Did you know that what you think is a hobby the CRA may see as a business? If you are making a profit from your hobby, then it is a defined as a business by Canada Revenue. It does not matter if your hobby is small, you still have to declare any income from it on your tax return.
However, it may not always obvious to you whether your hobby is taxable or not. For example:
- Producing crafts to sell at a Christmas sale might be seen by the CRA as a business, but if you are actually spending more on the materials to make the crafts then you ARE NOT making a profit, so you don’t have to declare any business income.
- However, in a second example you may be buying items at clearance or garage sales, marking them up and reselling them on-line. In this example you ARE making a profit, so you need to declare this as income.
The income you make must be reported on Form T2125 Statement of Business or Professional Activities, which is included with the T1 income tax return package.
Doing this extra paperwork does have some major advantages. You can write off your business expenses against income, including business-use-of-home expenses, meals and entertainment expenses, motor vehicle expensesetc. You can also use the Capital Cost Allowanceto annually write off a portion of assets. To claim these expenses, you must keep track of all your sales and expenses and all of your receipts.
If you have income from a regular job, the net loss from your hobby gets deducted against your total income which may result in a lower tax bill. However, there are limits: you cannot continue to write off losses from your hobby year after year without the CRA using the profit test to see whether or not your activities are conducted with a “reasonable expectation of profit”.
From an article by Susan Ward