Nowadays, a lot of people are using a side business or additional source of income to augment their primary income. The tax implications of these extra sources of income are frequently misunderstood or overlooked entirely.
The side-hustle could involve earning money via the gig economy, selling goods online, renting out assets like cars and apartments, or earning money as a social media “influencer.”
In order to remind taxpayers of their tax responsibilities with regard to “platform economy” income — that is, income obtained through online platforms like Kijiji, Uber, and Instagram — the CRA has recently published several news releases to offer guidance.
The CRA advises that “whether the earnings you make from online platforms are your main source of income, or a small part of it, you are considered to be a platform economy participant. When it’s time to file your taxes, you must report all sources of your income, including gifts and donations”.
A lot of people are unaware that they could have to pay taxes on this kind of income. Maybe they view such activities as a hobby, rather than a business. This is a very important distinction when it comes to tax, as hobby income is usually not taxable.
Income is usually not taxable if your hobby generates some extra cash for you. For example, it is likely that you won’t have to pay tax on that unwanted Christmas present that you sold on Kijiji! Similarly, if you paint for fun and someone wants to purchase one of your creations, this probably wouldn’t be taxable as a one-off sale.
But as a hobby gets more serious, time-consuming and perhaps even profitable, you might eventually find that your hobby has turned into a business, and business income IS subject to income tax.
Determining when a hobby has actually become a business is a subject often debated between taxpayers and the CRA.
The difference between pursuing a hobby and running a business depends on the facts. Common indicators of a business include the intention to make a profit, a significant investment in time and money, and frequent sales of the fruits of your activity.
You must declare any income from a business in your tax return as self-employment income. Hobby income doesn’t have the same requirement.
If you do in fact run a business, you can claim any expenses you have incurred in the running of that business. These expenses may include overheads, materials, and fees for online platforms. If the expenses exceed your income, you will have a loss that you can apply against other sources of income, or carry over to other tax years if you don’t have enough other sources of income – but if you claim such a loss, you’re likely to be audited by the CRA to verify that you really are carrying on a business.
If your business generates gross revenue of more than $30,000 (from Canadian customers) over the course of four calendar quarters, you will normally also need to register for GST/HST.
One exception to this is ridesharing services (e.g., driving for Uber). This activity requires the driver to register for GST/HST from the first $1 of income earned.
To assist those operating in the platform economy in understanding their tax responsibilities, the CRA has recently provided ten “tips.”
1. Know your area of the platform economy
You could be working gig economy, the sharing economy, the peer-to-peer economy (e.g. selling items on Kijiji), or as a social media influencer. Each of these areas of the platform economy has different tax considerations and filing obligations.
2. Report your income and consider all sources
You may work in more than one area of the platform economy and all sources must be reported.
3. Know what applies to you as a non-resident
Even if you are not a resident of Canada, income earned in Canada will usually come with a Canadian tax obligation.
4. Keep records at regular intervals and explore your platform’s available documents
Online platforms frequently offer tax forms and summaries that can assist you in meeting your responsibilities.
5. Determine if you are self-employed or not
Remember that you might not be required to report and pay taxes on income if you are merely engaged in a hobby as opposed to running a business.
6. Claim your eligible business expenses
Costs such as advertising, platform fees and software licences may all reduce your business income for tax purposes.
7. Register for GST/HST and collect it if required
It is important to determine if you only have to register for GST/HST upon meeting the $30,000 supply threshold or whether you may have an immediate registration requirement.
If you are required to charge GST/HST, the CRA will demand that you remit the tax, even if you haven’t registered and even if you haven’t charged tax on your sales or services. The penalties for not remitting GST/HST can be significant.
8. Visit the CRA’s Taxes and the platform economy web page here.
9. Get help from the CRA for your taxes
For example, the CRA offers a liaison officer service for small businesses, giving them the opportunity to meet with a CRA officer to discuss reporting requirements and obtain support.
10. Correct your tax affairs voluntarily
If you voluntarily make the required corrections after realizing that you failed to report income or collect GST/HST, you may avoid penalties and interest.
Through the CRA’s voluntary disclosure program, taxpayers can request a waiver of penalties and interest, based on their willingness to come forward voluntarily and provide a complete disclosure of their situation (and, of course, upon paying any additional tax that is due).
More information on the CRA tips mentioned above can be found here.