Hobby or Business

Do you want your business to be more profitable? Do you want your financial forecasting results to be favorable? There is one way to help with that, by keeping your tax costs as low as possible. Read on to find legal ways to reduce business tax in Canada.

Hobbies are a most human aspect of life. As such, individuals of all ages are actively involved in one hobby or another. As a hobbyist, did you know that if your hobby generates income there may be hobby tax consequences? This can certainly zap the fun out of hobbies. Read on for more information.

Do I carryon a hobby or business?

There are no hard and fast rules for determining whether your hobby is actually a business by definition. The Canada Revenue Agency (CRA) defines a business as something done in the pursuit of profit. The difficulty in distinguishing a hobby from a business arises because of the essential personal element involved in hobbies. In other words, hobbies are not always an activity that you do for profit.

The acid test used by the CRA and the courts seems to be whether you are making a profit.

A business is required to pay tax on net business profits (income minus expenses) and can claim losses incurred in the pursuit of profit. A hobby, on the other hand, is required to pay hobby tax any profits but cannot claim any losses whatsoever.

According to publication IT3342R2 issued by the CRA, if the hobby generates a profit (revenue in excess of expenses) it is a strong indication that the hobby is a venture with an expectation of profit. If, however, the hobby results in a loss (expenses in excess of revenue), the reasonable expectation of profit does not exist. This may seem unfair to hobbyists but the CRA is not in the business of being fair.

Online Sales

Profits earned online with auction sites such as eBay and Kijiji are taxable just like regular profits. As a side project, if you participate regularly in e-commerce like eBay selling, you will be required to pay hobby taxes on internet sales.

However, if you make the odd sale on Kijiji or Craigslist such as selling old household items, you will not be required to declare this income as you almost certainly will incur a loss on the sale of old personal items.

Sales Tax

Businesses are required to collect and remit sales tax if they are a GS/HST registrant (total annual sales of $30,000 or more). Due to the nature of hobbies, the likelihood that your revenue from hobby sales is

at least $30,000 is very low. As such, you will not have to collect and remit taxes on hobby sales unless your revenue exceeds this threshold.

For more information on sales tax for online business please read – “sales tax for online businesses” article (this is one of the new articles for the online business industry page)

Reporting Requirements

If you generate a profit from your hobby, you will be required to report this profit as business income on Form T2125, (Statement of Business or Professional Activities) of your T1 personal tax return.

If your hobby generates income (even if it is not presently profitable), it is a good idea to keep track of all your expenses to help segregate hobby expenses from personal expenses, which will not be deductible against hobby income. If you anticipate that your hobby income will continue to grow, please consult your professional accountant for business and tax advice.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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