How to Define Business Income and Canadian Income Tax

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If you're running a business in Canada, you need to be prepared to report your business income to the government come tax time. The Canada Revenue Agency (CRA) defines business income as the sum total of the monetary value that you get from any activities that you do for profit.

There are two points of this definition that are critical to you regarding your Canadian income tax.

Monetary Value

The phrase "monetary value" should be used instead of "money," because money may not be what you get in exchange for your labor or the goods you provide. Whether you work on someone's car and they hand you cash when the job is done, or you barter your services fixing someone's car in exchange for lessons on how to use a computer software program, you're taking in revenue either way.

The point is that goods, services, or credits you receive through bartering count as business income, too, even though no actual money changes hands.

The Sum Total Means All

If you look up "income" on the CRA's website, you'll read "The sum of revenues earned in a specific period of time." This includes revenues from:

  • Salaries
  • Wages
  • Benefits
  • Tips
  • Commissions
  • Profits from operating a business or profession
  • Investments

Note that "the sum of all revenues" is not limited to revenues taken in Canada—all means all revenues you made anywhere in the world. So proceeds from products and services sold to individuals and companies in other countries count as business income.

How you make the revenue doesn't matter to the CRA, either. It's important to realize that from a tax point of view, there is no difference between an online business and a brick-and-mortar one. Profits that you make from doing business online count as business income too. 

For that matter, there's no difference between a legal business and an illegal one when it comes to income tax, as two Regina drug dealers discovered. Besides being convicted of trafficking in marijuana, money laundering, and other offences, they also had to pay income tax (and presumably penalties) on about $190,000 of ill-gotten gains. As the tax court judge pointed out:

It is well established that a taxpayer is subject to tax on his income regardless of its source... A taxpayer must keep reliable books and records for all of his income, including income from illegal sources.

Do You Have Business Income You're Not Declaring?

Some people get confused about the scope of business income. For instance, because they haven't registered a business, they think they don't have to fill out form T2125 and declare the business income when they're completing their T1 income tax form. Or they think that because they haven't sold much, what they've done doesn't count as business income.

But all the money you make counts, and if you've sold items for profit (even just a few) you're engaging in business activities, according to the Canada Revenue Agency. There's no amount threshold when it comes to selling goods for profit. For example:

  • Selling bisque dolls on eBay equals engaging in business activity, and therefore, having business income, whether you sell three dolls or 50.
  • A small, home-based catering business may only take in a few thousand in cash every year, but this still qualifies as business income according to the CRA and must be reported as such. Note that, in this case, properly reporting the income makes you eligible for a variety of home-based business tax deductions.

Remember, the government expects you to report your total worldwide income on your Canadian income tax, whether you made business income online or received a check from Bavaria. It all counts. 

Penalties for Not Reporting All Your Business Income

If you fail to report all your business income, you may be subject to a penalty of 10% of the amount you failed to report after your first omission. If you knowingly omit any income, you may be charged a penalty of up to 50% of the understated tax. However, if you voluntary report your ommissions to the CRA, you might be eligible to have these penalties waived.

Declaring Your Business Income

You need to declare your business income on your Canadian income tax return, which you do by completing form T2125 if you are operating a sole proprietorship or a partnership and then filling in your total income on the appropriate line of the T1 return. If you are operating a corporation, you would declare your business income on your T2 corporate tax return.

The Bottom Line

When it comes time to report your business income for tax purposes, all means all. Be sure you track all exchanges you make throughout the year, whether you're trading in cash, goods, or services, and be prepared to report everything to the CRA.