Tax season is officially upon us! Every Canadian is in the process of gathering their documents and trying to navigate tax brackets, rates, deductions and credits. But what if you earned money from a side hustle? Do you have to report it on your tax return? The answer is yes, side hustle taxes in Canada apply on income earned outside of your day job. If you’re not sure how to report this income and pay tax on it, continue reading to understand all the ins and outs.
Table of contents
What is a side hustle?
A side hustle is a job, hobby or way of earning income outside of your day job, which for most is a 9 to 5. Due to economic constraints, many Canadians have a side hustle to save more, pay their bills, or eliminate debt. In some circumstances, people might engage in the gig economy because they’re struggling to find full time work. Although, others may partake in a side hustle purely out of personal interest, perhaps crafting or gaming. In some cases, Canadians may be trying to start a full-time business using their passion before quitting their day job.
For some, a side hustle might be an evening shift. For others, it might be a side business. Here’s some common examples of side hustles in Canada:
- Freelance writing
- Graphic design
- Selling product or dropshipping
- Photography
- Computer programming
- Handiwork and maintenance
- Delivery and car sharing services
- Property rental services
- Day or swing trading
While these are common in Canada, there are tons of other side hustles in the economy. Regardless of what your side hustle is, you are required to pay tax on any income earned.
Are side hustles legal in Canada?
Yes, side hustles are completely legal in Canada. However, some employment contracts restrict you from engaging in other gainful activities outside of your commitment to your employer. Be sure you’re not violating the conditions of your day job by engaging in a side hustle. Finally, the side hustle you’re engaging in must be a legal activity.
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Do I have to report income from a side job in Canada?
Yes, you have to report income and pay tax for your side hustle in Canada. For the bulk of this article, “tax” is defined as personal income tax. Even though side hustle income is reported on your personal tax return, it is considered business income. Before diving deeper into this, let’s take a moment to explore other types of tax requirements for side hustles in Canada.
Most maintain a sole proprietor business structure for their side hustle. But if your side hustle is doing well and you decide to incorporate, you would be required to pay corporate taxes. Although, if you’re considering incorporation, it’s likely your side hustle is turning into a full time business which is outside the scope of this article.
Another potential consideration for side hustle tax in Canada is HST and GST. Fortunately, you are not required to track, charge and remit sales tax if you are considered a small supplier. If you make less than $30,000 in a quarter, then you’re considered a small supplier. If you’re making more than $30,000 in a quarter, chances are this side hustle is becoming a full time business. Again, that’s outside of the scope of this article. You can voluntarily register for a sales tax account, but that’s a personal choice. It does aid cash flow, but there’s more paperwork and tracking involved.
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Tax Requirements for Side Hustles in Canada
For most Canadians, a side hustle is a stream of income earned under a sole proprietorship structure. This means the individual is required to pay personal income tax on their net income from the side hustle. A side hustle is considered a business in Canada, which means you’re reporting business income. Here’s a list of the requirements for side hustle tax in Canada related to tracking and reporting:
If your side hustle is employment income
- T4. If your side hustle is through an employer and you receive a pay cheque, you will receive a T4. You will use this document to report income on your tax return. For instance, if you’re working a night shift as a cashier, you’ll likely receive a T4 from your employer. If you are earning money on your own, the next sections will apply to you.
If your side hustle is self-employment income
- Income. Side hustle income must be tracked throughout the calendar year so you know what amount to report on your T1.
- Expenses. A big tax benefit of side hustles is you can deduct expenses against your income. The main requirement is the expense was incurred to earn income. For instance, if you’re an Uber driver, you can deduct the cost of gas and car repairs against your ride share earnings. Just like income, you need to track expenses throughout the calendar year. Try to keep records of the expenses too, such as receipts and bank statements.
- Tax estimates. When employed, your employer deducts and remits personal taxes to the government on your behalf throughout the year. When you file your taxes in April, the tax amount will be much less because you paid your taxes consistently throughout the year. But with a side hustle, the income is always paid to you pre-tax. The first time you file and pay tax on your side hustle, you might be taken aback by the amount because it’s paid in a lump sum instead of throughout the year. As a general rule of thumb, save 30% of your gross income from your side hustle to cover the tax bill.
- Record keeping. As mentioned above, you should keep track of your side hustle income and expenses. These financial records will be used to report gross and net income so you can pay side hustle taxes in Canada.
