Understanding the difference between business income and employment income is essential for Canadian taxpayers. Whether you’re an employee, a self-employed professional, or juggling both roles, CRA expects proper classification and reporting to avoid penalties or audits. Here’s your complete 2025 guide to income types and CRA rules.
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💼 What Is Employment Income?
Employment income refers to the wages, salaries, commissions, bonuses, and other benefits earned under a contract of service (employee-employer relationship). This includes:
- Salaries and hourly wages
- Commissions or bonuses
- Taxable benefits (car, health insurance, stock options)
- Employment insurance (EI) or vacation pay
These are reported to the CRA using a T4 slip issued by the employer. Taxes, EI, and CPP are deducted at source.
🏢 What Is Business Income?
Business income is earned when you work for yourself, through a sole proprietorship or partnership. Common examples include:
- Freelancing and consulting
- Online selling (eCommerce)
- Trades or services (e.g., plumber, designer, IT support)
- Side hustles like ride-sharing or gig work
This income is reported on a T2125 – Statement of Business or Professional Activities, and you are responsible for remitting taxes and CPP contributions yourself.
📊 Key Differences in CRA Reporting Rules
| Criteria | Employment Income | Business Income |
|---|---|---|
| Reported Using | T4 Slip | T2125 Form |
| Tax Deductions at Source | Yes | No (You remit your own) |
| CPP Contributions | Employer & Employee Share | You pay both shares |
| Deductions | Limited | Many eligible business expenses |
❗ Be Careful: CRA May Reclassify Income
If the CRA believes you’re being paid as an independent contractor to avoid payroll deductions, they may reclassify your income as employment income and impose back taxes, interest, and penalties on the payer or you. Consider factors like control, ownership of tools, risk of loss, and integration to determine true employment status.
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🧾 Which Deductions Apply to Business Income?
If you’re self-employed, you can deduct:
- Office supplies, equipment, software
- Home office use
- Business travel and meals (50%)
- Vehicle expenses if used for business
- Professional development and advertising
📅 Important Filing Dates for 2025
- April 30: Personal tax return and balance due (unless self-employed)
- June 15: Filing deadline for self-employed individuals
👥 Dual Status? Report Both Income Types
If you have both a day job and a side hustle, report each on the proper form—T4 for employment and T2125 for your business. Don’t forget to calculate CPP properly on the business portion.
Disclaimer: This blog is for general informational purposes only. For personalized tax guidance, consult a certified Canadian tax professional.
