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.
Source: https://taxinterpretations.com/cra/severed-letters/2012-0442371m4
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.
what are the implications of Having a business vs a Hobby?
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.
Blog Post
A brand new blog post about what you need to know as a worker in the gig economy
A Guide to Navigating Taxes in the Gig Economy
In a recent study by H&R Block, nearly 28% of Canadians reported taking on a side hustle in the “gig economy” to boost their income. This is a significant increase from 2022 in which the analogous
