By David J. Rotfleisch
Special to the Financial Independence Hub
Are you a retailer who uses eBay as a virtual storefront to move a lot of products? Or, are you merely an occasional seller? Or, do you use Kijiji and Craiglist to empty out your basement, storage locker or Aunt Mildred’s apartment after she moved to a nursing home? Perhaps you rent out your house, apartment or cottage using FlipKey and Airbnb?
Do you do graphic design using sites like Fiverr? Or, do you have a website or a YouTube channel that makes you tens of thousands of dollars in advertising revenue? Do you drive for Uber?
Making money on the internet is easier than ever. And there are millions of sellers. CRA knows this. So, starting with returns filed in 2014 for individuals and 2015 for corporations, Canadians have to report internet sites used by them for income earned from the Internet. This will allow the tax man to check the information that the taxpayer reports with websites advertising products and services and to audit internet vendors who do not report their web based revenues.
The Province of Ontario just issued a press release that it recognizes the economic potential of the sharing economy by partnering with Airbnb to launch a new pilot project that will raise awareness about homeowners’ and consumers’ rights and responsibilities when offering or booking online accommodations, including informing users about how to follow tax laws such as reporting rental income. Airbnb will educate its hosts through an email notification during tax season to remind them of their tax obligations.
What are the rules about taxation of income earned from the internet? Keep in mind that any electronic transaction leaves a trace and can be requested by CRA.
1.) All internet income has to be reported for tax
All income, including internet sourced income income from Uber, rental income from FlipKey or Airbnb , sales on eBay, or miscellaneous revenues through Fiverr, Kijjiji or Craigslist, is fully taxable and has to be reported to the Canadian tax man.
The full- or part-time status of the business, such as an Uber operator who only works occasionally, does not affect the requirement to report all internet based income on a Canadian tax return
2.) An Internet business must register for GST/HST if it bills $30,000
If anyone in business bills more than $30,000 in a calendar year, they have to register for GST/HST, collect GST/HST from their customers and remit the taxes collected to CRA. If you register for GST/HST, you are allowed to deduct the GST/HST that you pay for direct expenses (called input tax credits) and only remit the net amount to CRA.
If your earnings are low you may qualify for the quick method that allows you to claim a percentage of your collections as a deduction instead of the input tax credits paid. Note that the $30,000 threshold applies to earnings from all sources even if the sources are from different businesses. So, if you have rental income from Airbnb and also provide ride sharing on Uber, if the total of both exceeds $30,000 you have to register for a GST/HST number.
3.) GST/HST must be remitted annually or quarterly
The frequency of filing depends on the annual billings. In most cases internet based businesses will have to file GST returns on an annual basis, but if they have high billings they might have to file on a quarterly or even monthly basis.
4.) Internet businesses have allowable income tax deductions
All expenses directly related to the internet income are deductible.
So, for an Uber driver expenses related to the operation of the vehicle can be deducted. This includes gasoline, insurance, repairs and maintenance, license fees and tires. For an eBay or Kijjiji seller, the cost of the items sold, shipping, eBay fees and computer expenses are deductible. Rental operations through FlipKey or Airbnb can deduct utilities, maintenance and property taxes.
If the vehicle or rental property is used only part-time for income, then total expenses will be allocated between the deductible business expenses and the non-deductible personal expenses.
5.) How can CRA find internet income
Internet-sourced income earned by an individual from a central operator that collects funds and remits to the individual (PayPal, Stripe) is easy for CRA to audit once they have access to the operator records.
CRA has carried out an audit of Uber and previously obtained a court order for the records of eBay. Online payments into a PayPal account are also easy for CRA to verify.
6.) What happens if an internet business did not declare income, nor charge GST/HST?
Failure to declare income on a Canadian tax return is tax evasion and the internet business owner can be charged criminally under the Income Tax Act.
A tax evasion conviction carries a penalty of between 50 per cent and 200 per cent of taxes evaded, plus a possible two years of jail time. There are also civil income tax penalties that are levied, plus interest.
7.) How can an internet business avoid tax evasion prosecution and civil tax penalties
The internet business owner can submit a voluntary disclosure application to CRA before the CRA contacts you first about suspected unreported income. If the application is properly submitted and accepted there, will be no income tax prosecution for unreported income or GST/HST and no civil tax penalties. There may also be an interest reduction.
The voluntary disclosure process is also kept confidential by CRA, unlike the case of income tax evasion prosecution where CRA issues news releases. However, the internet business owner has to submit the voluntary disclosure to CRA before being approached by a tax auditor. Once the tax man has begun an audit or enforcement action, or in some cases has even asked for information, it’s too late.
David J Rotfleisch, CPA and JD, firstname.lastname@example.org, is the founding Canadian tax lawyer of Rotfleisch & Samulovitch, P.C. a Toronto-based boutique income tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. www.Taxpage.com and www.CanadianTaxAmnesty.ca