If you operate a business, earn self-employed income, or earn any income on a regular basis, you must report the profit or loss to the Canada Revenue Agency (CRA). Additionally, you are entitled to deduct “reasonable expenses” that you incurred in the quest for profit.
That begs the following questions:
- What exactly is a business
- How can you know if you are operating one
- What deductions are available for me to claim?
The Canada Revenue Agency offers guidance on what it considers a business to be, but we felt it would be much easier to understand in plain terms – the same language that we use in all of our products and that our tax experts use when helping Canadians prepare their tax returns.
What is a Business?
The CRA considers a business to be any of the following activities, carried out with the intent to make a profit and with a reasonable expectation of succeeding in doing so:
- A profession
- A calling
- A trade
- A manufacture
- An undertaking of any kind
- An “adventure or concern in the nature of trade”
This is a very broad definition that encompasses just about any activity that you might perform in day-to-day life. If the activity has no personal element and is self-evidently a business activity, the analysis should stop there and the tax rules applicable to businesses should apply as long as you intend to make a profit.
However, many activities can be seen as both personal and business-oriented. It is not rare to see people turn hobbies into businesses or run part-time businesses out of their homes. According to the CRA, in such cases, what distinguishes a business from a hobby is the reasonable expectation of profit.
Reasonable Expectation of Profit
The notion of “reasonable expectation of profit” has been brought before the Courts dozens of times in many contexts, and there are many subtle distinctions that have been made. However, certain general tendencies have evolved and are accepted by the tax authorities. Some of the more important elements to be considered when determining an activity’s reasonable expectation of profit are:
- Profit and loss experience in the past
- The amount of gross income generated by the activity
- The time needed for an activity to reasonably make a profit, considering its nature
- Comparison of the activity with similar ones
- The amount of time you devote to the activity
- Your specific qualifications to make the purported business a success
- Your business plan and general efforts to make the purported business a success
- The adequacy of the business’s capitalization
There are other factors that can come into play, many of which depend on the nature of the activity. The CRA explicitly states that not one of the factors is more important than the other and that the determination of whether or not a business exists is a factual one, based on the specific circumstances of each case.
Since there is no clear definition of what this entails, it’s important to keep all receipts and records relating to the activity, as well as a note, if possible, as to the intention of undertaking because that might be critical should there be questions down the road by the CRA.
Deductions
Deductions and their eligibility are as unique as everyone’s tax situation. Which is why using any of the TurboTax products, such as those created specifically for self-employed taxpayers takes the guesswork out of deductions and taxes. With step-by-step instructions and easy-to-follow guides, TurboTax Self-Employed is the perfect choice for small business owners.
