Are you an entrepreneur in Toronto or Ontario and wondering whether your income is considered a business income or a hobby income? This is an important question to answer because the classification of your income can impact your tax liability, deductions, and more. In this blog post, we will explore the difference between business income and hobby income and everything you should know about them.

Business Income

Business income is income that you earn from a business or profession that you carry on. The Canada Revenue Agency (CRA) considers a business to be any activity that you carry out with a reasonable expectation of profit. This means that if you are engaged in an activity with the intention of earning a profit, then the income you earn from that activity is considered business income.

The CRA requires you to report all of your business income on your tax return, including income from self-employment, commissions, and tips. You are also allowed to deduct any expenses that you incurred while earning that income, such as rent, utilities, office supplies, and more. These deductions can help lower your taxable income, which can result in lower tax liability.

Hobby Income

Hobby income, on the other hand, is income that you earn from an activity that you do not carry on as a business. The CRA defines a hobby as an activity that is pursued for personal enjoyment or recreation, without any intention of making a profit. If you earn income from a hobby, you are required to report it on your tax return as “other income.”

Unlike business income, you are not allowed to deduct any expenses related to your hobby income. This means that if you spent money on supplies or equipment to pursue your hobby, you cannot deduct those expenses from your income to reduce your taxable income.

Key Differences

The key difference between business income and hobby income is the intention to make a profit. If you are engaging in an activity with the intention of making a profit, then your income is considered business income. On the other hand, if you are pursuing an activity for personal enjoyment or recreation, without any intention of making a profit, then your income is considered hobby income.

Another important difference is the ability to deduct expenses. Business income allows for deductions related to earning the income, while hobby income does not.

Final Thoughts

In conclusion, it’s important to understand the difference between business income and hobby income. If you are engaging in an activity with the intention of making a profit, then your income is considered business income, and you are allowed to deduct expenses related to earning that income. If you are pursuing an activity for personal enjoyment or recreation, without any intention of making a profit, then your income is considered hobby income, and you are not allowed to deduct any expenses.

As a business owner in Toronto or Ontario, it’s important to accurately report your income and expenses to ensure compliance with CRA regulations. An experienced accountant can help you navigate the tax laws and maximize your deductions to minimize your tax liability.