid-steer rental |
| Photographer | Studio lighting rental |
| Event planner | Furniture or event equipment rentals |
If the business pays to use equipment instead of buying it, this can be reported as rent.
Could These Expenses Go Elsewhere?
Yes — some leased items could technically be placed under other expense lines, such as:
- Office expenses (e.g., leased office equipment like printers)
- Cost of goods sold / other costs (e.g., equipment rentals directly tied to producing income like construction machinery)
However, the CRA cares more about consistency than the exact line — as long as the expense is genuine and documented.
The Most Important Rule: Be Consistent
Once you decide how to categorize a recurring expense, stick to the same category each year.
Why it matters:
- Helps avoid CRA review letters triggered by big year-to-year differences
- Makes business financials easier to understand for owners and potential buyers
- Keeps records neat and professional
If last year you reported a leased photocopier under Rent, do the same this year. If you decide to classify equipment rentals under Other Costs (for job-related machinery), continue doing that every year.
Consistency = fewer questions and a cleaner tax return.
Key Takeaways
| Point | Explanation |
|---|---|
| Rent expense | Includes rent for business premises and leased equipment |
| Alternative categories | Some expenses could go under Office Expense or COGS |
| Most important rule | Stay consistent year-to-year in expense classification |
| CRA focus | Reasonableness and consistency, not perfection |
Quick Example
Scenario: A pool installation company rents a mini-excavator for jobs.
Possible classification options:
- Rent expense ✅
- Other costs under Cost of Goods Sold ✅ (more accurate for job-based equipment)
Recommendation for beginners:
Pick one approach and apply it consistently each year.
As a tax preparer, your goal is to properly categorize expenses, keep good records, and stay consistent. Doing this helps avoid CRA scrutiny and builds reliable financial reporting for your clients.
Utilities & Property Tax for Business-Owned Premises (T2125 Guide)
When completing the T2125 – Statement of Business or Professional Activities, one important area is understanding how to report expenses for the space where the business operates.
In a previous section, we covered rent for leased business space. But what if the business owns the property instead of renting it?
In this situation, the expense treatment is different — there is no “rent” to deduct because the business isn’t paying rent to a landlord. Instead, the business claims the operating costs of owning the property.
✅ If the Business Owns Its Work Location
When a business owns the building or commercial unit where it operates, the following expenses can be deducted directly on the T2125:
| Expense | What It Means | Where It Goes |
|---|---|---|
| Property taxes | Municipal taxes paid for the property | Property taxes line on T2125 |
| Utilities | Heat, electricity, water, etc. | Utilities line on T2125 (line 9220) |
| Mortgage interest | Interest portion on commercial mortgage | Interest expense line |
| Insurance | Building/business premises insurance | Insurance expense line |
Important: Only the interest portion of mortgage payments is deductible — not the principal portion.
These expenses represent the cost of maintaining and operating the business property.
💡 Example
A business owns a small commercial workshop. During the year it pays:
- $6,000 property taxes
- $4,800 utilities
- $10,000 mortgage interest
- $2,500 building insurance
All these amounts would be reported as business expenses on the appropriate T2125 lines.
📍 What If Utilities Are Included in Rent?
Sometimes rented spaces include utilities in one combined monthly payment (e.g., rent + TMI: Taxes, Maintenance, and Insurance). If this happens:
- You do not need to split utilities from rent
- The full payment can be entered as rent expense
Only separate utilities when they are billed separately.
⚠️ Special Rule: Home-Based Businesses
If the business is run from the owner’s home, these expenses do not go directly on the main expense lines.
Instead, they are included in the Business-Use-of-Home Expenses section of the T2125.
Do not enter:
- Home property taxes
- Home utilities
- Home mortgage interest
- Home insurance
on the main expense lines — they will be claimed later in the home-office section (Part 7 of T2125).
We will cover this topic in more detail in the Business-Use-of-Home lesson.
