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Hobby vs Business ?

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  • Hobby vs Business ?

    The ongoing thread on renting out your shop got me to thinking again on defining the line between having a hobby and running a business. Many of my friends have hobbies from WW to photography to fishing to gardening who do it for the enjoyment of it but have sold items. Are they running a business?

    I looked up "business" and while not the only defining concept, "making a profit" or rather "trying to" is always there. The fellows above charge IMHO amounts that might cover materials and some expenses but little if anything for labour. The cash flow is always negative. Are they running a business?

    A friend in WW found it difficult to buy from certain suppliers unless he had a registered company/business. Since he did this he now includes it on his income tax return. He on occasion has made something for friends of friends and didn't give the piece for free. He charges what he thinks are his material and shop costs. Is he running a business?

    I would be interested in hearing your thoughts from the "reasonable man" approach and also those from the law.

    Maybe I just have too much time on my hands.

    Cheers, JG
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  • #2

    Re: Hobby vs Business ?

    Refer to the income tax act or call the CRA or an accountant/pro tax preparer to find out for specific situations whether it requires you to file your return with business activities.

    Keep in mind that even if you are losing money, you are running a business. If you are using the losses of a business activity to offset income from other sources, this is where you can run a foul of the tax act and get yourself into a heap of trouble and headache. You don't want the CRA to deem that you were carrying on the business without a reasonable expectation of profit after years of running it at a loss.

    You'll sometimes hear stories of some ingenious way that somebody is writting off their car and part of their house all the while running what seems to be no real business at all, or a hobby as a business. The guys who get caught never run around bragging about how they screwed up. They usually try to blame everybody else and not themselves. People often don't realize our tax system is somewhat of an honour system. Get caught not being honourable, and they have little mercy.

    A guy who sells the odd piece, I wouldn't get too worried about. The guy who has a yard sale every 2 weeks selling his stuff is likely running a business. The CRA often catches wind of a lot of income tax evaders via people snitching. Often hard working folk who cringe when they hear some guy bragging about how much extra money he's making "On the Side", pick up the phone to rat them out.



    • #3

      Re: Hobby vs Business ?

      I'll be very interested in the replies you get to your question. While I have questioned the "Do your own electrical work without telling anybody and void your insurance" sentiment, I believe that hobby vs business is a real insurance concern.



      • #4

        Re: Hobby vs Business ?

        Did my time with Rev Canada

        I did my time with Revenue Canada quite a few years back when I was working full time and doing some side work. Due to a "life trauma" I didn't file one year, then didn't file the next year because of the last..... and on for 3 years until I got THE phone call. They were professional AND firm. They worked out a schedule with me to get caught up and when I ran into a problem with my accountant (I didn't want to chance doing the catch up myself), we negotiated an extension. Probably cost me $1000 in interest & fines, but seriously, the load off my mind from worring about it made it seem like a very small price to pay.

        Long story short, claim it and be up front about it. Who the heck wants to get THE phone call a few years down the road and scramble to remember maybe what you did claim and what you let slide.

        In my opinion, there is quite a bit of work having a part time side business, recording personal vehicle use and expenses, percentage of house use and expenses, house & vehicle insurance difference... etc,etc. However in my opinion "Keep it straight and sleep at night"

        My $0.02
        "Hope is not a plan"


        • #5

          Re: Hobby vs Business ?

          Hi Guys,

          I guess I didn't explain myself very well.

          I am not talking about someone who is operating in the black market and trying to hide income. I am more interested in the average home hobbiest who charges enough to cover his costs on a few projects a year. How many tables, etc. do you need for yourself or as gifts? If someone is willing to fund your winter project and you enjoy doing it, why not? If you accept the job, have you turned your hobby into a business?

          If that project means there is leftover lumber or a set of router bits or ... or... bought just for that job and the person you made that project for doesn't want this residual material / equipment and says for you to keep it, are you now running a business?

          What I am looking for is the line which must be crossed before a hobby becomes a business.

          The fellow I know who is a serious hobby photographer tries to sell some of his photos (on the net) as much for his ego as for any financial gain. When he retires he hopes to make it into a profitable business. Since he is already trying to sell his photos, has he already crossed that line?

          Thanks, JG


          • #6

            Re: Hobby vs Business ?

            Any Income is Income

            Hi JG,

            This is strictly my opinion, any income is additional income. I claim it all and write off all expenses that I have incurred in the pursuit of that income. This is also based on my past experience with RC.

            You'd really need to get an official read from Revenue Canada about the occasional (yeah, I know, define occasional) sale from your WW hobby. Most small businesses (hobby) would, in my opinion, operate at a loss when you include percentage of house expenses, vehicle expenses, equipment & tool expenses, and insurance, etc. Anything that I buy for that job is included in the expenses for that project, unless it is large (equipment) then I need to depreciate it.

