It is expensive to live in Canada. Many Gen-Zs and millennials do side hustles to get some extra cash, maybe to pay bills, shift to a better house, or save up for a goal. You might be a student, tutoring your juniors or D-jing at a club. You may walk dogs, mow lawns, ride Uber, make deliveries, click photos, write articles, do graphic designing, or work at a convenience store. Any job that pays you is an income; all income must be reported in your tax returns. 

Tax Implications of Your Side-Hustle 

One common mistake most side hustlers who are also salaried employees make is not reporting their income from side hustles. One person can earn income from multiple sources, and the Canada Revenue Agency (CRA) has a form for all sources of income. 

In CRA’s books, a side hustler is a self-employed individual who must fill out the T2125 form, giving details about their side hustle, including income and expenses. This form is a part of the T1 General Income Tax and Benefit Return. If you are employed, you can submit it with the T4 form. 

5 Common Mistakes Side Hustlers Make When Filing Taxes 

Many side hustlers know that their gig work has tax implications. However, the way gigs are taxed is a little complicated, making it prone to errors. Knowing the mistakes can help you avoid them and save you from penalties. 

Failing To Deduct Expenses Incurred to Perform Side Hustle 

The CRA treats a side hustler as a sole proprietor, self-employed, or independent contractor. Whatever work you do to make money involves some expenses, which you can deduct from your side hustle income. 

• Business Expense: If you write articles, you can deduct broadband and electricity expenses, the subscription for Word software, office supplies, and shipping costs for sending a signed copy of the agreement. You can deduct expenses for the music purchase if you are a DJ.  
• Home Office Expense: You do not need an office. Suppose you converted 100 sq. ft. of your 500 sq. ft. home into an office. You can deduct 20% of your utilities, insurance, property taxes, rent, mortgage interest, or maintenance costs from your taxable income as a business expense.
• Specific Expenses: Some expenses have different treatments. If you met your clients at a meal or took them to a baseball match, you can include up to 50% of that cost as a business expense. If you spend on buying equipment like a laptop or a guitar, you have to claim it over the years. The CRA has a list of Capital Cost Allowances specifying the depreciation rate for different types of assets.

If you want to deduct these expenses from your taxable income, you have to be detailed and save all the receipts that can validate that the expense is genuine. The CRA could ask you for these documents if it does a random check or has a query. Failing to claim these expenses could increase your tax bill. 

Claiming Personal Expenses 

While some side hustlers don’t deduct business expenses, some go overboard and deduct personal expenses from their taxable income. You have to clearly demarcate what’s personal and what’s business. For instance, you cannot claim shopping for clothes or personal care products (unless purchased for work, like an ad shoot) or the movie you watched with friends as business expenses. 

The most common mistake in bifurcating personal and business expenses is vehicle expenses. If you are driving from home to work, it is not a business expense. But if you are driving to a client location for gig work, it is a business expense. You have to record the mileage for all your gig work to derive the percentage of the car used for business.

If you travelled 100 km for gig work and your total travel is 200 km, you can deduct 50% of vehicle cost and fuel expense. 

Tip: Collect the fuel receipts and write down the mileage, meeting destination, and reason for visit for record purposes. The CRA likes details.  

Not Declaring Full Income or Past Side-Hustle Income 

You might have done some gig work and failed to declare it in the tax returns. If you realized this mistake before the CRA caught on to the missing income, you can voluntarily change your past tax return. The CRA allows you to adjust the filings for the previous ten tax years. It is better to contact a professional accountant, as adjustments can get complicated. 

There is a possibility that the CRA might also relieve you of the penalty for non-disclosure of income if you voluntarily made the change. Otherwise, the penalty is less than 10% of the undisclosed amount or 50% of the difference between the undisclosed amount and the tax withheld from that amount.

Failing To Register for GST/HST

As a side hustler, if you start earning more than $30,000 during any three consecutive months or four consecutive calendar quarters, you have to register for the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST). Once you register for GST/HST, you have to charge the applicable tax rate for your service to clients and file GST/HST returns. 

You can voluntarily register for GST even if you don’t meet the $30,000 threshold to claim input tax credit (ITC) for your business expenses. If you purchase a laptop and pay GST on it, you can deduct that money from the GST you collect from customers. 

Failing To Set Aside Money for Income Tax 

Lastly, if you spend the entire money from a side hustle, you might face a tax bill on that income at the end of the tax year, leading to a tax debt. Many side hustlers make the mistake of not budgeting the tax element. Always set aside 20-30% of your income for taxes in a separate bank account. This way, you won’t accidentally spend the tax money. 

Contact Ford Keast LLP in London to Help You with Taxes 

A skilled accountant can help you compute your taxable income with the relevant bifurcation of expenses. To learn how Ford Keast LLP can help you with your tax planning and filing, contact us online or by telephone at 519-679-9330.