Francesca Giroux, CPA
For the Lakeside Leader
An amount (other than a taxable capital gain) is subject to tax in Canada only if it is derived from a source of income, this is generally straight forward except in cases where there is a personal or hobby element to the business being carried out by the taxpayer. When the source of income is merely a hobby it is not subject to tax as it is not considered to be a source of income. In addition losses from hobbies are not deductible for tax purposes. In order to determine whether or not the source of income is solely from a hobby activity the courts have employed a two-stage approach. The fact that there may be a hobby element included in a person’s business activities does not mean that automatically the income is not from a business or property source, but it means that it will needed to be determined if it is undertaken in a sufficiently commercial manner.
The first stage is to answer the question: Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour? One factor evaluated in the assessment of this question is to determine if there is a reasonable expectation of profit for the business. Some of the criteria that are evaluated when looking at expectation of profit are the profit and loss experience in past years, the taxpayer’s training, the taxpayer’s intended course of action; and the capability of the venture as capitalized to show a profit after deducting capital cost allowance. The reasonable expectation of profit should not be the only factor considered when evaluating if the activity is commercial in nature. The second question to be asked is: If it is not a personal endeavour, is the source of the income a business or property? The answer to this question will determine how the income is taxed.
In general, if you are selling a product or service (i.e. direct to customer sales such as accessories, children’s toys, and household goods) you are conducting an activity for profit, even if you only sell a minimal amount of items a year. The income that you make from the business needs to be reported on your personal income tax return by completing form T2125 Statement of Business or Professional Activities. However, if your business (which has a hobby element) regularly incurs a loss, for example you are an individual who enjoys taking pictures and on occasion sell some of your photos and the costs to pursue this activity far exceed the casual revenue earned from the business it is likely that you would be considered a hobby photographer and the loss would not be deductible for tax purposes.
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Information provided is of a general nature. As each individual or company?s situation is unique, you may wish to consult with your CGA for information specific to your own needs.