Income Tax Filing Tips for Online Businesses

According to the CRA, you must report Internet business activities on your income tax return.  This broad term includes a wide range of earnings and activities, however year-over-year, as more-and-more Canadians earn income online, the CRA narrows the scope and gets more detailed regarding the tax filing requirements and obligations.

If you write a blog,  have a successful YouTube channel, or a lot of followers on Instagram and earn money from advertisements, this is considered income from an Internet business. Similarly, if you design web pages, sell items on Ebay for profit, or are paid to “click” or share Web pages, you also fall into this category.

Essentially, if you provide information, products or services online and earn income from it, the CRA requires you to report it on your income tax return. Reporting requirements can vary based on the structure of your business.

When you earn money from an employer, you are considered an employee. In contrast, anytime you earn money on your own, the CRA considers you a business owner.

This business can take a number of forms. For example, you may be self-employed or part of a partnership. Alternatively, you may opt to turn your business into a corporation. In all cases, the CRA requires you to report your earnings but also allows you to deduct business expenses on your income tax return.

Your Internet business income consists of all income you receive from doing business online. For example, if you sell items on Ebay, you need to report all of the payments you receive from your buyers. Similarly, if you receive money from any other sources, you also have to report this as income.

If you do a significant amount of online contracting for a single company or payer, this company may send you a T4A form detailing the amounts you have received.

To make completing your income tax return as easy as possible, make sure to save records of all of the income you receive throughout the year.

As a small business owner, you are allowed the deduct the expenses that you incur to earn your income.

These expenses include advertising and office supplies, computers or other electronics you use for your business, the cost of your Internet service, and even expenses related to your vehicle or home office.

In most cases, when you incur an expenses for your Internet business, you can claim their entire value as a deduction against your business income. For example, if you buy an old computer and parts for $100, fix them and then sell them on Ebay for $200, you have to report $200 as income. But you can claim the $100 as an expense.

However, in situations when you make a significant purchase for your business, the CRA requires you to write it off slowly over a number of years. For example, if you buy a warehouse to store items you sell, you can only write off a portion of the expense each year you have the warehouse.

To determine how to write off large purchases, you need to first determine the Capital Cost Allowance (CCA) class and rate of the asset that you have purchased.

If you use something for both personal and business use, you can only deduct a portion of the expense on your income tax return.

For example, if you purchase a new tablet to use for your Internet business, but you also plan to use it for fun. If you use it 30 percent of the time for business, you can claim 30 percent of its cost as a business expense.

This rule applies to a variety of expenses including computers, your Internet service and your car. However, there are special rules for claiming your home office as a business expense.

To deduct business-use-of-home expenses, your home office must be your principal place of business or you must only use the space for business and regularly meet clients there.

If you qualify for this deduction and your office fills up ten percent of your home’s space, you can claim ten percent of your home’s mortgage, rent, utilities and insurance payments as a business expense. If your office takes up a different amount of space, adjust the numbers accordingly.

Keep records and receipts of all of your expenses — you will need them when you file your income tax return.

If you are self-employed, you need to complete Form T2125, Statement of Business and Professional Activities. This form has sections to record your income, deductions and Capital Cost Allowances. It also has a special section devoted to Internet business activities.

Ensure that you note your relevant website addresses in this section and the percentage of your total income generated from the Internet.

If you are part of a partnership, you should also complete T5013 Statement of Partnership Income. This form has special lines for partners and requests information on which percentage of the partnership you own.

You can create a partnership with a written contract or a verbal one, and can split ownership as you like. If you own 30% of the company and your partner owns 70%, you should report 30% of the income and claim 30% of the expenses, and he should claim the other 70%.

If your Internet business is a corporation, you need to complete Schedule 88, Business Internet Activities and submit it along with corporation income tax return (T2).