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In the US you're allowed to deduct hobby expenses up to (but not exceeding) income from that hobby as part of your miscellaneous deductions. But I can't find a definitive source on the corresponding rule for Canada.

I know that Canada has the same "expectation of profit" test as the US with regards to allowable net losses (to reduce regular income), but does Canada have the same rule for all expenses as well — that is, if you have expenses from a hobby with no expectation of profit, would you still owe personal taxes on all income from that hobby without the chance to deduct anything?

If that were the case, a hobbyist would need to gross up their prices or funding goals by 25-50% to cover taxes for all expenses in order to break even compared to an actual business — it doesn't seem fair, so I'd like to know what the law actually says in this regard.

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Yes, your business needs to be in the business of making money in order for you to deduct the expenses associated with it. I suppose in theory this could mean that if you take in $10,000 and spend $30,000 every year, you not only don't get a net deduction of $20,000 (your loss) but you have to pay tax on $10,000 (your revenue).

However this is super fixable. Just only deduct $9500 of your expenses. Tada! Small profit. For all the gory details, including how they consider whether you have an expectation of profits, see https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p-176r/application-profit-test-carrying-on-a-business-revised-sept-30-1998.html

This "expectation of profit" rule appears to apply to things like "I sell home décor items (or home decorating advice) and therefore need to take several multi week trips to exotic vacation destinations every year and deduct them as business expenses." If you're doing woodworking or knitting in your home and selling on Etsy you don't particularly have any expenses. It's hard to imagine a scenario where you consistently sell for less than the cost of materials and then end up dinged on paying tax on revenue.

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  • I'm imagining a scenario where I run a Patreon to make games, but the money I take in from that doesn't cover all the server expenses.
    – Joe Z.
    Commented Feb 9, 2016 at 20:34
  • if that's a gift to you from your patrons, it's not taxable anyway. If you're exchanging game access for money, that's revenue. If you're giving the game away to anyone and everyone, and some people are giving you money, there's no direct connection between those things, and the gifts are not taxable in Canada.
    – Kate Gregory
    Commented Feb 9, 2016 at 20:37

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