Side Hustle & Tax Considerations in Ontario

entrepreneur researching side hustles

Starting a side hustle can be an exciting way to pursue your passion, supplement your income, and test out a business idea with minimal risk. However, it’s crucial to understand the tax implications of running a side hustle, especially in Ontario. This guide will help you navigate the differences between operating as a Sole Proprietorship versus incorporating your business, including the tax rates and benefits of each structure.

Understanding Sole Proprietorship vs. Corporation

Sole Proprietorship

A Sole Proprietorship is the simplest business structure where the business and the owner are legally the same entity. This means the business’s income is reported on the owner’s personal tax return. While it’s easy and inexpensive to set up, it comes with certain drawbacks, particularly in terms of liability and taxation.

Corporation

Incorporating your business means creating a separate legal entity. This separation provides limited liability protection and can offer tax advantages. However, incorporating involves more complexity, including higher costs and more regulatory requirements.

Tax Considerations For Sole Proprietorship

Personal Income Tax

As a sole proprietor, your business income is added to your personal income and taxed at your personal income tax rate. Here are the personal income tax rates in Ontario for 2023:

Income BracketFederal Tax RateOntario Tax RateCombined Tax Rate
Up to $53,35915%5.05%20.05%
$53,359 to $106,71720.5%9.15%29.65%
$106,717 to $165,43026%11.16%37.16
$165,430 to $235,67529%12.16%41.16%
Over $235,67533%13.16%46.16%

Deductions & Expenses

As a sole proprietor, you can deduct business expenses from your income, which can significantly reduce your taxable income. These expenses might include:

  • Home office expenses
  • Supplies and materials
  • Marketing and advertising costs
  • Travel and meals (related to business)

HST Registration

If your side hustle earns more than $30,000 annually, you must register for a Harmonized Sales Tax (HST) account and collect HST on your sales. This involves additional administrative work but also allows you to claim input tax credits on HST paid for business expenses.

Tax Considerations For Corporations

Corporate Tax Rates

Incorporating your side hustle means paying corporate tax rates on business income. Here are the corporate tax rates for Canadian-controlled private corporations (CCPC) in 2023:

Prov/TerritoryFederal Tax RateProvincial Tax RateCombined Tax Rate
Alberta9%2%11%
British Columbia9%2%11%
Manitoba9%0%9%
New Brunswick9%2.5%11.5%
Newfoundland and Labrador9%3%12%
Northwest Territories9%4%13%
Nova Scotia9%3%12%
Nunavut9%3%12%
Ontario9%3.2%12.2%
Prince Edward Island9%3%12%
Quebec9%3.2%12.2%
Saskatchewan9%2%11%
Yukon9%2.5%11.5%

Tax Advantages

  • Lower Tax Rates: Corporations benefit from lower tax rates on active business income.
  • Income Splitting: Paying dividends to family members can reduce the overall tax burden.
  • Deferral of Taxes: Retaining earnings in the corporation allows deferral of personal taxes until funds are withdrawn.

Additional Considerations

  • Increased Administrative Work: Corporations require more complex accounting and regulatory filings.
  • Annual Returns and Compliance: Regular filings and compliance with both federal and provincial regulations are mandatory.

Apprehensions About Incorporation

Many individuals feel apprehensive about incorporating their side hustle due to perceived complexities and costs. However, incorporating can often be the best option when considering the following factors:

Liability Protection

In a Sole Proprietorship, the business and the owner are one and the same, meaning the owner is personally liable for all business debts and obligations. Incorporation creates a separate legal entity, providing limited liability protection. This means personal assets are generally protected from business liabilities, which is crucial for high-risk ventures.

Personal Tax Burden

Sole proprietors pay personal income tax on all business profits, which can be significantly higher than corporate tax rates, especially as income increases. Incorporating allows you to take advantage of lower corporate tax rates and potentially save on taxes through income splitting and tax deferral strategies.

Investing Corporate Funds

One significant advantage of incorporation is the ability to invest corporate funds. As a sole proprietor, all business income is taxed at your personal rate, which can be quite high. In contrast, a corporation can retain earnings and invest them back into the business or other investment opportunities, benefiting from lower corporate tax rates. This is particularly advantageous if you do not need to withdraw all profits for personal use, allowing the corporation to grow its capital efficiently.

Branding & Credibility

A corporation often appears more professional and credible to customers, suppliers, and investors. It can enhance your brand’s image and make it easier to secure financing and business partnerships. Incorporation also allows you to use legal entity endings like Ltd, Inc., or Corp., which can add to your business’s credibility.