            My big question is how many years can you operate at a loss before RC calls foul. I'm hoping to take this hobby into a full time business when I retire (5 - 8 years) so I guess we'll see.

            I agree with billh's point. Keep your insurance company in the loop.

            "Hope is not a plan"


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            • #7

              Re: Hobby vs Business ?


              There are two answers to your question. One is based on the tax implications. The other is whether you simply want to play philosophically with the definition.

              If you want to know the answer from Revenue Canada's perspective you simply have to look at the tax act or give Revenue Canada a phone call or email. The tax act specifies how much income there must be before you have to report and it specifies that there must be an intent to make a profit within a reasonable time. It's pretty cut and dried and our opinions aren't relevant in this context.

              If you just want to play philosophically with the definition, that's just opinions. Mine's as good as anyone's. I don't think someone who occasionally charges enough to recover their costs for a piece is in business.

              In the case of your photographer acquaintance, it's the tax act that matters because it's a real-life situation, not just a philosophical discussion. He just needs to call Revenue Canada and they will be happy to tell him if, or when, he crosses the line. They won't charge him anything for that information.



              • #8

                Re: Hobby vs Business ?

                What Ken said and a bit.

                Occaisional sale for cost recovery... would not likely be considered a business. Given your parameters, hoping to have lumber left over, or paying the power for a couple of months, or even paying for a few hundred dollars in new tools needed to make the specific items sold would not be considered a business as far as I know.

                However, where is the line that re-classify's a hobby as a business? That may be more difficult to define, but I think Ken's points are accurate.

                If you are acquiring tools over a period of time, selling items over that course of time to pay for those tools and you have every intent of setting up as a profitable retirement business you have a couple issues to consider. In this case I would first check with an insurance company (not the one you have now) to see what is required from their perspective. You may find that to qualify for insurance you need to satisfy a lot of safety standards and liability issues that would be similar to permitting issues that your local municipality/city may have. Assuming that you can satisfy the isnurance and permitting issues then why not set up as a business prior to retirement? You are making sales but not likely turning a profit, thus you may be able to gain some tax deductions as in depreciation of machines and paying rent for the building used in the business, you will be allowed to deduct a portion of your utility cost, property taxes, phone, and internet etc. Any room used within the walls of your dwelling will have to be dedicated to the business activities or CRA may dissallow your deductions for same. Paying mileage from the business to yourself when incurred for picking up supplies and/or delivering goods, and other business related travel may be easier to track that using depreciation on your personal vehicles. Furhtermore, doing this prior to retirement will likely result in some tax gains as any losses can be used against your larger pre-retirement income.

                It has been my experience that CRA will tolerate running a side line business at a loss for a period of not more than three consecutive years, longer would suggest that you never had intentions of making a proofit and they may then dissallow all previous deductions. Once you change that to your only business you may get away with additional years of losses but I fear that would be a difficult argument to win with CRA, especially if you are receiving an additional source of retirement income.

                Just a few of my thoughts FWIW.
                Wendall / Woody in the Hat

                View my gallery hall...

                Maintenance-free means when it breaks, it can't be fixed.


                • #9

                  Re: Hobby vs Business ?

                  I suppose this discussion clarifies why good, well built furniture cost more money than cheap off-shore stuff that's thrown together.
                  Just the admin cost of establishing and running a small biz is significant.


                  • #10

                    Re: Hobby vs Business ?

                    Originally posted by Woody in the Hat View Post
                    ... thus you may be able to gain some tax deductions as in depreciation of machines and paying rent for the building used in the business, you will be allowed to deduct a portion of your utility cost, property taxes, phone, and internet etc. Any room used within the walls of your dwelling will have to be dedicated to the business activities or CRA may dissallow your deductions for same. ...
                    This has its own issues. If you claim deductions for any part of your property (space in the house, percentage of garage/shop, etc.) you will also have to declare a capital gain for that portion of your propery when you sell it.

                    If you charge rent to your business for that part of your property you will have to declare the rent as personal income.

                    Revenue Canada is going to get you one way or the other.



                    • #11

                      Re: Hobby vs Business ?

                      Originally posted by JG View Post
                      ... Many of my friends have hobbies from WW to photography to fishing to gardening who do it for the enjoyment of it but have sold items. Are they running a business?

                      ...The fellows above charge IMHO amounts that might cover materials and some expenses but little if anything for labour. The cash flow is always negative. Are they running a business?

                      ...He on occasion has made something for friends of friends and didn't give the piece for free. He charges what he thinks are his material and shop costs. Is he running a business?

                      Cheers, JG
                      I can't give you an exact interpretation of the law but I will comment on what you call the "reasonable man" approach . I'll let you decide if I'm a reasonable man or not.

