Bookkeeping for Canadian Makers: T2125 for Craft and Product Businesses

If you make candles, jewelry, ceramics, clothing, food products, art, or anything else and sell it for a profit, you are running a business in CRA's view. That income goes on Schedule T2125 of your T1 personal return. Here is how to track everything correctly so that tax season does not become a scramble.

Is Your Making a Business or a Hobby?

CRA distinguishes between a business (a genuine profit-seeking, commercial activity) and a hobby (a personal pursuit with occasional sales). What matters is whether you carry on the activity in a sufficiently commercial, businesslike way. You do not need to be profitable yet, but the activity has to be a real attempt to earn a profit, not a personal pastime.

Signs CRA looks for to treat your activity as a business:

• You price your goods to cover costs and generate income
• You sell regularly, not just at one annual market
• You keep records of income and expenses
• You invest in improving your product or reach (new equipment, markets, platform listings)
• Your losses are explained by startup costs or specific circumstances, not just ongoing losses with no plan to profit

If CRA decides your activity is a personal hobby rather than a business, it generally will not let you deduct business losses or expenses against your other income. The risk is real if you report consistent losses for multiple years with no credible path to profit.

Tracking Your Sales Income

All sales go on T2125 Part 2 as business income, regardless of how you received payment. This includes:

• Etsy and other platform sales (report gross, before Etsy's fees)
• Cash sales at craft fairs, markets, pop-ups
• Instagram or Facebook direct sales
• Consignment sales (reported when the consignee sells the item, not when you drop off goods)
• Wholesale orders to stores or galleries
• Custom orders and commissions

Keep a sales log for cash sales. A simple notes app entry after each market with total sales for the day is enough. Platform sales are recorded in your seller dashboard and easy to pull at year-end.

What You Can Deduct

Expenses must be incurred to earn business income. Here are the most common deductions for makers, with the T2125 line they belong on:

Materials: Expenses vs Inventory

This is where most makers get confused. When you buy yarn, wax, resin, clay, or any raw material, you cannot deduct the full purchase price in the year you bought it. Only the cost of materials that went into goods you actually sold during the year is deductible.

At December 31, count what you have left: raw materials, work-in-progress (half-made items), and finished goods you have not sold. Value your inventory at the lower of its cost and its fair market value (you can also value the whole inventory at fair market value, as long as you use the same method consistently from year to year). That total goes on line 8500 (closing inventory) on T2125 Part 4, and it reduces your COGS accordingly.

If you use materials up quickly and your unsold-goods balance is small, CRA may not scrutinize your Part 4 closely. But if you are buying significant stock and not doing a year-end count, you are likely overstating your expenses.

Home Studio Deductions

The CRA flat rate method ($2/day) was discontinued after the 2022 tax year, so you now use the detailed method. You can claim business-use-of-home expenses if your studio meets either one of these tests:

• It is your principal place of business, or
• You use the space only to earn business income, and you use it regularly to meet clients or customers

If the studio is your principal place of business, it does not have to be used only for the business. A dual-purpose room can still qualify, as long as you claim only the business share, prorated by both space and time. If it is not your principal place of business, the space generally needs to be used only for the business to qualify.

Calculate the percentage of your home that is your studio: studio square footage divided by total home square footage. Apply that percentage to:

• Rent (if you rent)
• Mortgage interest (the interest portion only, not the principal)
• Property taxes
• Home insurance
• Utilities (heat, electricity)
• Maintenance and repairs related to the whole home

The home office deduction cannot create a loss. It can only reduce your income to zero, and any unused portion carries forward to next year.

GST/HST for Makers

Once your total taxable sales go over $30,000 in a single calendar quarter, or over four consecutive calendar quarters (across all channels combined), you must register for GST/HST. That includes Etsy sales, craft fair cash, and direct sales.

Most handmade goods are taxable supplies. Food products are sometimes exempt (basic groceries) but most artisan or specialty food items are taxable. Once registered, you add GST/HST to your prices, collect it from buyers, and remit it to CRA periodically. You also claim input tax credits on materials and business expenses you paid GST/HST on.

Common Questions

Do I need to report income from craft fairs?

Yes. All business income is reportable regardless of how you receive it. Keep a simple sales log for each market day: total sales, not itemized receipts.

Is my craft business a hobby or a business in CRA's eyes?

CRA looks at whether you run the activity in a commercial, profit-seeking way. Consistent sales, intentional pricing, and records of income and expenses all support business status. Occasional sales with no real effort to profit point toward a hobby, and a hobby generally cannot deduct losses against your other income.

Can I deduct materials I bought but have not used yet?

Only the materials that went into goods you sold are deductible this year. Unused raw materials, WIP, and finished goods on hand at year-end are inventory. They carry forward and become a deduction when you eventually sell them.