A final piece of advice is related to cash based side hustles. You might think if you are paid in cash it won’t have to be reported, but this is not true. Regardless of whether you’re paid digitally or physically, you still need to track and report income related to your side hustle.
How much money can you make on the side before paying taxes in Canada?
The second you start earning income on a side hustle, you’ll be required to report and start paying tax on it. Of course, if you randomly make $50 bucks selling something on Kijiji and don’t report it, you probably won’t get into a ton of trouble. But when you start making a couple thousand every year? You should definitely report it to avoid tax consequences down the road.
In terms of HST and GST tax, you only have to register for a sales tax account when you begin making over $30,000 for four consecutive quarters. Otherwise, you don’t have to worry about sales tax, unless you choose to enroll prematurely. Some people think they can charge sales tax when they aren’t registered for a sales tax account. This is illegal and you could break trust with clients if they ever ask you for your registration number, only to find out you’re not registered and have been up-charging them under the guise of sales tax.
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Calculating Side Hustle Taxes in Canada
If you’re employed, your taxes will be fairly straightforward. Sum all your T4s from your day job and side hustles and report it as you normally would. Your tax burden won’t be as high as it would be with self employment income since taxes are deducted at the source. The sum of the income among all your T4s is your taxable income.
For self employment income, your side hustle earnings are reported on the T2125 schedule, better known as the Statement of Business or Professional Activities. Your income is reported under Part 3A/B/C and your expenses are reported under Part 3D and Part 4. Lastly, your net income is reported under Part 5.
In addition to your income and expenses, you’ll also be required to identify your business and what industry it’s in. You also have the opportunity to claim capital cost allowance if your side hustle involves an asset, such as a laptop, vehicle or other similar equipment. If you want to claim home office and motor vehicle expenses, you can do that using this form as well. Finally, if you split income with other partners in your side hustle, the division of income is reported here too.
Tax Calculation
The amounts from above will roll up with your other taxable income. From there, you can calculate your tax liability. For the 2022 tax year, these are the federal tax brackets:
| 2022 Federal Tax Brackets | 2022 Federal Tax Rates |
| $0 to $50,197 | 15% |
| $50,197 to $100,392 | 20.5% |
| $100,392 to $155,625 | 26% |
| $155,625 to $221,708 | 29% |
| $221,708 and above | 33% |
Remember, you’re also required to pay provincial or territorial tax on your side hustle income. You can use a combined federal and provincial tax rate to better estimate your tax liability. Once you arrive at your tax liability amount, you can start claiming tax credits. These amounts will reduce your tax liability. Unfortunately, there are no special tax credits for side hustlers.
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Filing Taxes for Side Hustles in Canada
Like everyone else, T1 personal tax return filings are due by April 30 of each year. The same is true for Canadians with a side hustle. Ideally, you should be gathering and preparing the documentation related to your side hustle now for the 2022 tax year!
Dealing with the CRA for Side Hustles
When it comes to employment income, the process is pretty straightforward and standard. It’s all reported on your T4 and you use that to file your taxes – easy peasy. Since the amounts on a T4 are prepared and checked by your employer, the risk of misstatement or error is low in the CRA’s eyes.
But with side hustles taxes in Canada, the risk of reporting the incorrect amount on your returns increases. For this reason, you might be targeted for a CRA audit. If you receive a CRA audit letter, don’t panic! In most cases, they’ll ask to see some documentation related to your side hustle income and expenses. Once they check your records against what was reported on your tax return, you’ll be in the clear!
To ensure a CRA audit goes smoothly, be sure to address it swiftly and keep open lines of communication. Even if you did make a mistake on your taxes, the CRA will fix it and you might have to pay a bit more tax. As long as you’re working with them to resolve the problem, it’ll go away as quickly as it arose. But if you fail to communicate with them or ignore the problem, they may escalate the situation to get your attention.
Managing Side Hustle Taxes in Canada
As the old saying goes, more money means more problems! And in this case, the additional problem is greater paperwork and higher taxes. Although, navigating the Canadian tax system will help you learn the ins and outs of taxation. Not only will you learn how to optimize tax on your side hustle, but you’ll also become more financially literate and better understand tax efficiency strategies.
Not sure how to approach your side hustle taxes in Canada? A financial advisor can help. Find your perfect match today!
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