Is Your Hobby A Business?
Hello All,
Hobbies by definition can be deeply fulfilling. When engaging, you often lose track of time and while the outcome might be important, it is the journey that provides us with most satisfaction. There is a meditative aspect to being deeply immersed in doing something that you enjoy or love and might include knitting, playing video games, or taking photographs of nature.
For some of us, hobbies can actually turn into revenue generating activities which is (quite literally) an added bonus. It seems like the dream to actually earn some money or even make a career out of doing something that you love. Sadly, Revenue Canada (CRA) or whatever revenue agency you happen to be closest to, is in the business of marring perfection and demands closer scrutiny of any activity that brings in cash.
This means that once you start generating revenue from your hobby, you have to make a determination as to whether it constitutes a business. This, unfortunately, is not based on our own personal definition . Rather we must follow guidance from the tax court of Canada and CRA on this issue. In a ruling, that has now become somewhat of a precedent for the hobby vs business test, the tax court made the following assertions in reference to a specific case :
The existence of a personal element must be put in perspective. There is frequently a personal element in the carrying on of a commercial enterprise in the sense that the person derives great personal satisfaction from the activity. This does not make the activity any the less a business. Professional artists, photographers, writers, musicians (and sometimes even lawyers) no doubt derive great satisfaction from what they do but if their activity is commercial and is intended to yield a profit it is nonetheless a business. It is only where the personal element so overshadows any element of commerciality as to substantially displace it that one may conclude that the activity is merely a hobby and is not a business at all.
…
The appellant’s activity here has the necessary ingredients of commerciality to make it a business - the commitment of substantial capital, the organized and businesslike way in which records are kept and the devotion of enormous amounts of time by the appellant and his wife and, in earlier years at least, his sons as well as the intent to earn a profit. Perhaps some people might see Mr. Martin’s hopes as overly optimistic or even ill conceived but if an intent to earn a profit is a necessary ingredient in a business it certainly exists here.
In other words, numerous businesses have a personal element combined with a passion so simply deriving personal satisfaction is not sufficient to deem it as a hobby. Secondly, the type of effort that one puts into the activity is key in determining how to classify it.
So, what are the implications of this?
As someone who is engaging in an activity you must firstly ascertain if you are doing it with intention of earning a profit. This would rule out any hobbies where you receive no money (other than perhaps occasionally winning a bet) and will also likely exclude the sporadic sale of artwork to a collector or a piece of writing to a literary magazine.
However, if you do have the intention of selling and actually put some work into it, you will likely find yourself with a business on your hands. Some other questions might include: How much time do you devote to the activity? Have you purchased special tools? Do you have an accounting system? Separate bank accounts? Do you market on social media or other types of media? Have you registered your business? These might be asked under scrutiny and will factor into the proper classification.
The classification is also important (and beneficial to the taxpayer) in the case of your entitlement to claim expense deductions. With a number of hobby based businesses, it can take time to actually become profitable which means that your expenses might be higher than your sales in a given year. The consequence of this, if you are in fact classified as a business, is that you can claim a loss on your tax return and deduct it from other income that you earn, thereby reducing your taxes.
The hobby vs business distinction, as such, is a grey area. There isn’t a checklist of facts that makes it one or the other. Instead it is a determination of all the facts. CRA is almost always only going to audit you when your taxes paid appear to be insufficient. This means that they will want to call your hobby a business in you have higher revenues and lower expenses. In the reverse situation, where your expenses exceed your revenues, they will want you to prove that you are a business and not a hobby. At least they’re consistent.
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Tax Stuff:
Hobby vs Business: A an article from CPA Canada that provides some more insight on whether you have a hobby or business from the perspective of Revenue Canada
CRA on the Gig Economy: Some guidance directly from CRA on your obligations and their expectations for workers in the Gig Economy.
CRA Prescribed Interest Rates: The increase in CRA’s interest rates, in keeping with the broader economy, is significant. For those of you who pay your taxes after the deadline or do not pay instalments, it might be worth looking into changing that as your tax bill could be a lot higher.
QuickBooks Tip: Using Tags
One of my favourite features for organizing data is using tags in QuickBooks Online. The tag feature allows you to see all transactions relating to a specific categorization. For example, you might want to see all expenses that you incurred on a certain trip, that are allocated to different accounts in the chart of accounts. You could then create in tag in each relevant transaction (just look for the tag section). To create a report, go to reports and search for “tag”. The list of reports using tags will show up.
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Small Business Tax Facts(Sole Proprietorships/Registered Businesses/Self Employed Workers)
This book helps you take control of your finances by giving you a better understanding of tax (brackets, tax rates, deductions etc), how it applies to your unincorporated small businesses and how to do your own tax return (or at least understand what your accountant does). It also includes a comprehensive breakdown of deductible expenses, by category with special sections on more complex deductions such as home office, vehicle and capital cost allowance.
FastStart Your Corporation(Corporations)
A step by step guide to starting your small business corporation, including what you need to know about incorporation, setting up your accounting and tax considerations.
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FastStart Your Business (Sole Proprietorships)
A step by step guide for anyone who is planning to start a Canadian business or become self employed (and does not want to incorporate) and wants to know what they need to do or simply has questions.
Small Business and Your Dividends (Corporations)
For incorporated small business owners who want to know more about small business dividends, the differences between salary vs dividends and which is better and step by step instructions on how to file your own dividend declarations (T5s).
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Wishing everyone an enjoyable (increasingly dusky) weekend!
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