416 519 2579 info@aptaxgroup.com

Posted on July 7, 2013

Is your hobby a business?

Written by Avner Polatsek | @AvnerPolatsek

mountain climber

A common question we receive is: Can I claim business expenses for my hobby?

While it’s tempting to call your hobby a business because of all of those great business expense tax write-offs, the process is a little trickier than simply filing certain tax forms.

Why does it matter?

The main benefit of considering your hobby as a for-profit-endeavour is that the CRA will allow you to claim business-related expenses and if these expenses are more than your business income, you can claim a loss. Anything from your mortgage to your car insurance might qualify as a business expense and a loss can reduce the taxes you pay from other income sources.

Proving Your Hobby is a Business

Because of this potential tax advantage, people try to push their luck and call their personal hobby a business to get a tax break, but never intend to actually make a profit.

You can probably guess that the CRA doesn’t look too kindly on this.

4 Things the CRA might look at to determine for-profit status:

  1. Your past profit and loss experience – Losses will attract attention, as most businesses claiming a loss for more than two years would probably shut down or make serious changes. The CRA will be looking at your past claims to determine whether or not you’re trying to use your hobby just to get a tax break.
  2. Your training or expertise – If you say that you’re starting a business that requires a certain certificate or level of education, the CRA might want to see that you’ve completed this training.
  3. How you’re planning to succeed – Many businesses experience losses, especially when they are in the building stages. This is completely fine as long as the CRA can see what you’re planning to do to make a profit – your intended course of action.
  4. Whether expecting a profit is reasonable – As we mentioned before, a business claiming multiple years of losses is a red flag. The CRA needs to see that your business has the potential to make money. In other words, if you’re saying that you are renting properties, but never charging enough rent to cover your costs, you might have a problem.

Currently, we are seeing a huge rise in entrepreneurship, as many people want to create their own jobs out of their existing passions. This is great for many reasons, but we want to ensure that you’re covered for tax time.

Our number one tip for people turning their hobby into a business is to keep spectacular records. When your hobbies make money, you need to start treating them like a business and reap the rewards of all of the deductions that can come along with them!

If you need any help determining whether or not your hobby can be classified as a business, contact us. For Americans living in Canada, there are extra IRS considerations when filing your taxes as a business. We specialize both US and Canadian taxes and would be happy to assist you.