Practically everyone today seems to have some form of debt. Whether that’s from student loans or credit cards, debt is a huge issue for Canadians—one that we could all use a little help to get out of. To gain some relief, people all over the world have turned to side hustles and the “gig economy” such as driving for Uber, hosting AirBnB guests, or selling knicknacks on eBay or Etsy.
No matter your situation, it’s clear that debt problems are becoming more prevalent. While side jobs are an excellent way to earn some extra income, they still need to be reported to the CRA for tax purposes. If you’re working a side hustle or planning to start a gig economy job, it’s wise to consider the tax implications before moving on.
Bruce Sellery, Credit Canada’s CEO, recently hosted a Moolala podcast with Yannick Lemay, Learning Program Lead & Tax Specialist at H&R Block to go over some of the implications of not claiming your side gig on your tax return.
What Is the Gig Economy?
Part-time and temporary jobs are contributing to what is now known as the “gig economy.” This labour market is fueled by people who are seeking out additional income by providing services on a schedule that is more flexible in comparison to full-time employment.
Even if you’ve never used the term gig economy, you’re probably more familiar with it than you think. Jobs like driving for Uber or delivering groceries through Instacart are just a few examples of popular side hustles.
So why are people turning to side gigs on top of their day jobs? Well, a study conducted by H&R Block found that 85% of Canadians believe that their normal income is not able to keep up with inflation. While more than 8.7 million Canadians have side hustles, nearly 25% of them don’t understand the tax implications of having additional income streams.
Do You Have to Pay Taxes on a Side Hustle Canada?
In short, yes you have to pay taxes on a side hustle in Canada. The Income Tax Act imposes an obligation on residents of Canada to pay taxes on their income. According to the Canada Revenue Agency, income earned from a side hustle is potentially considered to be “self-employment income.” This income is considered to be taxable if it comes from any activity that you carry out for profit or with reasonable expectation of profit.
If a taxpayer is audited by the CRA, they will look for evidence of business intent. This would include incurring business expenses, buying materials, getting training, or any indication that you are operating a business plan. Finding this sort of evidence would indicate that you are operating a business and therefore need to pay tax on the income from that business.
How much can a small business make before paying taxes in Canada?
This is actually three questions in one! To be specific, the questions are:
- How much can I make before I have to pay CPP?
- How much can I make before I have to pay income tax?
- How much can I make before I have to register for GST/HST, and start collecting & remitting that?
CPP – Canada Pension Plan – is pretty straightforward. If you are over the age of 18, working in Canada but outside of Quebec, you are required to contribute to CPP if your earnings for the year are above $3,500. As a self-employed person, you must contribute 11.9% of your pensionable earnings, to a maximum of $7,508.
The threshold for income tax is a bit more complicated since it includes any other income from any income source, not just your side hustle. If your total income for the year is below $15,000, which is the basic personal amount deduction, you will owe no income tax at all. If your income is above the basic personal deduction, then you might have to pay income tax – this will depend on your situation and any applicable tax credits.
Finally, the obligation to register for GST/HST kicks in when your side hustle has generated total revenues of more than $30,000 in the immediate trailing 12-month period.
What Happens if I Don’t Claim Taxes on My Side Hustle?
When it comes to side hustles, Canadians might not be aware of the need to file taxes on secondary income streams—or they might not know how to. Failing to file personal income tax when doing gig work can have some notable repercussions.
1. Fees
One of the penalties for late taxes might be paying hefty fees. For example, the base penalty for late-filing a final return is 5% of any balance owed, plus an additional 1% of the balance owed for each full month it’s late by, up to a maximum of 12 months.
Note that if you cannot afford to pay the balance owed at tax time, you can still avoid the penalty by filing your taxes before the due date, but paying the balance owed a little bit later. You may also be able to avoid the penalty if the late filing was due to circumstances beyond your control—such as a hospitalization. Here, you would want to file a Form RC4288 Request for Taxpayer Relief and let the Canada Revenue Agency (CRA) know why you had to file late.
2. Lost Tax Advantage Opportunities
Filing income tax comes with associated benefits, like deductions and credits, but failing to do so means you might miss out on some of these opportunities. Perhaps gig workers believe that they’re not making enough to qualify for certain benefits, but these taxes should be filed regardless.
3. Criminal Charges
Failing to file taxes on any income stream is considered tax evasion according to Canadian law. Penalties may vary case by case, but knowingly submitting false income statements along with significant impacts on your tax return can result in criminal charges.
Even if you are simply unaware of the need to file taxes on your side gig, there may still be criminal penalties. The CRA expects taxpayers to understand and be responsible for filing their taxes correctly—if you’re unsure if you need to file income from your gig job, it may be helpful to contact the CRA directly for advice.
How Does the CRA Determine Gig Economy Income?
Even if you are unaware of how to report your side gig, the CRA is able to access income information reported to freelancing services, like Uber and DoorDash. For taxes that have not been paid, the CRA will send out letters to taxpayers requesting receipts or paper trail information regarding unreported income.
