The Canadian tax system casts a very wide net, in which each resident of Canada is taxable on all sources of income worldwide, with very few exceptions. In addition, Canada has what is known as a “self-assessing” system, in which Canadian residents voluntarily file an annual tax return on which they report all income earned during the previous year, claim any available deductions and credits, and pay any resulting amount of tax owing.
It might seem that in a system in which each taxpayer is expected to voluntarily report all sources of worldwide income, and pay tax on that income, there will be many instances where taxpayers fail to comply with their tax reporting and payment obligations. And that might be the case, were it not for the system of income documentation which exists.
Under that system, nearly all payments made to a Canadian resident must be recorded on a prescribed form, known as a T-slip. Income from employment is documented on a T4 slip, interest income is documented on a T5 slip, income from a registered retirement income fund is documented on a T4RIF slip, etc. Within two months after the end of the taxation year, a copy of each such T-slip must be provided to the Canadian resident who received the income, and a second copy filed with the Canada Revenue Agency (CRA). Consequently, should the taxpayer fail to report one or more sources of income on the annual return for that year (or not file a return at all), it’s relatively easy for the CRA to flag that omission and follow up to ensure that the taxpayer meets their tax filing and reporting obligations.
It’s a system that works well but, until this year, there was a potentially significant income source which was not documented on any kind of T-slip and therefore not reported to the CRA. That source of income is income from online activities or, more broadly, income arising from the digital economy.
There are, of course, many possible sources of such income, including online marketplaces like Kijiji, Poshmark, Facebook Marketplace, AirBnB, etc., as well as online gig economy platforms like Uber or Doordash. Millions of Canadians earn income through such platforms or apps and, while it’s impossible to quantify, it’s likely that substantial amounts of such income are not reported as income for tax purposes. And, as the digital economy continues to grow, the failure to report such income means an ever-increasing loss of potential revenue for the federal government.
In response to that risk, the federal government announced, as part of the 2022 federal budget, that new rules would be introduced to require platform operators to document the amount of income earned by individual Canadians from online activities in a tax year and to provide both the individual and the federal government with that information. The first tax year for which that new rule was effective was 2024, and the deadline for platform operators to document income amounts for 2024, and to provide that information to both the taxpayer and the CRA, was January 31, 2025. And, of course, all taxpayers who have earned such income are expected to report that income on their individual income tax return for the 2024 tax year.
Platform operators are required to provide the CRA with identification and activity information for any Canadian resident who meets the definition of a “reportable seller”. The general definition of a “reportable seller” is any Canadian resident who is registered with a platform and has received amounts during the year from sales made on that platform. However, the cost to the CRA of pursuing taxpayers who earn very small amounts from such sales and/or do so very infrequently would almost certainly outweigh the benefit of any additional tax revenue collected as a result. Consequently, individuals who meet the definition of a reportable seller, but who trade infrequently or for very small amounts, are considered to be “excluded sellers” who are exempted from the new reporting requirements. (It’s important to remember, however, that taxpayers are required to report and pay tax on ALL income from online activities – the fact that such income is not subject to the new reporting requirement does not in any way exempt it from the usual tax filing and payment obligations.)
The threshold amounts which allow an individual to be characterized as an excluded seller (and for that reason exempt from the reporting requirements) are actually quite low. In order to be an excluded seller, an individual must have fewer than 30 sales of goods per year for which they have earned no more than a total of $2,800. Consequently, an individual who, during 2024, makes an average of three sales per month (36 per year) and receives an average of $80 per sale would be considered to be a reportable seller, and the activities and income earned by that individual during 2024 would have been reported to the CRA by January 31, 2025
Where reporting is required, the platform operator must provide the CRA with both identification and activity information with respect to each reportable seller. That information can include:
- Identification information
- Name of seller;
- Seller’s primary address;
- Sellers’s date of birth;
- Seller’s tax identification number (for Canadian individuals, that means their social insurance number); and
- Seller’s financial account identifiers (for example, bank account numbers)
- Activity information
- Total income from sales (paid or credited) and number of sales, broken down by calendar quarter, and
- Fees, commissions, or taxes withheld or charged by the platform operator.
Individuals who have earned income through the digital economy will not likely be familiar with how to report such income on the tax return for 2024. On that return, more “traditional” sources of income are identified on separate lines of the tax return form (employment income on line 10,100, interest income on line 12,100, Canada Pension Plan benefits on line 11,400, etc.). However, most individuals who earn income as part of the digital economy will be considered to have earned income from business, and the reporting of such income is more complex than is the case for other types of income. Such individuals must complete Form T2125 Statement of Business or Professional Activities. The good news for those who are reporting business income is that Canadian tax rules provide for the deduction of reasonable expenses incurred to earn such income. For participants in the digital economy, such expenses could include advertising costs, costs incurred to use a platform for sales, or costs for software licence and subscription fees. Those are not, however, the only costs which can be deducted in the computation of business income.
Take, for example, an individual who makes scented soaps and candles in their home and sells those products through a website and/or an online marketplace. The direct cost of expenditures incurred for supplies to make, sell, and deliver those products, including materials costs and shipping costs, are deductible from sales income earned, as is a portion of operating costs (mortgage interest, heat, hydro, property taxes) incurred for the home in which the business is based.
On the T2125, the full amount of online income earned (which, for reportable sellers, will be the amount documented on the information slips provided by the platform operator or operators) is reported, and deductions are claimed for all reasonable expenses that were incurred to earn that income. A detailed listing of the most common business expenses claimed, and how to calculate each, can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses.html.
Once the taxpayer has calculated gross (total) business income and net business income (meaning business income minus deductions), those figures are transferred to page 2 of the T1 individual income tax return form. Gross business income is reported on line 13499 and net business income is reported on line 13500. (Of course, where tax software is being used to complete the return, the software will automatically carry figures over from the T2125 to the required lines on the T1.) Net business income is then added to any other kinds of income earned by the taxpayer during the year, to arrive at total income for 2024.
Taxpayers who are reporting business income for the first time may well find these reporting obligations onerous and probably a bit confusing. However, simply not reporting the income or not filing a return at all isn’t a good strategy. A failure by the taxpayer to report such income is likely to eventually come to light when the CRA reviews the detailed information filed with it by platform operators with respect to online sales and revenue by an individual taxpayer, and compares those income amounts to amounts reported on the return filed by that taxpayer. When that occurs, the delinquent taxpayer will be facing not only a bill for unpaid taxes, but interest charges and likely penalties as well.
There is detailed information available online on how to comply with the requirement to report and pay income tax on income from online activities, and that information can be found on the CRA website at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/platform-economy/understanding-tax-obligations.html.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
