Airbnbers and Uber drivers be warned: your income is taxable
Most users of share economy services don't properly document income and expenses
The online sharing economy offers an easy way for people to make a few extra bucks by renting out spaces in their homes, giving strangers rides in their car or selling crafts and other knick-knacks. But, experts warn that all the money made through services like Uber, Airbnb and Etsy counts as income and must be declared on tax forms.
"There's no threshold. There's no magic number that says above a certain dollar amount it's taxable," says Paul McVean, a tax partner at Anklesaria McVean Professional Corporation in Toronto. He estimates about five per cent of his firm's clients profit from the share economy.
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There's an urban myth that money made on Uber, Airbnb, eBay and other online services isn't technically income, says Caroline Battista, an H&R Block senior tax analyst who's frustrated by the term "sharing economy."
Canadians must report any income earned anywhere in any way when filing taxes, including any money made through these part-time or full-time ventures. Even bartering for services or crowdfunding aren't exempt from taxes.
When two people or businesses exchange professional services — for example, a tax firm exchanging services with an advertising company — they must declare the cash value of the services traded on their T2125 (statement of business or personal activities) form, says McVean.
"Just because it wasn't paid in cash, doesn't mean that the tax consequences are any different," he said.
Hobby vs. business
Some petty gains from a hobby don't necessarily need to be reported, experts say, such as a grandmother's sale of a crocheted doily or two at the annual church bazaar.
There's no magic number that says above a certain dollar amount it's taxable.- Paul McVean, Anklesaria McVean Professional Corporation
"The question comes down to when does it stop being a hobby and become a business?" said Alan Rowell, a tax specialist and owner of The Accounting Place in Stoney Creek, Ont.
There's no clear-cut definition. But, the Canada Revenue Agency considers the amount of time someone devotes to the endeavour and whether there is a reasonable expectation of profit, Rowell said.
If a carpenter retires, decides to fill his spare time building wooden trinkets in his garage and sells a couple, that's a hobby, he says. When he showcases his pieces on the internet and starts shipping orders across Canada, that's a business.
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People making more than $30,000 annually from these ventures must register for a GST and HST account.
Taxi and limousine drivers whose fares are regulated by federal or provincial laws must register regardless of income, according to the CRA's website. Uber drivers must "comply with any GST/HST reporting requirements," Jennifer McCabe, a CRA spokeswoman, said in an email.
'Nobody's keeping track of anything'
The biggest issue those self-employed in the sharing economy face is lack of documentation, experts say.
Like any other business, self-employed individuals are allowed to declare expenses to deduct against their income, which also means they need the right documentation to back-up those claims.
Hosts who rent out their home for short-term stays through services such as Airbnb or VRBO need to track their guests' stay closely. Homeowners can deduct a portion of the property taxes and mortgage interest for the period in which they are renting out the space while renters can claim some of the rent paid during that time as a business expense. Both can deduct a percentage utilities and home insurance, says McVean.
How much of those costs can be claimed depends on how much of the home is rented out and for how long, said Battista. Hosts will need to calculate the percentage of square footage that the rental space takes up and the percentage of time guests occupied the space.
"You need to be able to track that backwards very carefully," she said.
Steep penalties for unverified claims
Rowell often sees clients who joined Uber, Airbnb or other online services to make some quick, extra money. Over time, their room for rent or car for hire grows into a business.
"When they start out, then, nobody's keeping track of anything," he said.
When they start out, then, nobody's keeping track of anything.- Alan Rowell, The Accounting Place owner and tax specialist
Often,these people don't realize they need to be documenting income and expenses until they either visit a tax professional or receive a letter from the CRA demanding to see proof of income or the expenses they're claiming.
"Both times, it's too late," says Rowell.
The CRA will disallow 100 per cent of expenses that can't be accounted for. The best a person can do is go back and try to recover as many receipts as possible.
But it's not enough to simply show a credit card bill, says Battista, because those don't show what was purchased.
"Just because I bought something at a gas station, doesn't mean it was gas," she said. "It could have been, you know, a drink and some bubble gum."
If the CRA discovers unreported income, the person will face interest and financial penalties.
If someone realizes they've been neglecting to declare income, it's best to get ahead of the CRA and offer up the information through the voluntary disclosures program, says John Dobbs, Liberty Tax Service's director of Canadian operations. The person will still be charged interest, but no financial penalties will apply.
CRA tracking online income
While experts say there is no grey area when it comes to sharing economy revenue streams and the income simply must be declared, it's clear that the CRA is attempting to better track online income.
Mid-way through last year's income tax season, the government added a section to the T2125 form. It now requires Canadians to enter the URLs of any websites they earn income from, as well as the percentage of income earned online.
The move signals that the CRA is aware that Canadians are profiting from online ventures.
"They're working to gather as much information as possible to understand the source of this income to make sure that people are properly reporting," McVean said.