# Business or Hobby



## sags (May 15, 2010)

Let's say:

You own a business and lose money the first year.

You lose money the second year.

The losses are occuring because the amount of income you are receiving from providing a service is less than the costs incurred to provide that service, and it is unlikely to change in the future.

Now the question.

If you are going to lose money for the third year, it raises doubts about the business (reasonable expectation of profit) from the CRA point of view.

It might be that the business would be deemed a hobby and expenses would not be allowed.

So, are you required to claim the income for the third year, and not be allowed to deduct the expenses..........

Or

Should you NOT claim the income and expenses, so as to not report a loss?

Kind of in a muddle here..............


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## MoneyGal (Apr 24, 2009)

There's nothing special about the third year of business that would cause CRA to disallow the losses. There's no rule (and never will be) about the number of years over which you can claim losses before REOP tests are invoked. 

Also: you are ALWAYS required to report income and you are never required to claim losses.


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## marina628 (Dec 14, 2010)

You should file the true numbers but why continue a business that will never be profitable?My first two years in business were a loss as we were investing everything back into the business.Our third year we made money but when we carried forward the previous losses we did not pay any taxes.Year 4 we ended up paying taxes on $308,000 and last year quite a bit more.Over the years we have learned to be more efficient and cut our overhead.


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## sags (May 15, 2010)

I am going to discontinue the business, as I believe the cost will always outweigh the customers inclination to pay. I still have to file taxes for last year though and until I actually quit. They are having a difficult time replacing me, and I do enjoy it..........but I can't keep reporting losses year after year.

From what I have read, I may not have a business but a hobby.

According to one CRA circular that I read, to go from a hobby to a business, there must be expectation of profit. If you don't expect a profit, then you are a hobby and should NOT claim either income or expenses. Taxes are due only on net income after expenses.........so they say not to file.

I will have to do the numbers this year, and if I lose money again I will probably not even file the numbers, because I don't want to get audited on something I am losing money on.


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## MoneyGal (Apr 24, 2009)

sags said:


> From what I have read, I may not have a business but a hobby.
> 
> According to one CRA circular that I read, to go from a hobby to a business, there must be expectation of profit. If you don't expect a profit, then you are a hobby and should NOT claim either income or expenses. Taxes are due only on net income after expenses.........so they say not to file.


I'd be very interested to see this circular. 

From the T4002 guide - "Business and Professional Income:"

_You are considered to be self-employed if you have a business relationship with a payer and you also have the right to determine where, when, and how your work is done.

A business is an activity that you intend to carry on for profit and there is evidence to support that intention.

A business includes:

a profession;
a calling;
a trade;
a manufacture;
*an undertaking of any kind*; and
an adventure or concern in the nature of trade 

[snipped section on professional income]

Business income includes income from any activity you do for profit. For example, income from a service business is business income. However, you do not include employment income as business income.

*Include all your income when you calculate it for tax purposes.* If you fail to report all your income, you may be subject to a penalty of 10% of the amount you failed to report after your first omission.

A different penalty may apply if you knowingly or under circumstances amounting to gross negligence participate in the making of a false statement or omission on your income tax return. This penalty is 50% of the tax attributable to the omission or false statement (minimum $100)._

There *is* a distinction for sales of personal-use property, but that is not what you are talking about. 

I get no hits using the search term "hobby" on the CRA website.


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## marina628 (Dec 14, 2010)

Definitely file and also you need to look at the HST liability as well.My clients are outside Canada so all tax exempt.


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## Four Pillars (Apr 5, 2009)

sags said:


> I am going to discontinue the business, as I believe the cost will always outweigh the customers inclination to pay. I still have to file taxes for last year though and until I actually quit. They are having a difficult time replacing me, and I do enjoy it..........but I can't keep reporting losses year after year.
> 
> From what I have read, I may not have a business but a hobby.
> 
> ...


I think you are doing the right thing - no point in continuing a money-losing business.

Have you tried making some changes? IE raising prices to make it profitable?


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## sags (May 15, 2010)

I found this CRA circular, but it is from 1992. Apparently there was a Supreme Court ruling regarding the art business sector, that involved the difference between a hobby and a business.

It is an old circular though, and I am not sure it is still relevant.

http://www.cra-arc.gc.ca/E/pub/tp/it334r2/it334r2-e.txt

_Hobbies 

11. In order for any activity or pursuit to be regarded as a source of income, 
there must be a reasonable expectation of profit. *Where such an expectation does not exist (as is the case with most hobbies), neither amounts received nor expenses incurred are included in the income computation for tax purposes and any excess of expenses over receipts is a personal or living expense, the deduction of which is denied by paragraph 18(1)(h). *On the other hand, if the hobby or pastime results in receipts of revenue in excess of expenses, that fact is a strong indication that the hobby is a venture with an expectation of profit; if so, the net income may be taxable as income from a business. 

The current version of IT-504, Visual Artists and Writers, discusses the concept of "a reasonable expectation of profit" in greater detail. Where a hobby consists of collecting personal-use property or listed personal property, dispositions should be accounted for as described in the current version of IT-332, Personal-Use Property. _

The "business" is a simple delivery type of business, and the cost of maintaining a vehicle outweigh the income provided. I didn't realize this until I did my taxes last year, but the allowance of 50 cents per kilometre, means that I lose on every delivery over 8 kilometres return trip. Then there is gas and maintenance and a cellphone costs.

I have approached my customer about raising the rate, but it is a non starter. They simply can't afford to pay more, so I am helping them out until they can find someone else wanting the job. Nobody is lining up for it, and I have been approached by several other businesses in the area to perform the same service because they can't find someone either, but I can only afford to lose so much money.........lol 

A lot of places today use their hourly employees to work in the shop and do deliveries as well. It seems to work for them, but I don't want a full time job working inside.

If Moneygal is correct, I seem to be in the position where the CRA is saying, " you are losing money and you will continue to lose money, but we want you to claim the losses anyways. Then we will audit you because are claiming losses when you have no expectation of profit".....................


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