Not Declaring Internet Income - Tax Evasion
Expert Advice - Timely Tax Survival Secrets for Internet Income
Tax Season is upon us, and with it increased CRA scrutiny of the web. So do you use the internet to earn some (or all) of your income? Are you someone who earns extra cash by renting out your home, apartment or cottage using FlipKey and Airbnb? There are currently more than 11,000 hosts in Ontario that list their properties on Airbnb. A typical host in Ontario makes about $280 per month in additional rental income, and in 2015 more than 375,000 people visited Ontario via Airbnb. Perhaps you use Kijiji or Craiglist or Fiverr to sell stuff or offer services. Or, do you have a website or a YouTube channel that brings in advertising revenue? Are you a ride sharer who drives for Uber? Finally do you use that powerhouse of the internet, an eBay store or just occasional listings to sell your products?
Making money on or through the internet is more common than ever and CRA knows this. According to an estimate by PricewaterhouseCoopers (PwC), global revenues from five of the key sharing economy sectors (accommodation, transportation, finance, services and labour, and music/video streaming) are projected to grow to $335 billion US by 2025 from $15 billion US today. CRA has changed the reporting rules for sharing economy starting with returns filed in 2014 for individuals an in 2015 for corporations. Canadians now have to report their internet sites for income earned from the shared economy. This will allow CRA to cross-match and verify what the taxpayer reports with the websites advertising goods and services and to audit Canadian taxpayers who do not report their shared economy internet income. Remember that any electronic transaction leaves a trace and can be verified by CRA. Paypal records are also easy for CRA to audit.
Ontario issued a press release on February 19, 2006 that is recognizing the economic potential of the sharing economy by partnering with Airbnb to launch a new pilot project. The purpose of the project is to raise awareness about homeowners' and consumers' rights and responsibilities when offering or booking online accommodations including in particular advice on how to follow income tax laws such as reporting rental income from Airbnb.
Airbnb will also educate its hosts through an email notification during income tax season to remind them of their income tax filing obligations. Ontario and Airbnb will collaborate to create a webpage with content specific to Ontario regulations and link to the Ontario government website for detailed information on topics such as consumer protection, accessibility requirements and more.
So what are the tax rules about income earned from the shared economy?
All shared economy internet income is taxable and has to be reported in Canada
All sources of income, including shared economy internet income such as rental income from FlipKey or Airbnb , sales on eBay, or miscellaneous revenues through Fiverr, Kijjiji or Craigslist, or ride sharing through Uber, is fully taxable and has to be reported to CRA.
The fact that Airbnb rental income may be less than $300 per month does not mean that it does not have to be reported. It does. Nor does the full or part time status of the operations, such as an Uber driver who only works occasionally, affect the requirement to report all shared economy internet income to CRA.
Internet businesses can deduct expenses
While all internet income is taxable, the flip side to that is that all expenses directly attributed to earning that internet income are deductible.
You need to keep all receipts to support your deductions, and if you’re an Uber driver while expenses related to the operation of the vehicle can be deducted, you have to pro rate the expenses between your business and personal use of the car. The same is true of a part time rental operation. Expenses that can be deducted by a drive sharer are oil & gasoline, tires, insurance, maintenance and repair costs, car washing expenses and license fees. Rental operations through any source including of course FlipKey or Airbnb can deduct advertising costs, utilities, cleaning expenses, maintenance, insurance and property taxes.
For an eBay, Craigslist or Kijjiji seller, the cost of the items sold is the largest deduction, followed by shipping, eBay fees and computer expenses.
An important non-tax consideration is to ensure that your insurance covers your commercial use of the vehicle or home.
$30,000 in billings means internet business must register for GST/HST
Anyone in business who bills more than $30,000 in a calendar year, has to register for GST/HST in that year and collect GST/HST and remit those taxes collected to CRA. Once you reach the $30,000 threshold you have to continue to charge GST/HST even if your billings go below that threshold in a subsequent year. You can also register even if your billings are below this amount. Once you become a GST/HST registrant you are allowed to deduct input tax credits (GST/HST that you pay for direct expenses) and only remit the net taxes to CRA. The $30,000 registration requriement applies to earnings from all sources even if they are from different business operations. So, if you have sales on Ebay and also rental income from Flipkey and the total of both exceeds $30,000 you have to register for a GST/HST number.
If your earnings are below $400,000 annually you may qualify for the quick method of calculating your GST/HST. It allows you to claim a percentage of your collections as a deduction instead of claiming the input tax credits paid. You can elect for the quick method by filing a form GST74.
GST/HST returns must be filed annually or quarterly or monthly
How often you have to file your GST/HST returns and remit the tax depends on your annual billings. For companies that bill $1.5 million or less, which will be most internet based businesses, they have to file GST returns on an annual basis but may have to make quarterly tax installment payments.
Not declaring income or charging GST/HST is tax evasion
Failure to declare all of your income from all sources, including the shared economy, on your Canadian T1 or T2 income tax return is tax evasion under section 239 of the
Income Tax Act. A conviction for tax evasion has a monetary penalty of between 50 per cent and 200 per cent of taxes evaded, plus possible imprisonment for a two year term. There are also civil tax penalties that are assessed, and interest is charged on the taxes plus penalties. In 2014/15 the courts awarded $9.7 million in criminal fines related to tax evasion and 95 individuals and businesses received criminal convictions. Furthermore 34 of those individuals received prison sentences for tax evasion amounting to a total of 57 years in jail. Our top Toronto tax lawyers can assist you if you have not declared all of your income, or have been charged with income tax evasion.
CRA audits of shared economy internet income
As stated above, Canadians now have to report their internet sites for income earned from the shared economy. This will make it easy for CRA to cross-match and verify what the taxpayer reports with their websites advertising goods and services and to audit Canadian taxpayers who do not report their shared economy internet income. Internet-sourced income earned by an individual from a central operator that collects funds and remits to the individual such as PayPal is simple for CRA to audit once they have access to the operator records.
CRA carried out an audit of Uber in 2015 and obtained access to Uber records. In 2009 CRA obtained a court order for the records of eBay.
Internet business voluntary disclosure to avoid tax evasion prosecution and civil tax penalties
CRA has a policy of encouraging voluntary compliance with the Income Tax Act. The internet business owner can submit a voluntary disclosure application through one of our expert Toronto tax lawyers. We submit several voluntary disclosure applications for Canadian taxpayers every week. However you must approach CRA before they contact you first about suspected unreported internet income. If the application is properly submitted and accepted there will be no civil tax penalties and more importantly no income tax prosecution for tax evasion for unreported income or GST/HST. An interest reduction is also possible.
The voluntary disclosure process is also kept confidential by CRA, unlike the case of income tax evasion prosecutions where CRA is looking for publicity. Remember that the Canadian internet business owner has to submit the voluntary disclosure to the tax man before the tax auditor comes calling. Once CRA has started an audit or enforcement action, or possibly even asked for information, it may be too late.