Do You Have to Declare Hobby Income in Canada?
Your Hobby May Actually Be a Business Tax-Wise
Question: I make a few bucks from my hobby. Do I have to declare this hobby income on my Canadian income tax?
Yes! What you consider to be a hobby may be a business in the eyes of the Canada Revenue Agency. How to tell? If you are actually making a profit from your hobby then it is considered to be business income. You may not consider that you actually run a business, but you do according to the government.
The Canada Revenue Agency (CRA) defines a business as "any activity that you do for profit".
They go on to say that the definition of business includes a profession, a calling, a trade, a manufacture, an adventure or concern in the way of trade, and an undertaking of any kind.
Note that it doesn't matter if your hobby income is small; there is no "you-have-to-make-more-than" threshold before your income counts. If you are selling products or services for profit, the Canada Revenue Agency doesn't care that you are only selling "a few" or that you consider your activity to be a hobby - when you file your Canadian income tax you must declare all of your income from all sources, including your hobby income.
1) Bob has excellent woodworking skills and as a hobby makes beautiful carved salad bowls which he sells in a kiosk at Christmas in a local mall. He has a woodworking shop with a number of expensive tools and must also pay for materials as the money he makes from selling the bowls does not cover the costs to make them.
He does it for enjoyment and is not concerned with making a profit. Does he have to declare business income?
Answer: Probably not. The general rule is that you must be making a profit (e.g. revenue exceeds expenses) or intend to make a profit in the future. In Bob's case, his expenses (shop, tools, materials) exceed whatever revenue he makes from selling his hobby items.
Note that if he decided to declare his hobby income it might actually be an income tax advantage as it could enable him to write off his business expenses and record a business loss (see the Advantages of Declaring Hobby Income below).
2) As a hobby Jane goes to garage sales on a regular basis and picks up items which she sells on eBay for a considerable markup. Because she only sells on eBay does she have to report business income?
Answer: Yes, if she is selling on eBay on any kind of regular basis, she needs to declare her hobby income on her income tax. The Canada Revenue Agency (CRA) won a court case against eBay in 2009 which requires eBay to provide information on high-volume sellers to the CRA (those that make over $1,000 a month, called PowerSellers). But that doesn't mean that they'll turn a blind eye towards those who sell regularly on eBay and make less than that a month. Jane's business passes the profit test and she needs to make sure all her income is declared. The CRA makes no distinction between selling online and selling offline (also known as bricks and mortar selling).
How Do I Report Hobby Income?
You must report the money you make from your hobby as business income by completing Form T2125, (Statement of Business or Professional Activities) which is included with the T1 income tax return package.
If you are unfamiliar with the process or just want a refresher, How to Complete Your T1 Canadian Income Tax Form will lead you through it.
Advantages of Declaring Hobby Income
Reporting the proceeds from your hobby item sales as business income requires additional paperwork, but it also has some major advantages, the main one being the ability to write off business expenses against income. This includes business-use-of-home expenses, Meals and entertainment expenses, motor vehicle expenses, etc. You can use the Capital Cost Allowance to annually write off a portion of assets such as property and equipment your business has acquired. To do this, of course, you must keep track of all your sales and expenses (including all receipts).
If you have regular income from a job or business and the hobby expenses exceed the revenue from the sale of the hobby items, the excess still gets deducted against your total income so your overall tax bill will be lower.
Note that there are limits to this - you cannot continue to write off thousands of dollars in losses from your hobby activities against your regular income year after year without attracting the attention of the CRA. The CRA uses the Profit Test to determine whether your activities are conducted with a "reasonable expectation of profit".