At one time, having a “side job” meant a little extra cash to help with the family income without much consideration to reporting these at tax time. These days, having a side job is known as “side hustling”, and it is quickly becoming a popular first step towards entrepreneurship. A side hustle can include anything from house-cleaning to chauffeuring to freelance writing to hoteling. It can include ventures such as AirBnB, Uber and TaskRabbit, to name a few. If you’re in this category of business, or have any sort of business or hobby on the side, you should be declaring them at tax time.
How do I know if I have a side hustle, or just a hobby?
For starters, a side hustle would show a revenue with an increasing demand for your services or goods month over month. A hobby may include the sale of goods, but without a profit. For example, if you crochet hats and scarves and sell them at the annual Christmas craft show, just covering your cost of materials without making a profit, that’s a hobby. If you crochet to sell items for a profit, your “hobby” has become a business. This can include selling items for profit at craft sales, online, on consignment in a local store, or by word of mouth. Even if you started out at the craft show and the demand has grown, your hobby has become a business.
What does that mean with respect to my tax return?
The Canadian Revenue Agency mandates that if you have sales of $30,000 in one calendar year, you must register your business and charge GST/HST. This isn’t necessarily a bad thing. While you will have to charge and pay taxes on this revenue, it can also work in your favour in two ways:
- You can claim back any GST/HST you paid on expenses as a refund, and
- You can write off expenses towards your business, including business use-of-home expenses, supplies, materials and marketing expenses, meals and entertainment expenses, motor vehicle expenses, and so on.
Also, if you are making profits, you will need to pay taxes based on your net income. If you’ve ever had a full-time job, you will be familiar with taxes being withheld before you receive your paycheque, so you may not have ever had to pay taxes separately. Depending on your tax bracket, it’s always a good idea to keep some money aside for tax time. After a few years in business, this will become easier to predict and you will be in the habit of setting aside a portion of your revenue for taxes.
How do I report a side hustle?
You must report the income by completing form T2125 (Statement of Business or Professional Activities). In order to make this process easier, use a tracking software or online accounting system. It can be as simple as using a free online basic invoicing software and a spreadsheet for expenses – but it’s important to keep track of where you are to know what taxes you owe, and what you can write-off at the end of the year. You will need to keep all of your receipts for expenses in order to write them off.
What if I’m not making any money?
If your expenses exceed the revenue from the business, the excess is deducted against your total income so your overall tax bill will be lower. It’s not uncommon to start a side business and receive no income in the first year, or to have your expenses exceed your income. But you still need to report the business, and the $0 in sales each year while tracking your expenses. Note that writing-off losses year after year may also attract the attention of the CRA. They will determine whether your activities are conducted with a “reasonable expectation of profit” and determine that your venture is only a hobby after all.
If you find the prospect of reporting a business daunting, you can look to a Chartered Professional Accountant for help.