In today’s gig economy, many Canadians are exploring new ways to earn extra income, from crafting on the side to freelance consulting. But whether you’re selling handmade jewelry or offering graphic design services after hours, it’s important to determine whether your activity is a hobby or a side hustle for tax purposes. The Canada Revenue Agency (CRA) views these two activities differently, and the tax implications can be significant. In this blog post, we’ll break down the key differences between a hobby and a side hustle, how the CRA distinguishes between the two, and what that means for your taxes.
What is a Hobby?
A hobby is typically an activity pursued for personal enjoyment or recreation, rather than with the intention of earning a profit. Hobbies can sometimes generate small amounts of income, but the primary motivation is personal satisfaction, not financial gain.
Tax Implications:
- No Income Reporting Required: If the CRA considers your activity a hobby, any money earned from it is generally not taxable, as it’s not considered business income.
- No Deductions Allowed: You can’t deduct expenses related to your hobby, since there’s no intent to make a profit. For example, if you spend money on supplies for painting as a hobby, you can’t write off those expenses.
Examples of Hobbies:
- Painting or crafting for personal pleasure and occasionally selling a few pieces.
- Gardening and occasionally selling extra produce at a local market.
- Collecting and trading sports memorabilia without aiming to turn a profit.
Key Consideration:
The CRA’s main criteria for determining whether an activity is a hobby is the lack of a reasonable expectation of profit. If you aren’t actively trying to make money or grow your hobby into a business, the CRA is more likely to classify it as a non-taxable hobby.
What is a Side Hustle?
A side hustle is an income-generating activity pursued alongside your primary job or business. Unlike a hobby, a side hustle is run with the intention of earning a profit. This means that any income you make from your side hustle is considered taxable business income by the CRA.
Tax Implications:
- Income Reporting is Mandatory: Any income earned from a side hustle must be reported to the CRA as business income. Whether you made $100 or $10,000 from your side gig, you’re required to report it on your tax return.
- Deductions Allowed: One of the perks of having a side hustle is that you can deduct reasonable business expenses from your taxable income. These might include costs like advertising, office supplies, internet, equipment, and even a portion of your home expenses if you work from home.
Examples of Side Hustles:
- Freelance graphic design, writing, or consulting outside of regular working hours.
- Running an online store on platforms like Etsy or Shopify with the intent to make a profit.
- Offering services like photography, dog walking, or tutoring for pay.
Key Consideration:
To classify an activity as a side hustle, the CRA looks at whether there’s a reasonable expectation of profit. Even if your side hustle isn’t profitable every year, showing a clear intent to make money (e.g., through advertising, improving skills, or expanding services) usually qualifies it as business income.
How Does the CRA Determine the Difference?
The CRA considers several factors when deciding whether an activity is a hobby or a side hustle. Understanding these factors will help you make the right classification for tax purposes:
Reasonable Expectation of Profit:
This is one of the most important factors the CRA looks at. If you engage in an activity with the reasonable expectation that you’ll eventually make a profit, it’s more likely to be considered a business (or side hustle) rather than a hobby.
Consistency and Effort:
Are you making consistent efforts to grow your activity and increase profitability? If you regularly market your services, actively seek clients, or work on improving your skills, the CRA is more likely to consider it a side hustle.
Records and Business-Like Approach:
Do you keep detailed records of your expenses and income? Do you have a business plan or budget? If you’re running your activity in a business-like manner, it’s more likely to be seen as a side hustle. Hobbyists are less likely to keep formal records or have plans to expand their activities.
Time and Resources Invested:
How much time and money are you investing in your activity? Significant investments of time, money, or other resources can indicate that you’re running a side hustle rather than engaging in a hobby.
Tips for Managing Your Side Hustle
Keep Accurate Records:
Track your income and expenses carefully to ensure you report everything accurately to the CRA.
- Take Advantage of Deductions: Make sure you’re claiming all eligible deductions to reduce your taxable income. This includes costs related to marketing, supplies, professional fees, and even a portion of your home if you use it for business.
- Consult a Tax Professional: If you’re unsure whether your activity qualifies as a business or hobby, or if you need help maximizing your deductions, consult with a tax professional to ensure you’re in compliance with CRA regulations.
Determining whether your activity is a hobby or a side hustle is crucial for ensuring you comply with Canadian tax laws. If you’re engaging in an activity for fun without a focus on profit, it’s likely a hobby, and the income is not taxable. However, if your goal is to earn extra income, your activity will likely be classified as a side hustle, and you’ll need to report that income to the CRA and take advantage of deductions where possible.
Sway Accounting specialize in helping small business owners navigate the complexities of tax compliance. If you’re unsure how to classify your activity or need assistance with tax planning, reach out to us today for personalized advice and support.