How to Define Business Income

Are You Declaring All Your Business Income on Your Income Tax?

How the CRA defines business income.

The Canada Revenue Agency (CRA) defines Business income as the sum total of the monetary value that you get from any activities that you do for profit.

There are two points of this definition that are critical to you in terms of your Canadian income tax.

1) Monetary Value

I use the phrase "monetary value" instead of "money" because money may not be what you get in exchange for your labour or the goods or services you provide.

Whether you work on someone's car and they hand you cash when the job is done or you barter your services fixing someone's car in exchange for lessons on how to use a computer software program, you're taking in revenue either way.

The point is that goods or services or credits you receive through bartering count as business income, too, even though no actual money changes hands. (See the Canada Revenue Agency's Interpretation Bulletin IT-490, Barter Transactions for more on this.)

2) The Sum Total Means All

If you look up "income" on the Canada Revenue Agency website, you'll read "The sum of revenues earned in a specific period of time." This includes revenues from:

  • salaries
  • wages
  • benefits
  • tips
  • commissions
  • profits from operating a business or profession
  • investments

Note that "the sum of all revenues" is not limited to revenues taken in in Canada - all means all revenues you made anywhere in the world.

 So products and services sold to individuals and companies in other countries counts as business income.

And how you make the revenue doesn't matter to the CRA either. It's important to realize that from a tax point of view, there is no difference between an online business and a bricks-and-mortar one.

Profits that you make from doing business online count as business income too. 

And actually, there's no difference between a legal business and an illegal one when it comes to income tax either - as two Regina drug dealers discovered (CBC.ca). Besides being convicted of trafficking in marijuana, money laundering and other offences, they also ended up having to pay income tax (and presumably penalties) on their ill-gotten gains of about $190,000. The Tax Court judge pointed out that: 

"It is well established that a taxpayer is subject to tax on his income regardless of its source... A taxpayer must keep reliable books and records for all of his income, including income from illegal sources."

Do You Have Business Income You're Not Declaring?

Some people get confused about the scope of business income. For instance, because they haven't registered a business, they think they don't have to fill out form T2125 and declare the business income when they're completing their T1 income tax form (see Do I Have to Fill Out Canadian Income Tax Form T2125? and How to Complete the T1 Canadian Income Tax Form as a Business).

Or they think that because they haven't sold much, what they've done doesn't count as business income.

But all the money you make counts, and if you've sold items for profit (even just a few!) you're engaging in business activities according to the Canada Revenue Agency. There's no amount threshold when it comes to selling goods for profit. For example:

  • Selling three bisque dolls on eBay equals engaging in business activity and therefore having business income, just as selling forty-eight bisque dolls on eBay does.
  • Running a small catering business from home may only take in a few thousand in cash every year but this still qualifies as business income according to the CRA and must be reported as such. Note that in this case properly reporting the income makes you eligible for a variety of home-based business tax deductions.

Remember, it's your total world-wide income that the government expects you to declare on your Canadian income tax - whether you made business income online or received a cheque from Bavaria.

It all counts. 

The Penalties for Not Reporting All Your Business Income

If you fail to report all your business income, you may be subject to a penalty of 10% of the amount you failed to report after your first omission.

It gets worse "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" (Canada Revenue Agency).

Declaring Your Business Income

You need to declare your business income on your Canadian income tax return which you do by completing Form T2125 if you are operating a sole proprietorship or a partnership and then filling in your total income on the appropriate line of the T1 return.

If you are operating a corporation, you would declare your business income on your T2 corporate tax return.

For further information see:

Your Small Business & Canadian Income Tax - What to Do & How to Do It.

Work from Home? Don't Forget These 6 Canadian Tax Deductions

Canada's Business Expense and Tax Deduction Rules

How to Calculate Capital Cost Allowance - A Must Know for Your Canadian Business

Examples: Geoffrey kept careful record of the toys he sold at his booth at the Christmas Faire because he knew he would have to declare what he made as business income on his Canadian income tax.