Interior designer tax services: T2125 or T2, and the HST call on procurement

T2125 first, T2 when the numbers say so

Most studios start as sole proprietorships, reporting design fees and procurement margin on a T2125 inside the personal return. That is the right call while you are drawing out everything the studio earns — incorporation adds a corporate filing without adding a benefit. The switch to a corporation and a T2 makes sense when the studio consistently earns more than you spend, because retained profit is taxed at Ontario's combined 12.2% small business rate instead of your personal bracket, and the deferral funds slow seasons, a junior hire, or the deposit float that procurement demands.

One trap is specific to designers: procurement inflates your top line long before the fees look serious. The $30,000 small-supplier threshold counts total taxable revenue — product sales included — over four consecutive calendar quarters, so a studio billing modest fees but reselling a condo's worth of furnishings must register for GST/HST far earlier than a pure service business would. We check the registration question at the first discovery call, not after CRA does.

Agent or principal: the decision that sets your HST base

When you buy furnishings as principal — purchase order in your name, title passing through you, your markup on top — you claim the input tax credit on the trade price and charge HST on the full selling price. When you genuinely act as agent — the client authorizes the purchase, knows the vendor's price, and owns the piece from the moment it is bought — the cost flows through without HST added, and you charge HST only on your fee. The economics and the paperwork must tell the same story, because CRA reads the contract, the invoices, and who bore the risk, not the label you used.

Neither answer is wrong — principal preserves your margin privacy, agency keeps big-ticket purchases off your revenue line. What hurts is drifting between the two mid-project. We fix the model in the letter of engagement and make the invoices match it, so an HST review confirms the position instead of reconstructing it.

The home studio, the sample library, and the site-visit car

A home studio is deductible in proportion to the space it actually occupies. On a T2125, business-use-of-home expenses — the workspace share of rent or mortgage interest, utilities, insurance, property tax — are limited to the income the business earned, with the unused balance carried forward to a profitable year. If the studio is incorporated, the corporation instead reimburses a documented share of home costs, and we keep CCA off the home entirely so the principal residence exemption stays intact.

Beyond the room itself: fabric samples, finish libraries, and reference materials are ordinary expenses when they are consumed in pitching work; drafting hardware and rendering machines are capital assets depreciated by class. The car that carries you between site visits, showrooms, and receiving warehouses is deductible on the business share of a kilometre log — the one record CRA asks for first and designers keep last.

Deposits, instalments, and the US project

A true deposit is not taxed until it is applied against a bill, while an invoiced prepayment triggers HST immediately — so the way your proposals request money is itself a tax decision, and we set it deliberately. On the income side, strong project years create personal or corporate instalment obligations for the following year; we calculate them from actuals each quarter so a March instalment letter never comes as news. And when a client hands you their Naples condo or Manhattan pied-a-terre, the fee may face US withholding and state sales tax questions that the Canadian return cannot fix after the fact — that layer lives in our cross-border tax guide for interior designers. For how our year-round engagement runs, see our tax services page.

Source: CRA — GST/HST for businesses.