Register an HST Tax Account

Financial Options When Keeping Money in the Corporation

When you keep money in the corporation, you have several investment options that can help grow your business’s capital efficiently. Here are some key options:

Real Estate Investment

Corporations can invest in real estate properties, which can provide rental income and capital appreciation. This can be a solid long-term investment strategy, especially if the real estate market is performing well.

Stock Market Investment

Corporations can invest in the stock market, including:

  • Stocks: Investing in company shares can provide dividends and capital gains.
  • GICs (Guaranteed Investment Certificates): These are low-risk investments that provide guaranteed returns over a fixed period.
  • Bonds: Investing in government or corporate bonds can offer a steady income stream with relatively lower risk compared to stocks.

Personal Pension Fund

Corporations can set up a personal pension plan for the business owner, which allows for significant tax deferral and savings. Using corporate funds to purchase a pension plan can be a strategic way to ensure financial security in retirement while benefiting from corporate tax rates.

Tax Deductions Available For a Side Hustle Business

Running a side hustle business allows you to take advantage of various tax deductions, which can help reduce your taxable income. Here are some common deductions:

Home Office Expenses

If you use a portion of your home for business purposes, you can deduct a percentage of your home expenses, including:

  • Mortgage interest or rent
  • Property taxes
  • Utilities (electricity, heating, water)
  • Home maintenance and repairs
  • Home insurance

The deductible amount is based on the proportion of your home used for business activities.

Vehicle Expenses

If you use your vehicle for business purposes, you can deduct related expenses. These might include:

  • Fuel costs
  • Maintenance and repairs
  • Insurance
  • Lease payments (if leasing the vehicle)
  • Depreciation (if owning the vehicle)
  • Parking fees

The deductible amount is based on the percentage of the vehicle’s use for business activities.

Travel & Meals

You can deduct travel expenses incurred for business purposes, such as:

  • Airfare
  • Accommodation
  • Meals (50% of the cost)
  • Transportation (taxi, rental car)

Supplies & Materials

Expenses for supplies and materials directly related to your business are deductible. This might include:

  • Office supplies (paper, pens, etc.)
  • Production materials
  • Inventory costs

Marketing & Advertising

Expenses related to promoting your business are deductible. This might include:

  • Advertising costs (online ads, print ads)
  • Website development and maintenance
  • Social media marketing

How to Pay Taxes When You Have a Job & a Side Hustle

When you have both a job and a side hustle, you need to be mindful of how to manage and pay your taxes. Here are some steps to help you handle your tax obligations:

Understand Your Total Income

Your total taxable income includes both your employment income and your side hustle income. You will need to report all sources of income on your personal tax return.

Set Aside Money For Taxes

Unlike your employment income, where taxes are typically deducted at source by your employer, your side hustle income does not have taxes automatically withheld. It’s crucial to set aside a portion of your side hustle earnings to cover your tax liabilities. A good rule of thumb is to set aside 25-30% of your side hustle income for taxes.

Make Quarterly Tax Payments

To avoid a large tax bill at the end of the year, consider making quarterly estimated tax payments to the Canada Revenue Agency (CRA). This helps you manage your cash flow and ensures you are not hit with penalties for underpayment of taxes.

Track Your Expenses

Keep detailed records of all your business expenses throughout the year. These records will help you claim all eligible deductions and reduce your taxable income. Use accounting software or maintain a spreadsheet to track your income and expenses.

File Your Taxes on Time

Ensure you file your taxes on time to avoid late filing penalties. The deadline for personal income tax returns in Canada is typically April 30th. If you are self-employed, you have until June 15th to file.

Why Use Ontario Business Central?

Ontario Business Central has been assisting entrepreneurs and business owners with registration and incorporation services since 1992. With over three decades of experience, we have built a reputation for providing fast, accurate, and reliable service. Whether you’re starting a Sole Proprietorship, incorporating your business, or need guidance on maintaining compliance, our team of experts is here to help.

We offer comprehensive support, including name searches, domain registration, and tax account setups, ensuring you have everything you need to succeed. Our dedication to customer satisfaction and our commitment to providing exceptional resources make us the preferred choice for thousands of businesses across Ontario.

Let us assist you in navigating the complexities of business registration and incorporation, so you can focus on growing your side hustle into a thriving enterprise. Reach out to Ontario Business Central today and experience the difference that expertise and personalized service can make.

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Ontario Business Central Inc. is not a law firm and cannot provide a legal opinion or advice. This information is to assist you in understanding the requirements of registration within the chosen jurisdiction. It is always recommended, when you have legal or accounting questions that you speak to a qualified professional.