Key Takeaways
| Situation | How to Deduct |
|---|---|
| Business rents space | Deduct rent; separate utilities if billed separately |
| Business owns commercial property | Deduct property tax, utilities, mortgage interest, insurance |
| Home-based business | Claim these costs in the home office expense section, not in the main T2125 expense lines |
Quick Tip for Beginners
Always ask your client:
“Do you rent your business space or own it?”
Their answer will determine which expense rules apply.
Salaries & Wages Expense on the T2125
When preparing the T2125 – Statement of Business or Professional Activities, one of the key expense categories you’ll encounter is Line 9060 – Salaries and Wages.
This line is used only when the business has employees and pays them a salary or hourly wages. Many new tax preparers confuse this with payments made to helpers, family members, or contractors — but they are not reported here unless they are official employees receiving a T4 slip.
✅ What Belongs on Line 9060?
Expenses that go in the Salaries & Wages line include:
| Item | Explanation |
|---|---|
| Employee salaries & hourly wages | Amounts paid to staff for work performed |
| Employer CPP contributions | Employer must match the CPP deductions withheld from employee pay |
| Employer EI contributions | Employer pays 1.4× the EI withheld from employees |
| Workers’ compensation premiums (WSIB/WCB) | Mandatory workplace safety insurance in most provinces |
| Employee group insurance/benefit premiums | Health, dental, life, and disability insurance premiums paid by the employer (if part of group benefits) |
Think of this line as everything related to employee payroll costs.
❌ What Does Not Belong Here?
Do not report the following on this line:
| Do Not Include | Where It Belongs |
|---|---|
| Payments to subcontractors | Report under Subcontractors expense |
| Money paid to family unless they are official employees on payroll | Only deductible elsewhere if reasonable, documented, and not disguised wages |
| Casual or informal labour payments | Must be official payroll to be listed here |
| Owner’s personal draws or payments | Not deductible wages for sole proprietors |
| Benefits paid personally by the business owner | Not a business expense |
If you put contractor or family payments here, the CRA may ask:
“Where are the T4 slips and remittances?”
If there are none, it can trigger a review.
🧾 Payroll Must Match CRA Reporting
To report salaries on this line, the business must:
- Have a CRA payroll (RP) account
- Issue T4 slips to each employee
- File a T4 Summary
- Remit payroll deductions (CPP, EI, and tax)
The numbers reported on this line should match the amounts from the T4 Summary for the year.
Key rule: If you claim salaries, there must be T4 slips filed — always verify this with the client or their bookkeeping records.
✍️ Tip for Beginners
If you see wage-type payments but no payroll records, ask:
“Do you issue T4 slips and remit payroll deductions?”
If the answer is no, then the expense does not belong on this line.
📎 What About Employee Benefits?
Group benefit premiums for employees can be placed:
- On Line 9060 (Salaries & Wages) — recommended, or
- Under Insurance expense
Just be consistent year-to-year so the CRA doesn’t see unusual fluctuations.
Key Takeaways
| Concept | Explanation |
|---|---|
| Line 9060 is only for real payroll employees | Must issue T4 slips |
| Includes employer CPP, EI, WSIB/WCB, and group benefits | All part of payroll cost |
| Do not include family payments or contractors | Unless they are official employees |
| Consistency matters | Use the same reporting approach each year |
Simple Memory Trick
T4 employees = T2125 Line 9060
If there’s no T4, then don’t use this line.
✅ Example: Reporting Salaries & Wages on Line 9060 (T2125)
When a business has employees, the salaries and wages paid can be deducted on the T2125 – Statement of Business or Professional Activities. This deduction is entered on Line 9060.
To get the correct amount for this line, you use the totals from the T4 Summary filed by the business.
🧾 What Is a T4 Summary?
A T4 Summary shows the total payroll information for all employees for the year. It combines the information from all T4 slips the business issued to its employees.
