Contractor expenses on the T2125: what actually goes on which line

First, the split that decides everything: job costs vs. overhead

The T2125 asks for your costs in two separate places, and getting this split right matters more than any individual line. Part 3D is cost of goods sold: what the work itself consumed. Part 4 is expenses: what the business costs to keep the doors open whether or not you sold a job this month. The form subtracts Part 3D from your revenue to give you gross profit on line 8519, and then subtracts Part 4 from that.

That gross profit line is the one number on the form a contractor should actually care about, because it answers whether the work makes money before overhead is even in the conversation. Bury your lumber and your subs down in Part 4 and gross profit becomes meaningless. Your net income comes out the same either way, so nothing gets flagged, and you learn nothing. It's also the first number a lender, a bonding agent, or a buyer asks for.

• Line 8300 opening inventory, and line 8500 closing inventory: material on hand at each end of the year. Most small contractors carry little or none, but if you stock a shop, it belongs here.
• Line 8320 purchases during the year, net of returns, allowances, and discounts: your job materials.
• Line 8340 direct wage costs: employee wages for the hands that did the work.
• Line 8360 subcontracts: everything you paid other trades.
• Line 8450 other costs: the job costs that don't fit the lines above, like disposal bins and site services.

Subcontractors go on line 8360, and they come with a slip

Subcontracts is line 8360, in Part 3D. Not salaries. Line 9060, salaries, wages and benefits, is for employees, including your employer contributions. If you frame with two guys on payroll and hire a licensed electrician per job, the payroll goes to 9060 and the electrician goes to 8360, and the distinction is the same one the CRA uses everywhere else to separate an employee from a contractor.

Here's the part that catches people who have never had employees: if you're a sole proprietor, the money you pay yourself is not on this form as an expense at all. You can't deduct your own wages. Draws show up on the capital reconciliation as line 9932, drawings in the current year, which is a record of money leaving the business, not a deduction against its income. Your income is the profit, which is exactly what the form is calculating.

There's also a filing obligation attached to 8360 that a lot of small contractors don't know exists. If more than half of your business income comes from construction activities and you paid a subcontractor more than $500 for construction services, you have to file a T5018 Statement of Contract Payments reporting those payments. It's due six months after the end of whichever reporting period you choose. The slip is how the CRA cross-checks that the sub reported the income you deducted, which is worth knowing before you decide how carefully to track sub payments.

Job materials are 8320, not office supplies

Line 8320 is where the lumber, drywall, wire, tile, fixtures, and fasteners go, net of anything you returned. Freight and delivery on those goods rides along with them. It is not line 8811, office stationery and supplies, which is genuinely the printer paper and the pens, and it is not line 8810, office expenses, which is your small recurring overhead like software subscriptions.

This is the single most common mis-file I see, and it's easy to understand why: the word supplies is doing double duty. On a jobsite, supplies means the stuff you build with. On the T2125, supplies means the stuff you run an office with. A year of building material sitting in 8811 doesn't change your tax bill by a dollar, and it destroys the only view you have of whether your jobs are profitable. If you want that view to be useful, the same discipline that fixes this is job costing.

Tools: $500 decides expense or depreciation

Tools are where the form stops being about categories and starts being about capital. The rule is a dollar threshold. A tool costing less than $500 falls into capital cost allowance class 12, which is written off at 100 percent in the year you buy it, with no half-year rule. A tool costing $500 or more goes into class 8 and depreciates at 20 percent on a declining balance.

The threshold is applied per tool, not per invoice, and that trips people constantly. One receipt from the supply house for twelve $180 tools is twelve class 12 items you write off entirely this year, not one $2,160 class 8 addition you depreciate for a decade. Worth also knowing: the $500 figure hasn't moved since 2006 and isn't indexed to inflation, so every year it quietly catches more of what you buy.

Whichever class a tool lands in, the resulting deduction goes on line 9936, capital cost allowance, computed in Area A of the form. It does not go in with your consumables. Blades, bits, blades again, tape, and glue are genuine consumables and belong in your job costs or your supplies, depending on whether you burned them on one job or across all of them.

Vehicle is line 9281, and line 9224 is a trap

Motor vehicle expenses are line 9281, and the number that goes there is calculated in Chart A of the form: your total vehicle costs for the year, multiplied by business kilometres over total kilometres. Fuel, insurance, repairs, licence and registration all go into that chart. Notably, your vehicle insurance goes in Chart A, not on line 8690 with your general liability policy.

Now the trap. Line 9224 reads Fuel costs, and then in parentheses, except for motor vehicles. That qualifier is not decoration. Line 9224 is for the fuel that runs your equipment: the generator, the compressor, the propane for the site heaters. Truck diesel is not 9224, it's part of Chart A feeding 9281. Put your gas receipts on 9224 while also claiming a mileage-based vehicle deduction and you have deducted the same litre of fuel twice, which is exactly the kind of thing that turns a routine review into a real one.

The other half of the vehicle deduction is the log. Business kilometres over total kilometres is the entire calculation, and without a record of the business kilometres you are negotiating with no evidence. A log kept as you drive takes seconds. A log reconstructed in March from memory and calendar entries takes a weekend and convinces nobody.

