by Ron Clarke
Do you have a regular full time job?
And are you running a hobby in your free time?
Having some fun with it, making a little cash but not really looking to make any money from it.
Maybe your approach is simply to provide a product or service to yourself, your family, and your friends and neighbours.
Why not report the hobby as a business on your tax return claiming the revenue and all the expenses, and the loss will offset your earnings at your “regular job” and reduce your taxes?
Because, the Canada Revenue Agency (CRA) has a keen eye to businesses running at a loss.
Let’s say you have a regular job and you also run a computer repair business out of your basement or make some crafts and sell them at markets.
You have a loss almost every year, or at best you breakeven.
You have been reporting your business on your tax return for four or five years, each year with a loss. As the calculations go, the business loss is netted against your other income and as a consequence your tax liability is reduced.
As each successive year goes by that you claim the business loss on your tax return, the odds increase for a CRA review.
At that time, CRA could determine that you have no intention of profit and consequently your operation is a hobby and not a for-profit business operation, and the loss will be denied.
In fact, CRA could deny losses claimed in past years and reassess those tax returns and require tax, penalties and interest be remitted to CRA.
Another common scenario is farming.
Let’s say you have a full time job, and you live on some arable land that you operate as a farm that grows a few cash crops plus you raise chickens to sell fresh eggs.
This past year you turned another loss, and this year the loss was larger again.
You have had losses almost every year for the better part of a decade and have been reporting them on your tax return.
Given the continuous annual losses, CRA would likely review the farm operation and could determine this farm is a hobby, and not a business. CRA would argue that you don’t have a profit motive considering you work full time at a regular job and continue to operate the farm despite increasing losses.
In other words, it’s not likely this farm will turn a profit.
Now let’s say you don’t live on the farm property. Is the farm operation then automatically considered a business operation? No. Where you live is not relevant.
As a final note regarding the reporting of business losses on one’s tax return.
In 2017, CRA announced that taxpayers reporting a “prolonged period of business losses” may be subject to review. Reading further, “prolonged period of business losses” is defined as business losses reported for two consecutive years.
Yes, only two years. And new business start-ups are not exempted.
With this all said, you do have to report your small business sales revenue to CRA, and you can claim direct and reasonable expenses.
You just can’t run at a continuous loss.
For what it’s worth, now five years after the enactment of this CRA review policy, although its bark remains loud for sure, the CRA follow through is spotty.
Ron Clarke, owner of JBS Business Services in Trail, provides accounting and tax services.