Taxation in Canada: Balancing Your Full-Time Gig and Side Hustle

Juggling a full-time job with a side hustle in Canada can be a rewarding way to boost your income and pursue your passions. But when it comes to tax time, things can get a little more complicated. Understanding the nuances of taxation for both employed and self-employed income is crucial to avoid surprises and navigate the system smoothly. In this blog, we’ll demystify tax complexities for those with a full-time job and a side hustle in Canada, focusing specifically on Ontario and self-proprietorship registration.

Taxation Fundamentals

Taxes in Canada follow a progressive system, meaning your tax rate increases as your income rises. Both your main job and your side hustle income contribute to your total taxable income, affecting your overall tax bracket.

Employed vs. Self-Employed Taxation

Employed: As an employee, your employer deducts income tax and Employment Insurance (EI) premiums from your paycheck. You may also contribute to the Canadian Pension Plan (CPP) or Quebec Pension Plan (QPP). You receive a T4 slip summarizing your earnings and deductions, which you use to file your tax return.

Self-Employed: As a self-employed individual with a side hustle, you’re responsible for calculating and paying your own taxes quarterly. This includes income tax, EI premiums (optional), and CPP/QPP contributions. You’ll need to register for a Business Number (BN) if your annual revenue exceeds $30,000 and keep meticulous records of income and expenses.

Tax Forms

Employed:

• T4: Summarizes your employment income and deductions.
• T5: Reports any other income received, like investment income.
• NR4: For non-residents filing taxes in Canada.

Self-Employed Tax Forms:

• T2125: Statement of Business or Professional Activities, reports your business income and expenses.
• RC361: Registration for CPP/QPP contributions.
• GST/HST return: If your annual revenue exceeds $30,000.

What Can I Write Off as a Self-Employed Person?

The available Write-Offs include but are not limited to the following:

Employed: Limited deductions like union dues, moving expenses, and childcare costs.

Self-Employed: Broader range of deductions, including:

• Home office expenses (proportionate to business use).
• Business supplies and equipment.
• Advertising and marketing costs.
• Travel expenses related to your business.
• Professional fees like accounting and legal services

When the self employed position you have is part time, it is also important to be mindful of what portion of expenses you use.  A full time entrepreneur has the ability to write off a larger portion of home, vehicle, cellphone expenses than those individuals who are entrepreneurs on a part time basis.

Sole Proprietorship Registration in Ontario

If your side hustle falls under a sole proprietorship (you operate the business alone), registering with Ontario Business Central (OBC) is optional. However, it offers benefits like a separate business name and easier business banking. You can register online or in person with a $145 fee.

How Does Having a Secondary Business Bank Account Help Me?

Having a separate bank account for your side hustle offers several advantages:

Financial Organization:

• Clarity and Separation: Separating your personal and business finances makes it easier to track income and expenses specifically related to your side hustle. This is crucial for tax purposes and understanding the financial health of your side business.
• Budgeting and Goal Setting: Keeping business funds distinct allows you to allocate them consciously towards specific goals, like reinvestment, marketing, or equipment upgrades.
• Simplified Record Keeping: By having all business transactions in one place, you streamline record-keeping for tax filing and accounting, saving time and effort.

Tax Advantages:

• Easier Deduction Tracking: Separating business expenses from personal ones makes identifying and claiming eligible deductions on your tax return much simpler.
• Audit Protection: If you ever get audited, a dedicated business account demonstrates clear division between your personal and business finances, simplifying the process and potentially reducing hassle.

Professional Image:

• Credibility: When receiving payments from clients or paying business vendors, utilizing a dedicated business account conveys professionalism and legitimacy to your side hustle.
• Building Business Credit: Establishing a separate business account lays the groundwork for building business credit, which can be helpful for future financing needs or obtaining business loans.

Considerations:

• Costs: Depending on the bank and your chosen account type, there might be monthly fees or minimum balance requirements associated with opening a separate account. Weigh the benefits against the potential costs.
• Switching Transactions: Be mindful of transferring funds between personal and business accounts, as these might be classified as income by the CRA. Keep clear records of such transactions for tax purposes.

Conquering the Gig Economy:

The rise of the gig economy adds another layer to tax complexity. Platforms like Uber and Airbnb often handle tax deductions on your behalf, but it’s crucial to understand how these deductions affect your overall tax picture. Consult a tax professional if you’re unsure.

Seeking Professional Guidance:

While this guide provides a solid foundation, navigating complex tax situations always benefits from expert advice. Consider consulting a professional accountant or tax advisor for personalized guidance, especially if you:

• Have significant business income or complex investments.
• Operate a large-scale side hustle with intricate bookkeeping needs.
• Face unusual tax situations like foreign income or real estate holdings.

Remember:

• Keep detailed records of income and expenses for both your job and side hustle.
• File your tax return on time (deadlines vary based on your filing status) to avoid penalties.
• Utilize available write-offs to reduce your taxable income.
• Seek professional guidance when needed, especially for intricate tax situations.

Bonus Resources:

• Government of Canada Tax Guide: https://www.canada.ca/en/revenue-agency.html
• Quickbooks Canada: https://quickbooks.intuit.com/ca/small-business/
• Credit Canada: https://www.creditcanada.com/
• Tax Tips for Canadians: https://financialpost.com/category/personal-finance/taxes/

Remember, staying informed and organized is key to managing your side hustle taxes effectively. Embrace the journey, leverage this guide, and seek professional help when needed. With the right approach, you can turn your side hustle into a financial success story while staying compliant with Canadian tax regulations.