                      I think the common thread in all your examples is, not for profit or for minimal profit.
                      In reality, the minimal profit is not really profit at all.
                      Lets keep one thing in mind. Every penny the hobbyist spends on tools and supplies comes from income he has already paid the tax on. If he sells a piece or two to try and recoup some of his expenses, he is not making a profit at all and in fact is loosing money (from a business point of view).
                      If one of those guys buys a load of lumber for $100 and builds a table for a friend and charges say $150 and keeps the left over lumber, did he make a profit? No. It's no different than if he told the friend to go buy the lumber and he would build the table for $50 to offset some of his expenses. Again there is no profit here because he has other expenses like wear and tear on blades, hydro, heat, sand paper, finish, building maintanence...etc.
                      If a guys says I will build a table for you if you buy the lumber and that new tool I need, is that a business proposition? Not really. That's bartering and it's not taxable. So is there a difference if the guy buys the lumber and the tool and charges his expenses to build the table? Strictly speaking, yes but Revenue Canada recognizes that there are a lot more expenses to build that table than what he charged for it. If he were to claim it as a business, he would have a whole host of write offs to offset the cost of the tool, not to mention depreciation.

                      So, in the above mentioned examples, none of these guys are running a business. If they do enough of those side jobs over a year that they make a profit over and above all expenses, then RCA might have something to say about it.

                      As a hobbyist you would have to be working pretty hard to show enough profit after all expenses to get the attention of RCA. When you add up the real costs, it's much more than many of us think it is.
                      J.P. Rap Mount Hope Ont.
                      Carpe Ductum (Seize The Tape)

                      "In this world, you must be oh so smart, or oh so pleasant." Well, for years I was smart. I recommend pleasant. Elwood P. Dowd


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                      • #12

                        Re: Hobby vs Business ?

                        technically I run a "business" since I operate p/t as a freelance contractor. 2 to 4 days a week I will go and do misc contracting work for a variety of different people. I don't advertise, and I haven't registered or incorporated myself, or whatever, but handymen are in demand where I live, so word-of-mouth is enough to keep me busy. The only reason I do it is to make a little extra rent money and also to give me a good excuse to buy more tools, because I can deduct the tools as expenses incurred in the earning of income. My father is a certified accountant, and so I talk with him regularly about this to make sure I stay above board. I keep a spreadsheet of any and all jobs I do, billed by the hour. Then I also keep a spreadsheet of deductions, which are itemised and numbered with the corresponding number written on the receipt. If I am ever audited (knock on wood) I will be ready. Now, frankly speaking because I do this primarily to only earn a little money and to buy tools, the fact is most months I operate at a loss. The money comes in, but it goes out. In fact, if I wanted to deduct absolutely everything that I could legally deduct (i.e. milage, use of house, etc.) then I could ensure that I always operated at a loss. This would be great in one sense because then I would never have to pay taxes! But my accountant/father warns me that CRA will frown upon any "business" that does not ever make profit. Under his direction I make sure that the deductions are scaled back a bit so as to always make sure I am running a bit of a profit.

                        In other words, if you start regularly making income - even just to cover your costs - then the CRA will regard you as a business. If you start being a business, then you better make sure that you make at least a little profit, or you'll run into trouble.


                        • #13

                          Re: Hobby vs Business ?

                          Originally posted by Ken in Regina View Post
                          If you claim deductions for any part of your property (space in the house, percentage of garage/shop, etc.) you will also have to declare a capital gain for that portion of your propery when you sell it.

                          If you depreciate your property or substantially have changed its use you can be subject to capital gains upon disposition rather than have it exempt as your principal residence. Just writting off the portion related to the ongoing costs proportionate to the usage of the house's business versus personal use is ususally of little concern except when an overly large proportion is used over long periods of time. That may cause the property to potentially be viewed as primarily used for business rather than a residence thus loosing the principal residence exemption regardless if you even had a second property to live in or claim as for your principal residence exemption.

                          It can occasionally make sense to depreciate the house if you have a secondary property such as a cottage that can claim the principal residence anyways. Keep in mind that any depreciation has to be "recaptured" upon disposition and what you end up really achieving is ongoing yearly tax relief, with a reconciliation of the depreciated amounts when you sell as well as a potential for a portion of the property not being eligible for principal residence exemption. There's a lot of what if's involved usually and should be done with a competent advisor/tax professional. When the place is sold is not the time to figure these things out, it's too late then to do it right and doing it wrong can cost tens of thousands.

                          Keep in mind that you can only use depreciation or use of home expenses to bring the income from the business generating activity to zero. You cannot use it to be written off against other income. Use of home expenses not utilized in a year can be carried forward to a future year(s) to be used when there is business income after other expenses that it can still be utilized against. (Does that make sense, I'm gettin' tired and don't feel like re-wording it).

