During the pandemic many Canadians started a business or began offering freelance, gig or contract services. Three years later, a significant number are still navigating the often-confusing rules around business income reporting and self-employment tax deductions.
Nathalie Hatter is one entrepreneur who turned a pandemic side project into an ongoing small business. A former corporate travel executive who planned company trips, Hatter saw her career stall in March 2020 when travel programs were cancelled after Canada advised against non-essential travel. Living in Oakville, Ont., and with elderly parents to protect, she looked for flexible, socially distanced work—starting with dogwalking. She handed out business cards in her neighbourhood and soon combined that idea with her chef training to make artisanal dog treats to sell at weekend farmers’ markets. Pivot Dog Biscuits was born. “I was selling out every weekend,” she says.
Three years on, Hatter’s dog treat business is thriving. She is preparing for tax season: the federal personal tax filing deadline is April 30 (it falls on a Tuesday in 2024). Self-employed individuals and their spouses have a filing extension to June 15, but any taxes owing are still due April 30. “I like to get my taxes in ahead of the curve,” Hatter says.
Is your side hustle taxable?
Yes—unless your activities are truly a small hobby that brings in only a couple of hundred dollars a year. Any meaningful business income is taxable, explains Dean Paley, a Chartered Professional Accountant in Burlington, Ont.
To estimate how much tax you may owe, use an online tax calculator (Paley recommends the Ernst & Young calculators). Remember to add roughly 12% to account for Canada Pension Plan (CPP) or Québec Pension Plan (QPP) contributions. If your combined net self-employment income and pensionable employment income exceeds $3,500, CPP/QPP contributions are required, and self-employed people must pay both the employer and employee portions.
Sole proprietors report business income on their personal tax return using Form T2125, Statement of Business or Professional Activities. Even if the business runs at a loss, that loss must be reported and can be deducted against other income in the same tax year.
If your side business generates $30,000 or more in taxable sales (before expenses) within a single calendar quarter or over four consecutive calendar quarters, you must register for a GST/HST number because you no longer qualify as a “small supplier.” It’s wise to register before reaching that threshold to avoid paying GST/HST out of pocket, fines, or having to retroactively charge clients. Once you are required to collect GST/HST, you must start charging your customers the applicable rate for their province.
What business expenses can you claim?
Self-employed Canadians can claim many ordinary and necessary expenses incurred to earn business income. For Hatter, deductible costs include home office expenses, vehicle costs related to deliveries, payment processing fees, advertising and baking supplies.
Large purchases such as computers, office furniture or vehicles are “depreciable property.” Those costs aren’t fully deductible in the year of purchase; instead, you claim a portion each year as capital cost allowance (CCA). For example, Hatter can depreciate a commercial mixer and steel racks over time using the CCA rules.
Deductible expenses for side hustles
In general you can deduct business expenses that are reasonable and directly related to earning income. Typical deductible items include:
- employee salaries and wages
- a proportionate share of auto expenses (fuel, maintenance, leasing or depreciation tied to business use)
- office supplies
- software subscriptions and digital tools
- home office expenses (a business-use portion of mortgage interest or rent, utilities, internet, property taxes, repairs, cleaning and home insurance)
- cell phone costs for the portion used for business
- advertising and marketing, including websites, social media promotion, posters and business cards
- business insurance, licensing fees and professional memberships
- shipping and delivery costs
- accounting, bookkeeping and legal fees
- meals and entertainment for clients (generally 50% deductible)
- premiums for private medical insurance when applicable
- business travel expenses
- professional development such as seminars and courses
- interest and bank charges on money borrowed for business purposes
What you cannot deduct
Some personal expenses cannot be claimed as business deductions. Common non-deductible items are:
- your own personal salary or wages drawn from the business
- interest and penalties charged on overdue income tax
- life insurance premiums
- ordinary personal clothing and grooming costs
How to track your business expenses and costs
Consistent record-keeping year-round simplifies tax time and helps you manage cash flow. Hatter started with an Excel spreadsheet and keeps all receipts, setting aside 25% to 30% of her income for taxes—advice shared by many tax professionals. As her sales grew, she moved toward a more robust accounting solution to manage inventory, expenses and payments.
Popular small-business accounting and invoicing apps include QuickBooks, Square Invoices, FreshBooks, Momenteo and Kashoo. Tax-filing software like TurboTax and Wealthsimple Tax can help carry forward unclaimed expenses, remind you about deductions, and surface credits such as homeownership or eco-related incentives.
If you have questions, the Canada Revenue Agency provides extensive tax information. If your situation is more complex or you need peace of mind, hiring an accountant or bookkeeper is a wise move—remember that professional fees are themselves tax-deductible.
How to reduce your taxable income
Reducing taxable income comes down to disciplined bookkeeping and making use of tax-advantaged strategies. One common approach is income splitting: if a family member works legitimately for the business and falls into a lower tax bracket, paying them a reasonable wage shifts income to be taxed at their lower rate.
Charitable donations to registered charities generate federal tax credits and can lower your tax liability. Contributing to a registered retirement savings plan (RRSP) up to your contribution limit is another effective way to reduce taxable income because contributions generally produce an immediate tax deduction and RRSP investments grow tax-deferred. If your RRSP room is maxed out, a Tax-Free Savings Account (TFSA) remains a powerful savings vehicle, though TFSA contributions do not reduce taxable income.
Above all, stay current with tax filings and payments to avoid audits, interest and penalties. “The government has gone after certain groups,” says Paley. “Penalties are not that fun.”
Read more about personal income taxes in Canada:
- The final tax return after death: How it gets done in Canada
- The tax implications of working abroad for residents and non-residents of Canada
- U.S. withholding tax in an RRSP for Canadians
- How are you taxed when you sell a small business?