Why is the 'mouse' nil in this script?

It's been a long while since I've worked with tools (Just don't use them if you're confident in making your own tool system) but I do know you're doing things you don't have to do.

First of all, you're putting the Activated() event inside an Equipped() event when Activated() fires only if the player has clicked AND while the tool is already equipped.

Wiki page on the Activated event.

The other problem is that mouse isn't defined in the Activated() event. That argument isn't found in this event (See wiki again). What you can do is just define it using a local variable since you also define the LocalPlayer.

--//Variables
local plr = game.Players.LocalPlayer
local mouse = plr:GetMouse() --Getting the mouse from the player

local tool = script.Parent.Parent
local hole = tool.Hole
local handle = tool.Handle
local debounce = true
local config = tool.Config
local range = config.Range
local dmg = config.Damage
local coolDown = config.CoolDown
local clips = config.Clips
local ammo = config.Ammo
local maxAmmo = config.MaxAmmo
local allowTracing = config.AllowTracing

--//Events
tool.Activated:connect(function()
    if debounce then
        --//Doesn't allow spamming
        debounce = false
        --//Ray Get, Set
        local ray = Ray.new(hole.CFrame.p (mouse.Hit.p - hole.CFrame.p*range.Value)
        --This time it shouldn't error

        local hit, position = workspace:FindPartOnRay(ray, plr.Character, false, true)

        if allowTracing.Value == true then
            --//Make "part
            local trace = Instance.new("Part", workspace)
            trace.Material = Enum.Material.Neon
            trace.BrickColor = BrickColor.new("Orange")
            trace.CanCollide = false
            trace.Anchored = true
            trace.Transparency = 0.5

            --//Show Direction
            local distance = (hole.CFrame.p - position).magnitude
            trace.Size = Vector3.new(0.2,0.2, distance)
            trace.CFrame = CFrame.new(hole.CFrame.p,position) * CFrame.new(0, 0, -distance/2)

            --//Remove Debris
            game:GetService("Debris"):AddItem(trace, 0.1)

        end

        --//Hit Detection
        if hit then
            local humanoid = hit.Parent:FindFirstChild("Humanoid")
            if humanoid then
                if hit.Name == "Head" then
                    --//Double damage on headshots
                    humanoid:TakeDamage(dmg.Value*2)
                else
                    --//Normal damage on body shots
                    humanoid.TakeDamage(dmg.Value)
                end
            end
        end

        wait(coolDown.Value)
        debounce = true
    end
end)