Increasingly, Canadians are choosing to have side hustles and to sell online. Various individuals make additional income for their households by selling handmade items on Etsy, reselling on Facebook Marketplace, selling services online, or creating content on online platforms. Many people begin these activities in a haphazard manner, and eventually they become a viable way to make money.
Unfortunately, for some reason, taxes are sometimes an afterthought. Someone may begin transacting items online without maintaining any sort of records or receipts. It may be months or even years after they have realized that this income should be reported to Canada Revenue Agency (CRA) and concern them that they have not completed the records, resulting in serious tax issues.
The bottom line is that it’s not a death sentence if you have flawed records, and it doesn’t mean that you can’t pay your taxes. The positive side is that bad records do not mean bad news or failure to pay taxes. The CRA realizes that records may not be complete for certain small businesses and new entrepreneurs. The key points are that good faith efforts are made to accurately report income, and that information is reconstructed in a reasonable way.
This guide to CRA reporting for side gigs covers how Canadians can make a reasonable estimate of an income from an online sale when the records aren’t ideal, and why it is better to take action than simply write it off.
With the digital economy, it is easier than ever before for Canadians to make money outside of the conventional workplace. The CRA has also greatly enhanced their capacity to detect unreported income.
Digital records are created when online marketplaces and payment processors are used. Financial institutions, third-party reporting entities and information sharing agreements may also be a source of information that will help the CRA in uncovering unreported income.
This is not to say all of the side hustlers are being targeted. But it does mean that it is becoming very important to report online sales income. People who think that they won’t be caught for taxes on online earnings by the government are taking a chance on a potential situation that could be hazardous.
Perhaps more importantly, many Canadians think they can’t prepare an accurate tax return without all the receipts and transaction records.
The CRA’s expectation is that taxpayers will keep sufficient books and records, but the absence of records will not exempt taxpayers from their tax obligation. If you had online sales income, it is generally expected that you report that income even if you did not get your documentation together 100% correctly.
For instance, if someone has a small business selling handmade jewelry on Etsy, they might not have all the receipts for the items they bought for stock. This is not to say it’s not reportable on a tax form. Rather, the person should make a reasonable effort to make up a set of income and expenditure from available information.
The higher the risk, the higher the chance of underreporting income altogether.
When it comes to reconstructing income, it can be daunting at first, but there are a number of ways to do it.
Bank statements can be helpful to have. Checking deposits can be used to track customer and online payments. E-transfers can also give a handy history of sales activity.
There are many online marketplaces that provide users with a way to download their transaction history. A seller of Etsy, for instance, could get a number of years’ sales reports from their account.
Besides, the payment processor, like PayPal or Stripe, also has detailed payment records. Shipping invoices, email confirmations, and customer communications are other means that can help fill holes in the information.
Think of a Facebook Marketplace seller who didn’t have any formal bookkeeping records. They should be able to get a good sense of the total sales figure by making reference to e-transfers received and bank deposits, even though they might not be as precise.
The goal isn’t to make perfect records in the past. It is for them to come up with an accurate approximation based on the income generated.
Business owners can review their credit card statements, bank transactions, and supplier invoices to identify deductible expenses, as well as shipping records and receipts in email.
Assume that a content creator has bought equipment and software subscriptions but lost some receipts. Even if the credit card statements or subscription invoices are not adequate, they may still contain enough information to make an estimate.
In general, the CRA wants to see taxpayers provide support for their deductions wherever feasible. Estimates should therefore be reasonable, consistent and based upon available evidence, and not a guess.
The CRA can look at a tax return and ask for details about it.
It is important to note, however, that this is not the same as someone’s intent not to report income. While some taxpayers may be better off not doing anything about their tax records, others may benefit from reconstructing those records using the information they have and making reasonable explanations.
Documentation that details the way in which estimates have been calculated can be very useful if questions arise. It is acceptable to submit bank statements, screenshots, platform reporting, and written explanations.
When done in good faith, taxpayers are better off complying with their tax obligations than being silent about income they have not reported.
A frequent error is that the small amounts of income are not reported. Income from a side business, whether it’s full-time or part-time endeavor, is generally considered taxable income.
However, one problem is the combination of personal and business dealings. It can be harder to keep track of your income and expenses down the road if you use the same bank account for all of them.
Other side jobs may also fail to consider GST/HST issues, especially if the line of work expands.
Finally, many people only get their financial records in order when tax season rolls around. By this time, information may have been lost or hard to find.
The best way to minimize future tax problems is to establish a better record-keeping system.
It’s much easier to organize if you have a business bank account and keep your business and personal finances in one place. Income and expenses can also be monitored during the year using digital bookkeeping software.
The electronic maintenance of receipts and the review of financial records on a regular basis can help avoid potential problems down the road.
Making small enhancements to the way records are kept makes it much easier to manage the CRA reporting requirements.
Having imperfect records doesn’t mean that you aren’t still legally liable for taxes, and by itself, it won’t result in CRA penalties or major issues. There are countless Canadians with side jobs or Internet businesses who find that their income reporting isn’t complete until after their side business expands or tax filing time runs out.
What’s important is to act. Relying entirely on income history is usually far preferable to not using income at all, as it can be estimated reasonably by looking at bank accounts, looking at platform reports, etc. and using information that is available. By proactively reporting, they are able to minimize uncertainty and allow people to take steps forward with more confidence.
Concurrently, this experience can be an opportunity to enhance record-keeping practices for the future. Today’s better organization could make tax filing in the future easier and less stressful.
It can be challenging to keep up with the CRA reporting requirements for side businesses, particularly if you’re missing some records. Online Accountant professionals assist Canadians in organizing their financial data, making precise income estimates and fulfilling their tax responsibilities with confidence. Call our team to discuss your situation and create a workable strategy for your needs.