                          My sister-in-law is in a similar situation and because I'm 17 years her junior, has elected to completely ignore my warnings to her on how to go about this stuff when I spoke to her once about it. She does her taxes herself and has a bookeeper friend check her work and thinks that everything is OK. She's in for a big surprise one day, and if not her, the poor kids who think the cottage will end up staying in the family when she passes on....likely NOT! We never talk to her as she is quite an arse anyways. It's too bad for her kids though. Thing is a lot of people have similar situations and too many prefer to stick their heads in the sand.

                          People should consult the proper pros when dealing with this stuff. It's like that commercial on TV where the doctor is on the phone with the guy telling him how to operate on himself "Shouldn't you be doing this?". This is the same thing.



                          • #14

                            Re: Hobby vs Business ?

                            And this is where I have a problem. People who come into the business not knowing what it costs, and undercutting the professionals. This is especially true in the Renovation side of things where anybody and their brother thinks they're a contractor. It seems like I am weekly getting underbid by someone who thinks they can do the job for 1/3 of what my quote is.

                            What you really need to decide is if this is going to be a hobby fine keep it that way, but if you're trying to feed a family and pay a mortgage run it like a business and charge accordingly.


                            • #15

                              Re: Hobby vs Business ?


                              In many ways you hit the nail on the head as far as I am concerned. Nothing irks me more than the "weekenders" who have full time jobs that give them good benefits such as regular days off that use their "hobby" to generate extra income. They already have good salaries etc and on their days off do everything from renovations to flooring to you name it. They can and do undercut the legitimate professional business person because of their regular employment. Their "hobby" is only to generate a few extra $$$ for them and they are not relying on their hobby for food on their table. I know that feeling because my Dad used to face being undercut all the time.

                              My favorite to pick on for this are cops and firemen, but I am sure there are plenty of others who do the same. They have good salaries, good benefits and lots of days off. On their days off they are suppose to be enjoying lots of r & r. There are lot that want to work on their days off and I can live with that, if they are not cutting the throats of those who are paying their real income.

                              On the other hand though......before I retired I fit into one of the above categories, and my solution to the problem was a simple one. Policy dictated we could engage in secondary employment as long as we advised our upper management of that secondary employment and that they approved that it was not in conflict with our jobs.

                              When word started getting out that I was pretty good with my tools, my employer actually came to me and asked me to do things for our office. They were all smaller items that popped up from time to time, or minor repairs that needed to be done to the building. When my boss tried to get quotes from contractors and others for those, they either right up front refused the job offer or made such a ridicuoulsy high quote that it was obvious they did not want to do the work. Example...we needed a place for the boys to hang their coats when they came into the office. 7 or 8 coat hooks on a board screwed to the wall at the back door. The quote the boss got was $275. We needed it. The boss couldn't find one in a store that would withstand the wear and tear and was not prepared to pay that kind of money for something that had like $25 in materials. It is understandable that the contractor did not want to build it and thus gave that as a price...more hassles for him that its really worth. But we had a legitimate need for it, so what to do about it.

                              So it was all little stuff that I did... the board with the coat hooks, a desk drawer that needed repairs, a wall repainted here or there. A shelf unit for the stenos to store their paperwork. A specialty roller unit. Just a whole list of little things that popped up from time to time. So when I was approached to do those, I had no problem doing those jobs and submitting a reasonable bill for my time, efforts and costs. No one else wanted to do the work, so why shouldn't I have when asked. And because I followed proper policy and had reported my "secondary" employment, upper management were well aware that they were paying me for the things I was doing on my time off.

                              What was nice is that after being asked to retire due to my medical problems word had spread enough not only amongst our offices, but also with other business's in the area about my skills that I was busy enough to the point where I set up "Max's Chop Shop" as a "legitimate business"...there is a pun in that name. To me it was just a hobby and I was only doing things that others didn't want to. But because of the extra income I did all the right things as far as R/C etc etc and never had any problems. I had found a niche in the market that others didn't want and I took advantage of it and made a nice bit of extra income from it. I don't feel I was taking away from anyone. I was only doing what others didn't want to because it was not profitable enough for them.

                              There came a time when I moved from that location to another city and simply shut the business down again following the proper rules in place. Again I've never had any problems because I followed all the "rules".

                              Whether I was right or wrong with how I did things, I guess is up to others on this board to decide.

                              Now that I have moved again and have a nice new shop, as far as I am concerned I am once again just a guy enjoying doing what I do...tinker with my tools and having fun. If word gets out that I have these skills and am asked to build things for others, then I guess I am gonna have to decide if I want to go back into "business". Right now though, I am happy just tinkering.