Important boxes on the T4 Summary:
| Box | Description | Who Pays It? |
|---|---|---|
| Box 14 | Total employment income paid to employees | Employer (paid to employees) |
| Box 16 | CPP contributions deducted from employees | Employee pays (employer withholds) |
| Box 18 | EI contributions deducted from employees | Employee pays (employer withholds) |
| Box 27 | Employer CPP contributions | Employer expense |
| Box 19 | Employer EI contributions | Employer expense |
Only the employer’s portion of CPP and EI is deductible as a business expense.
The amounts deducted from employees (Boxes 16 and 18) do not get deducted again.
📊 Example
Assume a business’s T4 Summary shows:
| Description | Amount |
|---|---|
| Total salaries paid (Box 14) | $218,420 |
| Employer CPP contributions (Box 27) | $12,428.50 |
| Employer EI contributions (Box 19) | $15,378.44 |
To calculate the amount for Line 9060, add:
- Salaries paid to employees
- Employer CPP
- Employer EI
Calculation:
Total salaries and wages expense = $218,420 + $12,428.50 + $15,378.44
Total = $246,226.94
This is the amount that will be reported on Line 9060 – Salaries, wages, and benefits.
📝 What Else Can Be Included?
This line may also include:
- Workplace safety premiums (WSIB/WCB)
- Employer-paid health and dental benefits (group insurance)
Some preparers choose to put group benefits under “Insurance” instead.
Either way is acceptable — just be consistent each year.
❗Important Reminders
| Rule | Explanation |
|---|---|
| Only report amounts for actual employees | CRA expects matching T4 slips and payroll remittances |
| Subcontractor payments belong elsewhere | Not allowed on Line 9060 |
| Use the T4 Summary totals | Ensures accuracy and matches CRA records |
If Line 9060 has amounts but no T4s were filed, CRA may question the return.
🎯 Key Takeaway
Line 9060 includes:
- Employee wages
- Employer CPP contributions
- Employer EI contributions
- (Optional) WSIB and group benefits
Always use the figures from the T4 Summary to avoid mistakes and CRA inquiries.
✅ Review of Other Deductible Expenses & Common CRA Watch-Areas (T2125 Guide)
As a new tax preparer, you’ll see many expenses on the T2125 Statement of Business Activities. While most seem straightforward, some areas attract extra attention from the CRA — especially if amounts look unusually high or personal in nature.
This section will help you understand:
- ✅ What types of expenses are allowed
- ⚠️ What NOT to deduct
- 🧐 Areas where CRA commonly reviews claims
- 🎯 Key tips to stay compliant and avoid reassessments
🛠️ Repairs & Maintenance (Line 8960)
Deductible examples:
- Fixing equipment or tools
- Minor repairs to business property
- Maintenance costs (painting, small repairs, servicing)
⚠️ Important rules
| Watch Out For | Why |
|---|---|
| 🚫 Deducting your own labour | You cannot claim a dollar value for your own time |
| 🚫 Insurance reimbursements | If insurance pays for a repair, you cannot deduct that cost |
| 🏗️ Capital improvements | Large upgrades must be capitalized, not expensed (turn into assets) |
💡 Quick Test:
Small repair = Expense
Major improvement increasing value/life of property = Capital asset (not here)
Home office repairs?
➡️ Reported in the home-office section, not here.
👨💼 Professional Fees (Line 8860)
Examples of deductible fees:
- Accountant fees for business records/tax filings
- Bookkeeping services
- Business-related legal advice
❌ Not deductible (personal):
| Not Allowed | Examples |
|---|---|
| Personal legal fees | Divorce, wills, trusts for personal estate, family matters |
| Real estate legal fees for personal properties | Only business-related property qualifies |
| Fees to buy a business building | These are capitalized, not expensed |
✅ Tip: Always ask — Was this fee related to earning business income?
⚡ Utilities (Line 9220)
Includes:
- Heat, electricity, water (for business space)
- Telephone & cell phone bills
- Internet for business use
📌 Cell phone & internet line used to be separate — now part of utilities!
Personal use must be prorated.
Example: If a phone is used 70% business / 30% personal, only 70% is deductible.
