Everyone’s got one: the part-time photography business, the consulting gig on weekends, the Etsy shop, or the DoorDash/Uber route. That “side hustle” is the new Canadian reality, a way to fight inflation and build something for yourself. But with every e-transfer payment you receive, there’s that small, nagging voice in the back of your head: “…is this legal? What am I supposed to do about taxes? Is the CRA (Canada Revenue Agency) going to come after me?”
This fear is a huge source of stress. The Canadian tax system is confusing, and no one ever teaches you this stuff. So, most people do one of two things: they either ignore it and pray (a terrible, high-risk idea), or they get so scared of “doing it wrong” that they don’t even start their business in the first place. You’re stuck, worried that your small effort to get ahead is going to land you in a mountain of trouble and penalties.
As your no-nonsense career advisor, I’m here to turn on the lights. It’s not as scary as you think. The CRA is not a boogeyman; it’s just a government department that runs on clear rules. This is your no-BS guide to understanding those rules. We’ll cover the “hobby vs. business” myth, the $30,000 “GST” rule, and a simple 2-step plan to stay 100% legal. Let’s get this handled.
Myth-Busting: “Hobby” vs. “Business”
This is the first trap. Many people think, “It’s just a hobby, I don’t have to claim the income.” This is a dangerous myth. The CRA has a very simple test to determine if you’re a hobby or a business: do you have a “reasonable expectation of profit”?
If you’re just selling your old junk on Facebook Marketplace, that’s not a business. But if you are *actively* trying to make money—you have a website, you buy supplies, you market yourself, you’re trying to grow—you are a business in the eyes of the CRA, even if you’re not profitable *yet*. And that means you *must* report the income.
The good news? This also means you get to deduct your *expenses*. (More on that later).
You’re Already a “Business” (And You Didn’t Even Know It)
Here’s another myth: “I don’t have to worry about this until I ‘register’ my business.”
The Truth: The moment you accept your first dollar for a service or product, you are, by default, a “sole proprietor.” You don’t need to file any special paperwork to *become* one. You just *are*.
This means that when you do your taxes, you are legally required to report all your self-employment income (the total amount you were paid) on a specific form called the **T2125 – Statement of Business or Professional Activities**. This form simply gets filed along with your regular T1 personal tax return. It’s just an extra schedule.
The Two “Gotchas” You *Must* Know About
Okay, so you’re a sole proprietor and you have to file a T2125. That’s the basics. But there are two rules that separate the amateurs from the pros.
1. The GST/HST $30,000 Rule (This is Non-Negotiable)
This is the most critical rule in Canadian small business.
- GST (Goods and Services Tax) / HST (Harmonized Sales Tax) is the federal/provincial tax you see on almost everything.
- As a small business, you are not required to collect or charge this tax to your clients… *until* your total, gross revenue (before any expenses) hits $30,000 within a 12-month period.
The *moment* you cross that $30,000 threshold, you are legally required to register for a GST/HST number with the CRA and start charging, collecting, and remitting that tax on every sale. Ignoring this is not an option. The penalties and back-taxes are severe. This is the #1 rule of a side hustle in Canada.
2. The Expense Trap (Keep Your Receipts)
The best part of being a business is that you get to deduct your “reasonable business expenses” from your income. This lowers your total “net income,” which means you pay less tax.
Example:
- You made $10,000 from your photography side hustle. (Your Gross Income)
- You spent $3,000 on a new lens, software (Adobe), and gas to drive to clients. (Your Expenses)
You only pay tax on your **$7,000** “Net Income,” not the full $10,000.
The Trap: You can’t just “guess.” If the CRA ever audits you (and they do), they will demand to see the *receipts*. Your bank statement that just says “Staples – $300” is not enough. You need the *itemized receipt* that shows *what* you bought.
The No-Nonsense Solution:
- Open a separate bank account for your side hustle. All income goes in, all expenses go out. Clean.
- Get a simple app (like Wave, or even just a dedicated Google Drive folder) and **take a photo of every single business-related receipt** the *moment* you get it. This 10-second habit will save you from a multi-thousand-dollar nightmare.
Your 2-Step “Stay Legal” Action Plan
This is all you have to do to stay 100% legal and sleep at night.
Step 1: Track *Everything* (Income and Expenses)
Use a simple spreadsheet. Column A: Date. Column B: Client/Vendor. Column C: Income In. Column D: Expense Out. Column E: What was it for? That’s it. This is your “T2125” in the making.
Step 2: Set Aside Your Tax (The “Tax Bucket”)
When you’re an employee, your boss deducts your taxes automatically. When you’re self-employed, *you* are the boss. The CRA will expect you to pay your income tax (and CPP contributions) on your net income.
The “No-Nonsense” Rule: The moment a client pays you $1,000, take 25% ($250) and move it into a separate high-interest savings account you’ve labeled “CRA Tax.” Do not touch it. It is not your money. It belongs to the government. This simple habit makes tax time completely stress-free. You’ll already have the cash, ready to go.
That’s it. A side hustle in Canada is not “illegal” or “shady.” It’s just a small business. And running a small business just means you have to do some basic, 1st-grade-level bookkeeping. Track your income, track your expenses, watch the $30k GST rule, and set aside your tax. You’re no longer “fearing” the CRA; you’re operating as a legitimate, professional, and smart entrepreneur.
Frequently Asked Questions (FAQs)
1. What expenses can I *actually* deduct for my side hustle?
The CRA’s rule is any “reasonable” expense to earn income. Common ones include:
- Software/Subscriptions: (Adobe, Microsoft 365, your website hosting)
- Materials & Supplies: (Anything you use to make your product)
- Advertising: (Facebook Ads, business cards)
- Home Office: (You can deduct a *percentage* of your rent/mortgage interest and utilities, based on the *square footage* of your dedicated office space. It’s a huge deduction.)
- Vehicle: (You can deduct a *percentage* of your gas, insurance, and repairs, based on the “business KMs” you drove. You *must* keep a logbook.)
2. What if I make less than $30,000? Do I still have to report it?
YES. The $30,000 rule is *only* for GST/HST. You must report *all* self-employment income, even if you only made $500. There is no “minimum” for reporting income.
3. What if I didn’t make a profit? What if I lost money?
You still file your T2125. If you made $1,000 in sales but spent $2,500 on equipment, you have a “business loss” of $1,500. This loss can often be used to *reduce* the taxable income from your *main 9-to-5 job*, which means you might actually get a bigger tax refund. Talk to an accountant!
4. Do I need to “register” my business name?
No. As a sole proprietor, you can legally operate under your *own personal name* (e.g., “Jane Doe, Graphic Designer”) forever. You only need to register a business name if you want to operate under a *different* name (e.g., “Jane’s Creative Designs”).
5. I use my car for Uber/Lyft. Are the rules different?
YES, CRITICALLY. Due to a special “taxi” rule, ride-sharing drivers are required to register for and collect GST/HST from your VERY FIRST DOLLAR. The $30,000 threshold *does not* apply to you. This is the #1 mistake new ride-share drivers make.