Although there is no one definition of the “sharing economy,” we will view it as interactions in which individuals or less formal businesses share personal property or services with others for payment. This concept is not new: people have always had the opportunity to engage in activities such as renting out a home while on vacation or selling jam at the local market. However, over the past few years, the popularity of sharing property or services has grown significantly due to technological advancements and increased confidence with online purchases, allowing buyers and sellers to connect more easily. Such arrangements are generally booked through a website, software application or other online platforms.
While participating in the sharing economy, even in an informal capacity, can be a great way to earn extra money, there are significant tax issues that can arise.With over $1.31 billion (November 2015-October 2016, Statistics Canada) in total annual spending in peer-to-peer ride services and accommodation sharing in Canada and abroad, the sharing economy not only provides a significant opportunity for individuals, but also a force with the potential to greatly transform traditional markets.
In this article we will identify a number of income tax, GST/HST and indirect tax issues, and comment on the Canada Revenue Agency’s (CRA) activity to ensure compliance, and that income is earned as an individual.
In administering the Income Tax Act, the CRA has identified five key sectors of the sharing economy:
- accommodation sharing – renting out homes, rooms, or cottages;
- transportation – ride-sharing, bike rentals, boat rentals;
- space rentals – gardens, workspaces, laboratories;
- making and selling goods – household goods, jewelry, meal preparation; and
- providing services – esthetics services, dog walking (etc).
Regardless of the sale type, amount, or method, earnings from business activity in the sharing economy must be reported. Just because you do not receive a “tax slip” such as a T4, does not mean the income is not reported.
Although there is no one definition of the “sharing economy,” we will view it as interactions in which individuals or less formal businesses share personal property or services with others for payment.While some may consider the activity merely a hobby, if the activity is conducted with a view to profit, it is considered to be a business. The tax rules for any business, from the corner store to the large corporation earning billions of dollars, also apply to businesses involved in the sharing economy. While many tax issues for smaller businesses are simpler than large multinationals, they are still complex for many.
Although it is simple to determine how much revenue to report (all of it!), the rules for claiming expenses are much more nuanced. To be deductible, expenses must be incurred to earn income, not be personal or living expenses, and not be capital in nature. Where there is a personal component to the expense, such as heating costs of your home where a portion is rented out, a reasonable portion may be claimed. In these cases, a proportion based on square footage is often permitted. Further, expenses must be reasonable in the context of the business. Certain expenses are specifically prohibited from being claimed, while others may be limited.
While there are many potential income tax issues, here are some that are particularly relevant to the sharing economy.
- Accommodation sharing – business or rental activity? – When sharing accommodations, you must determine whether the earnings are business or rental. While the tax rate on both types is the same for individuals, business income is subject to Canada Pension Plan premiums, while rental income is not. Further, each requires different parts of the tax return to be completed. In differentiating business and property income, you should examine whether additional services beyond a rental space and basic services (such as light, parking and laundry facilities) are provided. Services such as meal preparation and cleaning may indicate a business. In most cases, home sharing is considered a rental activity as sufficient extra services are not often provided.
- Accommodation sharing – principal residence – Also, when sharing accommodations, there is the risk an individual may lose access to their principal residence exemption when they eventually dispose of their property. This means that the individual may be taxable on some or all of the gain on the house, which could otherwise be avoided. While the rules can be very complex, the CRA generally accepts that the entire property is eligible for the exemption, provided there is no structural change to the property, the income producing use is secondary to the personal use and no capital cost allowance (depreciation for tax purposes) is claimed on the property. The CRA’s interpretation in this regard also extends to other secondary income-earning uses of a residence, such as using a room as a business office.
- Information disclosures – If you obtain business earnings from a webpage or website (which is typical in this sector), you must provide additional information in your tax return. This includes identifying the webpages or websites that you earn income from and the approximate percentage of revenue from online sales. Failure to do so could result in penalties or even allow the CRA to dispute your taxes beyond the normal assessment period (commonly three years).
GST/HST, PST and Other Indirect Taxes
While income tax is critical to understanding tax obligations, it does not stop there. Indirect taxes, such as GST/HST can also apply, and are quite often overlooked.
Regardless of the sale type, amount, or method, earnings from business activity in the sharing economy must be reported. Just because you do not receive a “tax slip” such as a T4, does not mean the income is not reported.Generally, if you earn more than $30,000 over 12 months, or in a three-month period from products, services or short-term rentals, you are required register for, collect, and remit GST/HST on your taxable sales. You must essentially add up the earnings from all of the businesses they control, not just the earnings from your business to determine if this threshold has been reached. In many cases, GST/HST on the costs incurred to operate the commercial activity can be recovered from CRA.
Some businesses, most notably taxi services, are required to register, collect and remit GST/HST regardless of the amount of sales. Effective July 1, 2017, legislation was clarified to ensure those in the ride-sharing industry are required to register, just like taxis. In limited cases, even if not required to register, you can choose to act as if they have met the threshold and register.
Where sales of tangible goods (such as a piece of jewelry) are made to customers outside of your province, care should be given to the GST/HST rate charged. In most cases, you should charge the GST/HST rate in the province to which the good is delivered.
In addition to GST/HST, numerous other local and provincial taxes may apply. This can include, for example, tourism taxes, lodging levies, and provincial sales tax (PST). The rules on these other indirect taxes vary greatly and should be reviewed based on your location. Further, those who ship to foreign countries may also face sales tax exposure outside Canada. For example, the Supreme Court of the U.S. recently upheld the ability of states to impose their sales taxes on deliveries from out-of-state locations.
What is the CRA doing?
While participating in the sharing economy, even in an informal capacity, can be a great way to earn extra money, there are significant tax issues that can arise.The CRA recently identified activity in the sharing economy as one of the four largest risks of non-compliance (CRA Annual Report to Parliament 2016-17). Therefore, the CRA has allocated considerable funds and initiated projects to reduce non-compliance, which include:
- Education Campaigns – The CRA has released a number of Tax Tips (see here) highlighting the tax requirements for those in this sector. In addition, the CRA has released a number of webinars on various issues for small businesses, including issues related to registering for and collecting GST/HST, and deducting expenses (see here). Also, a business can request a visit from a CRA officer to discuss common tax errors and financial benchmarks in the industry, and answer tax-related questions as part of the Liaison Officer Initiative Program.
- Partnerships with Industry – The CRA has partnered with groups in certain industries. For example, in Quebec and Ottawa, Airbnb now collects a local lodging tax on behalf of its hosts for short term rentals. Similarly, in B.C. Airbnb announced that they reached an agreement to collect PST through its online platform.
- Third-Party Requests for Information– The CRA can obtain information from an individual or business about third parties, and has recently done so with more frequency. For example, in late 2017 PayPal was required to send the CRA information about all Canadian business account holders that received or sent a payment through their online account between 2014 and November 10, 2017. Also, in 2017, Square Canada was required to submit information on sellers who had processed more than $20,000 in any calendar years 2012-2015 or January 1-April 30, 2016. Further, in 2016, a court upheld search warrants issued to Uber related to the investigation of whether drivers were appropriately collecting and remitting sales tax in Quebec. Once obtained, the CRA can compare information provided to earnings reported by the individual.
In addition, CRA undertakes education and compliance activities regularly to ensure taxpayers properly self-report their income. It is well aware of the risk of tax non-compliance. Where income has gone unreported, consider using the CRA’s voluntary disclosure program to minimize penalty and interest charges.