⚠️ CRA sometimes checks phone bills — especially if 100% claimed.
✈️ Travel Expenses (Line 9200)
Valid business travel deductions:
- Flights, hotels
- Meals during business travel (subject to 50% rule)
- Travel costs for employees on work trips
⚠️ High-risk area — personal vs business
| Situation | Deduction |
|---|---|
| Owner travels alone for business | ✅ Expense allowed |
| Owner attends a conference but brings family | ✅ Only business portion allowed |
| Family trip disguised as business | 🚫 Not allowed |
❗ CRA often reviews conference + vacation trips (e.g., Vegas, Florida).
Keep proof like schedules, receipts, business purpose.
📎 Summary Table: Key CRA Watch Items
| Category | Red Flags | Hint |
|---|---|---|
| Repairs & Maintenance | Own labour, large renovations | Large jobs = likely capital asset |
| Professional Fees | Personal legal/accounting | Must be business-related |
| Utilities | 100% cell phone claims | Apply a reasonable business % |
| Travel | Family travel, vacation conferences | Deduct only business portion |
✅ Tips for New Tax Preparers
✔ Ask clients questions — don’t assume
✔ Keep notes explaining business purpose
✔ Be consistent year-to-year
✔ If unsure whether personal or business → allocate a reasonable split
⭐ Goal: Maximize deductions without triggering CRA attention
📂 “Other Expenses” on the T2125: When & How to Use It
While preparing a business return using the T2125 Statement of Business Activities, you’ll usually categorize expenses into the standard lines (office supplies, utilities, wages, etc.).
But sometimes you encounter business expenses that don’t clearly fit anywhere — or you want to show them separately for clarity.
That’s where the “Other Expenses” line comes in. ✅
🧾 What Is the “Other Expenses” Line?
This is a blank line on the T2125 where you can:
- Enter an expense that does not fit any standard category
- Label the expense clearly (e.g., Training Expense, Seminar Fees)
- Maintain transparency in reporting
💡 Think of it as a custom category for legitimate business expenses that don’t belong in existing sections.
🎯 Examples of Expenses You May Put Here
| Expense Type | Why It Belongs Here |
|---|---|
| 📘 Training / courses | No dedicated training line on T2125 |
| 🎤 Conferences & seminars | If not travel-related or language unclear |
| 👥 Professional development memberships | If not strictly office expense |
| 🛠️ Specialized service fees | That don’t match professional or subcontractor fees |
Example label options:
- “Training & Education”
- “Industry Certification Fees”
- “Conference Registration”
- “Coaching & Mentorship Fees”
⚠️ When Not to Use “Other Expenses”
Avoid using this line when the expense clearly fits somewhere else, such as:
| Category | Should go here instead |
|---|---|
| Office paper, pens, stationery | Office Expenses |
| Gas, mileage | Motor vehicle expenses |
| Bookkeeping help | Professional Fees |
| Employee wages | Salaries & Wages |
✅ Golden Rule: Use an existing category whenever possible.
🤔 Why Not Dump Everything Into “Other”?
Although it’s tempting to lump mixed expenses here, it’s better not to.
CRA may review high “Other Expenses” totals.
If the number looks unusually high, they may request details. That’s fine if you kept proper receipts — but it’s better not to raise unnecessary questions.
💡 Best Practices for New Preparers
📌 Use “Other Expenses” sparingly
📌 Name the expense clearly for transparency
📌 Keep receipts and notes for CRA review
📌 Try to categorize using existing lines first
⭐ Pro Tip:
If you’re unsure whether an expense fits another category, ask the client for context — understanding the nature of the expense helps categorize correctly.
✅ Example Entry Format
Instead of dumping into office supplies, you might list:
Training & Development — $850
This makes the business expenses more accurate and easier to review later.
🧠 Key Takeaway
The “Other Expenses” line is a helpful tool, not a catch-all bucket.
Use it to keep records clean, transparent, and professional — and avoid unnecessary CRA scrutiny.
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