What Products or Apps Can I Use to Help Me Keep Track of Business Expenses?

These following products can assist you to enter, keep track of and have available to a accounting professional or the Canada Revenue Agency when needed

1. Zoho Expense:

• Best for overall ease of use and comprehensive features.
• Features a user-friendly interface, automatic mileage tracking, and integration with popular accounting software.
• Offers a free plan for basic use, with paid plans starting at $7 per user per month.

2. Expensify:

• Best for flexible expense management and receipt capture.
• Features powerful receipt scanning technology and allows for custom expense categories, employee reimbursements, and integration with various corporate cards.
• Has a free plan with limited features, and paid plans start at $5 per user per month.

3. Shoeboxed:

• Best for convenient paper receipt management.
• Allows you to mail in paper receipts for scanning and digitization, eliminating the need for manual entry.
• Plans start at $14.99 per month with varying receipt limits.

4. FreshBooks:

• Best for freelancers and small businesses with simple invoicing needs.
• Combines expense tracking with basic invoicing functionalities, making it ideal for solopreneurs and small teams.
• Offers a free plan with limited features, and paid plans start at $15 per month.

5. QuickBooks Self-Employed:

• Best for seamless integration with the QuickBooks ecosystem.
• Integrates with QuickBooks for expense tracking, income and expense categorization, and tax estimate generation for self-employed individuals.
• Costs $5 per month when paid annually or $7 per month when paid monthly.

Beyond the Basics:

This blog provides a high-level overview, but specific situations may require deeper exploration. Consider consulting a tax professional for personalized advice and navigating complexities like GST/HST or incorporating your business.

Remember:

• Keep detailed records of income and expenses for both your job and side hustle.
• File your tax return on time to avoid penalties.
• Utilize available write-offs to reduce your taxable income.
• Seek professional guidance when needed.

Smart Planning: Setting Aside Funds For Taxes, CPP, RRSPs, and TFSAs With Your Side Hustle

Growing your income through a side hustle is exciting, but remember, with increased earnings come additional tax responsibilities. Setting aside a portion of your side hustle income proactively can ensure you’re prepared for tax season and future financial goals. Let’s discuss the merits of allocating 30% of your side hustle income and explore other smart saving strategies:

Tax Buffer – Setting Aside 30% for Tax Obligations

While the ideal percentage may vary based on your specific tax situation and deductions, setting aside 30% of your side hustle income for taxes can be a good starting point. Here’s why:

• Self-Employed Taxes: Unlike traditional employment where taxes are withheld, self-employed individuals are responsible for calculating and paying income tax, EI premiums (optional), and CPP contributions quarterly. This 30% buffer helps cover these obligations as they arise.
• Federal and Provincial Taxes: Depending on your income bracket and province, you’ll owe federal and provincial income taxes on your side hustle earnings. The 30% buffer provides a cushion to cover these taxes come filing season.
• Unexpected Costs: Audits, late fees, or unforeseen tax situations can crop up. Having a buffer helps you handle these without financial strain.

Remember: This is a general guideline. Factors like deductions, income level, and tax filing status can influence the exact amount you need. Consulting a tax professional can provide personalized advice.

Beyond Taxes: Investing in Your Future

While paying taxes is crucial, don’t neglect long-term financial goals. Consider these strategies alongside your tax buffer:

Topping Up CPP: The Canada Pension Plan (CPP) provides retirement income, and voluntary contributions can increase your future benefits. If you have room after accounting for taxes, topping up your CPP can be a wise investment in your later years.

Maximizing RRSP Contributions: Registered Retirement Savings Plans (RRSPs) offer tax-deferred growth on contributions, potentially lowering your current tax bill. Contributing to your RRSP can be beneficial, especially if you’re in a higher tax bracket. Remember, contribution limits apply, so research and plan accordingly.

Utilizing TFSAs: Tax-Free Savings Accounts (TFSAs) allow tax-free growth on contributions and withdrawals, making them ideal for various financial goals. Consider allocating a portion of your side hustle income to your TFSA for tax-free savings towards future needs like a down payment, travel, or emergencies.

Key Considerations:

• Consult a financial advisor: Personalized advice based on your income, risk tolerance, and long-term goals is invaluable.
• Prioritize debt repayment: Address high-interest debt before aggressive saving to minimize financial burdens.
• Create a budget: Allocate funds for taxes, savings, and regular expenses to ensure financial stability.
• Review and adjust: Regularly review your income, taxes, and financial goals, adjusting your allocation strategies as needed.

By setting aside funds for taxes and strategically investing in your future, you can empower your side hustle to contribute not only to your current lifestyle but also to your long-term financial well-being. Remember, proactive planning and informed decisions are key to success!

If you have any questions about getting your business started or need some support or assistance, we are always here to help.

inquiries@ontariobusinesscentral.ca
Toll-Free: 1-888-951-3917
Local: 1-416-599-9009
Fax: 1-866-294-4363
Office Hours: 9:00am – 5:00pm
Monday – Friday E.S.T.

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.