From the perspective of the Canada Revenue Agency, what you consider a pastime could be considered a business—If you make a profit from it, it is referred to as business income.
Although you may not consider what you're doing to be a business, the CRA defines a business as "any activity that you perform for profit." This includes a profession, a trade, a business enterprise, or an undertaking of any kind.
The difficulty in separating a pastime from a business stems from the fact that hobbies require a significant amount of personal involvement. To put it another way, hobbies aren't always a money-making venture.
The CRA's test appears to be whether you're earning a profit or taking a loss.
According to the CRA, if a pastime makes a profit (income exceeds expenses), it is a strong indication that the activity is a profit-making venture. If the pastime, on the other hand, results in a loss (expenses exceed revenue), there is no reasonable expectation of profit.
It makes no difference how little money you make from your passion because there is no limit. When filing your Canadian income tax return you must record all of your income from all sources, including hobby money.
Form T2125 (Statement of Business or Professional Activities) must be used to declare the money you earn from your hobby as business income.
The extra paperwork comes with numerous benefits, the most important of which is the opportunity to deduct company expenses from revenue. This encompasses expenses such as business-use-of-home, meals and entertainment, motor vehicle expenses, and so on.
If you have a regular source of income from a job or sole-proprietorship, you can deduct the net loss from your sole-proprietorship from your total income, lowering your overall taxable income. However, there are certain limitations to this. You cannot continuously deduct losses from your hobbies from your normal income year after year without catching the CRA's attention.
Do you need assistance filing your personal income tax return? Contact our experts today.
Published by Elite Accounting Inc.
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