Canada is a vibrant place for side hustlers. Starting and managing a side hustle in Canada can be an exciting and rewarding endeavor, providing individuals with the opportunity to pursue their passions, supplement their income, and even turn their side gig into a full-fledged business. However, achieving success in the competitive landscape of side hustles requires careful planning, strategic decision-making, and a thorough understanding of the Canadian business environment.
Here’s how you can set yourself up for success while staying on the right side of Canadian tax laws and business regulations.
Understanding the Canadian Side Hustle Landscape
If you've noticed more Canadians juggling multiple gigs, you're not alone! Side hustles have boomed in the Great White North, offering folks extra income and creative outlets outside their 9 to 5 grind. From crafting handmade goods to freelance writing, Canadians are diving into a variety of side hustle industries. Whether it's pet sitting, tutoring, or graphic design, there's a side gig out there for every passion.
Embarking on a side hustle in Canada presents a promising avenue for individuals looking to diversify their income streams and pursue their passions outside of traditional employment. In a landscape where side hustling is on the rise, understanding the nuances of the Canadian market and navigating legal, financial, and logistical considerations are vital to setting oneself up for success.
Choose the Right Hustle: Find Your Niche and Stand Out
Before jumping in, ask yourself: what do you love? Picking a side hustle that aligns with your interests not only makes the process enjoyable but also increases your chances of success. Imagine trying to sell something you’re not passionate about. It’s like trying to bake a cake without the right ingredients. You need that spark to keep your hustle going strong.
Register Your Business (When Necessary)
Even if your side hustle is small, you may need to register it depending on its size and nature. The business structure options include:
- Sole Proprietorship: The simplest structure where you own and operate the business. You report income and expenses on your personal tax return.
- Partnership: If you’re sharing the business with others, you’ll report your portion of income and expenses.
- Corporation: A more complex structure that involves creating a separate legal entity for your business, which can offer tax advantages and liability protection.
Legal and Financial Considerations for Canadian Side Hustlers
1. Track Income and Expenses Properly
Keeping detailed and organized records of your income and expenses is crucial to the success of your side hustle. This will help you at tax time and ensure you’re aware of how profitable your business is.
- Separate Finances: Use a separate bank account for your side hustle to keep personal and business expenses apart. This makes it easier to track your finances and claim deductions.
- Keep All Receipts: Save receipts for any business-related expenses, such as materials, advertising, travel, and supplies. Consider using accounting software like QuickBooks, Wave, or Xero to automate tracking.
- Track Mileage: If you use your vehicle for your side hustle (e.g., making deliveries, or meeting clients), keep a log of your business-related kilometers. You can deduct a portion of your vehicle’s operating expenses (fuel, maintenance, insurance).
2. Navigating Tax Obligations and Regulations
- Understanding Tax Deductions for Side Hustlers: Maximize your savings by knowing what expenses you can write off, like supplies, mileage, and home office costs.
- Report All Income: Whether you make $100 or $10,000 from your side hustle, the CRA expects you to report all earnings. This is usually done via the T2125 form (“Statement of Business or Professional Activities”), which allows you to declare income and deduct expenses.
- Pay Estimated Taxes: Since you won’t have taxes withheld like with a traditional paycheck, it’s smart to set aside a portion of your earnings for taxes. Many side hustlers save between 20% and 30% of their income to cover taxes, depending on their tax bracket.
- Compliance with GST/HST Regulations: Stay on the right side of the taxman. If your business earns $30,000 or more in revenue annually, you must register for a GST/HST You’ll need to charge and remit GST/HST on your sales and can also claim input tax credits for the GST/HST you pay on business expenses. Make sure you're collecting and remitting the Goods and Services Tax/Harmonized Sales Tax as required.
3. Claim Tax Deductions
One of the perks of running a side hustle is the ability to deduct legitimate business expenses, which reduces your taxable income. Common deductions include:
- Home Office Expenses: If you operate your side hustle from home, you can deduct a portion of your rent or mortgage interest, utilities, and home maintenance expenses. The deduction is based on the percentage of your home that’s used exclusively for business.
- Supplies and Materials: Any items you purchase specifically for your side hustle, such as raw materials, packaging, or tools, are deductible.
- Marketing and Advertising: Costs associated with promoting your business, such as online ads, flyers, or website hosting, are fully deductible.
- Professional Services: Fees for legal, accounting, or consulting services are deductible. This is particularly helpful if you hire a tax professional or business advisor.
4. Build an Emergency Fund
Side hustles can be unpredictable, especially in their early stages. It’s smart to set aside a portion of your profits into an emergency fund to protect yourself financially. This will cover any unexpected business expenses or periods when your income may fluctuate.
A good rule of thumb is to save 3-6 months of operating expenses, especially if your side hustle becomes more of a main source of income over time.
5. Stay Compliant with Canadian Laws
Running a business comes with legal responsibilities. Make sure you:
- Comply with local regulations: Depending on your industry and location, you may need permits or licenses to legally operate your side hustle.
- Understand employment laws: If you hire freelancers or employees, familiarize yourself with Canada’s labor laws, including minimum wage requirements and the legal obligations surrounding independent contractors.
- Protect your intellectual property: If you develop unique products or services, consider trademarking your business name or applying for patents to protect your ideas.
6. Scale Your Side Hustle with Technology: Accepting Online Payments
The fact is, with the technology we have today, there’s no reason why you should wait for payment. Use accounting solutions that let you get paid by credit card, directly from your invoice. Not only will you get paid faster, but your clients will thank you for the convenience.
And, for those clients who are still slow to pay invoices, the right accounting software will let you send them a nudge with automatic payment reminders and even late payment fees (if you choose).
Conclusion:
Whether your goal is to generate extra income or eventually transition to full-time self-employment, setting yourself up correctly from the beginning will put you on the path to long-term success. Our expert team of professional accountants in Toronto is committed to ensuring your tax affairs are planned optimally and that your business and income streams are structured in a strategic and coordinated manner. Our goal is to take tax preparations and obligations off your plate so you can focus on building your business. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances and ensure you comply with CRA reporting and payroll deductions.
Frequently Asked Questions
How much money should I set aside for my taxes?
Typically, the rule of thumb is that you should set aside 25% of your income for taxes. If you are in a higher tax bracket or collect GST/HST, then you may want to set aside a bit more, closer to 35%.
What if I have cross-border clients?
Income generated from clients outside of Canada still needs to be reported to the CRA, but these clients do not need to be charged GST or HST. However, it is recommended that foreign income be separated in the event of an audit.
Should I do my taxes myself?
You should consider working with a tax professional or accountant if you are new to self-employment or have complex income and expenses. Tax professionals and accountants can help minimize your tax payable and maximize the benefits that you are entitled to. However, understanding the taxation system in Canada is a powerful tool, especially for a business owner or self-employed individual. If your income and expenses are quite simple, it might be worth your while to take a stab at filing your taxes on your own. As your business grows, your knowledge of taxes will grow, making you a stronger entrepreneur.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.