Is your side-hustle client taking risks with their taxes?

Despite vast awareness of tax implications, Canadian gig workers could still be making mistakes with CRA

Is your side-hustle client taking risks with their taxes?

As costs of living continue to put pressure on household budgets, a greater number of young Canadians are looking for alternative income through side hustles. If your client is one of them, they probably know that there are tax implications – but they might still be overlooking eligible deductions or applying them improperly.

According to research from TurboTax Canada, which found around one quarter of Canadians (23%) – including half of Gen Zers (52%) and one third of millennials (34%) – are getting income from a side gig in addition to their primary employer.

Based on the research, which draws from a survey of roughly 1,500 Canadians conducted by Maru for TurboTax Canada, almost half of Canadian side-giggers (46%) are between 18 and 34 years old.

What’s more, more than four fifths of Canadians with a side gig (85%) – including a vast majority of Gen Z and millennial gig workers (95% and 91%, respectively) – cited inflation and the rising cost of living as factors in their decision to pick up a side gig.

The survey also revealed that 56% of side-gig Canadians – including 53% of millennials and 40% of Gen Zs – were very aware of how having a side hustle impacts their tax return. But according to Emily Verrecchia, a tax expert with TurboTax Canada, there are a number of common expenses that young Canadians with side hustles might not realize they could write off.

“Everyday, seemingly modest expenses such as office supplies, software subscriptions, and shipping costs are often overlooked - but they add up!” Verrecchia told Wealth Professional. “On the larger side, there may be expenses related to the use of their ‘office space’: their home.”

For those young Canadians taking on a work-from-home side hustle, the square footage of their home office relative to their home can matter a lot. Someone with a 1,000-square foot home office in a 5,000-square-foot home, she notes, will have used 20% of their home real estate as an office space, which means 20% of many household expenses such as heat, electricity, and insurance can be counted as a business expense.

As for young Canadians who have to move around as part of their side hustle, Verrecchia says business travel can be written off. That includes up to 50% of the cost of meals, beverages, and entertainment.

To avoid awkward conversations with the Canada Revenue Agency, it’s best for Canadians with side hustles to be upfront with their tax filings. In a recent survey of gig workers, H&R Block found nearly half (49%) are open to the idea of not declaring their full incomes. That decision could come back to haunt them: in instances where it discovers tax evasion, the CRA can hit the offenders with substantial penalties and interest, aside from ordering them to pay the back taxes owed.

Filing taxes is one thing, but filing them properly is another. According to Verrecchia, side giggers’ claims can be denied because they don’t submit sufficient supporting documentation to the tax man. In other instances, they may try claiming deductions that fall outside of what’s eligible.

“I’ve seen people try to claim clothing, dry cleaning, pet care, and even personal care items as an expense, but these items cannot be written off because they are considered personal expenses by the CRA,” she says.

To avoid those tripwires, Verrecchia recommends the use of online tax software solutions that prompts users for all the information needed to support their claims. The right software, she adds, can automatically flag hundreds of credits and deductions to help Canadians with side hustles make wise tax-planning decisions.

“With the cost of living this high, every dollar counts,” she says. “Especially for this tax season, it’s important that Canadians with side hustles are aware of all expenses - big and small - that they can write off to maximize their return.”