Determining what is considered to be gig economy income can vary tremendously. Some side gigs and freelance opportunities are more similar to self-employment, but others might not be as obvious. It might be best to judge the need to file income tax based on your situation or to ask the CRA directly for more information.
A Hobby vs a Business
Some Canadians might not file income tax because they believe that their secondary income stream is a result of a hobby and not a business. In terms of the gig economy, the difference between a hobby and a side hustle really boils down to intent.
If you are looking to make a little extra money using resources that you already have, such as selling old clothes, then the intent isn’t necessarily to make a profit. On the other hand, if you have substantial expenses or have gone through training (such as signing up for Instacart and completing their in-app training), then the intent more aligns with making a profit and can be considered as a business where you’re self-employed.
Benefits of Claiming Taxes on Your Side Hustle
Aside from avoiding penalties, Canadians should be reporting all sources of income because they can gain some great benefits. While some of these benefits may seem small, they might be enough to help you make ends meet just a little bit easier.
1. Credits and Deductions
Deductions will vary from gig to gig, but claiming things like gas and maintenance if it contributes to your side hustle can help provide you with tax credits. The gig economy has a wide range of occupations, so the list of what can be deducted from your taxes is quite long.
Yannick Lemay, the Learning Program Lead & Tax Specialist at H&R Block spoke with Credit Canada CEO Bruce Sellery on the Moolala Podcast about how “there are more than 400 deductions and credits available,” yet Canadians are still hesitant to file personal income tax on side hustles.
Lemay goes on to note that “there’s also plenty of credits and benefits that are paid to Canadians if you are eligible simply because you have filed your tax returns, you don’t even have to ask for the credit, you don’t even have to file a special form for it, you’re just going to get it.”
There are also several provincial and territorial tax benefits that you can receive from filing your side hustle. Even if you think your income might be too low to receive any of these credits, filing them might help you qualify.
Examples of Deductible Expenses for Side Hustles
Any profitable business can deduct any expenses that can be reasonably related to the generation of that business’ income. Here are some common examples of expenses related to side hustles:
- Materials used in the creation of product; shipping expenses
- Wages paid to employees
- Home office expenses, e.g. a portion of utilities, internet, insurance, etc.
- Travel costs, e.g. a portion of auto expenses
- Office Supplies
- Phone bills
- Advertising/marketing expenses, including websites, social media, business cards
- Insurance costs
- Licensing fees
- Professional fees (accounting, legal, taxation)
- Interest/bank charges on business loans
- Depreciation (Capital Cost Allowance) on fixed assets purchased for the business
2. Pay Off Debt
Your income tax return can be used to help you ease some of the debt you might have. If you're stressed over making regular contributions toward your debt, think about using tax refunds to help make things a little easier.
Additionally, if you have a monthly budget, using tax returns to contribute to your regular expenses can help you work toward your financial goals.
3. Plan For Your Future
Don’t miss out on opportunities to save for retirement! Contributions to a Canada Pension Plan (CPP), Quebec Pension Plan (CPP), or Registered Retirement Savings Plan (RRSP) can be expanded when you file additional income streams. While contribution amounts are dependent upon income level, any contributions that you can make will reap great benefits down the line.
How to File Your Side Hustle Taxes in Canada
The Canada Revenue Agency will require a taxpayer with a side hustle that is considered to be a self-employed business to file form T2125, Statement of Business or Professional Activities. They provide a guide to completing Form T2125, which is a helpful resource. This form will need to be submitted with the rest of your tax filing for the year (your T1).
Assuming that you have a relatively small side hustle that has not yet grown into a full-fledged business, you may need to complete the following sections on the T2125 form:
- Part 1 - Identification
- Part 2 - Internet business activities (if you’re running a web-based business)
- Part 3A - Business income
- Part 3C - Gross business income. The total here will go on Line 13499 on the T1 General
- Part 3D - Cost of goods sold (if your gig includes making something that requires expenses related to inputs)
- Part 4 - Expenses. This is where all the other expenses are entered.
- Part 5 - Net income. The total here goes to Line 13500 on the T1 General form.
- Part 7 - Business-use-of-home expenses. This is where you can claim expenses for a home office.
- Chart A and Chart C - Motor vehicle expenses. This is where you can claim expenses related to a vehicle.
If your side hustle has expanded to the point where you should be completing other sections of the T2125, it’s probably not a side hustle anymore...it’s a small business. This would be a good time to speak to a professional accountant for further information.
Find the Right Solution for You
If pursuing a side hustle is the right debt management step to help you enhance your finances, there are a lot of factors to consider concerning income tax. The world of taxes isn’t always easy to navigate, but Credit Canada is here to help shed some light on income tax and debt relief.
Our financial coaches can help answer your questions regarding filing taxes on extra income streams. Feel free to check out our tools to assist you with your movement toward debt relief. Reach out to our team of credit counsellors right away for help navigating your taxes and the gig economy!