If you're HST-registered, the receipt total is not the number

This one quietly doubles deductions on a lot of returns. When you claim the GST/HST you paid on a business expense as an input tax credit, you have to reduce the expense you report on the T2125 by that same amount and enter the net figure on the line. You already got the tax back through your HST return. Deducting it again on your income tax return claims it twice.

So the $1,130 invoice you paid, on which you claimed $130 of input tax credit, is a $1,000 expense on the form. If you're registered and you enter receipt totals straight off the paper, every line on your T2125 is inflated by the tax you already recovered. And if you end up with an input tax credit you can't apply against an expense or against an asset's capital cost, CRA's instruction is to report that amount as other income on line 8230 rather than leave it floating.

This is also the clean explanation for why your T5018 figure and your line 8360 figure won't match, and shouldn't. One is gross, one is net. Books that track the tax separately from the amount give you both without a reconstruction.

The rest of the lines, in contractor terms

Everything below is Part 4, the operating expenses, entered as the business portion only. Most of these are self-explanatory once you see them next to what a contractor actually spends money on.

• 8521 advertising: truck lettering, yard signs, your website, print and online ads, sponsorships.
• 8523 meals and entertainment: generally limited to 50 percent, and the limit is why this line is worth keeping honest.
• 8590 bad debts: only deductible if you already reported the amount as income. Work you invoiced and never got paid for on an accrual basis qualifies. Work you never invoiced was never income, so there's nothing to deduct.
• 8690 insurance: general liability, tool and equipment coverage, builder's risk. Vehicle insurance belongs in Chart A, and home insurance belongs in the business-use-of-home calculation.
• 8710 interest and bank charges: equipment loan and line-of-credit interest, bank fees, card processing fees.
• 8760 business taxes, licences and memberships: municipal business licence, trade association dues, certification and ticket renewals.
• 8810 office expenses: small recurring overhead, including software subscriptions.
• 8811 office stationery and supplies: the actual office supplies, not job material.
• 8860 professional fees: your accountant and your lawyer, including contract review.
• 8871 management and administration fees: bookkeeping and administrative services you pay for.
• 8910 rent: shop, yard, and storage rent. Equipment rental is commonly filed here too, though it's worth confirming with your accountant which line they prefer.
• 8960 repairs and maintenance: repairs to your own shop and equipment. Not repairs you performed for a client, which are the job.
• 9060 salaries, wages and benefits, including employer contributions: employees only, never your own draw.
• 9180 property taxes: on business property.
• 9200 travel: out-of-town work, lodging, and the travel that isn't your daily vehicle running around.
• 9220 utilities: shop hydro and heat, business phone, internet.
• 9224 fuel costs, except for motor vehicles: equipment and heating fuel only.
• 9275 delivery, freight and express: shipping that isn't already rolled into a material purchase.
• 9281 motor vehicle expenses, from Chart A.
• 9936 capital cost allowance, from Area A.
• 9270 other expenses: the honest catch-all, and you have to specify what it is. A large number sitting here is a question waiting to be asked, so use it sparingly.

Business-use-of-home is line 9945, and it's deliberately separate

If you run the business from home, that deduction is not another expense line. It's computed on its own in Part 7 of the form, and the allowable result lands on line 9945 in Part 5, after your net income before adjustments is already calculated. You take the business-use portion of your home costs, based on the share of the space used for business, and that portion is what gets claimed.

Two things follow from that structure. First, home costs must not appear twice: putting a share of your home hydro into line 9220 utilities and then also claiming home office puts the same dollar on the form twice. Pick one. If you rent a shop or a yard, that's line 8910 and it has nothing to do with 9945. Plenty of contractors legitimately have both a shop and a home office, and the only requirement is keeping the two calculations apart.

Second, the home-office claim can't be used to create or increase a business loss. The form caps it at the income available, and the unused portion carries forward to a future year. So a lean year doesn't waste the deduction, but it also won't manufacture a refund.

The form isn't the problem. March is.

Every mis-file above is trivial to avoid at the moment the money is spent and genuinely painful to untangle nine months later. Standing at the counter, you know without thinking whether that $340 is drywall for the Elm Street job, a tool you'll own for years, or the shop's hydro bill. In March, staring at a bank line that says the vendor name and nothing else, you're guessing. Categorising a year of receipts is a twenty-minute job if it was done as you went, and a lost weekend if it wasn't.

That's the whole reason Stairkey's expense and year-end tooling works the way it does. Each expense category carries its own T2125 line, so coding a receipt to Materials or Subcontractor at the moment you file it is also deciding where it lands on the form. HST is tracked separately from the amount, so what reaches the line is the net figure rather than the receipt total. And the year-end package exports a line-mapped profit and loss along with separate mileage and home-office schedules, so your accountant gets something they can work from instead of a generic list to hand-bucket. The accounting side picks it up from there.

None of that is a substitute for an accountant, and it isn't meant to be. It just means the conversation in March starts from records that already know what they are.