Earning Income From a Side Hustle? The CRA Might Be Watching!

Side hustles and freelance work can be a great way to generate a passive income, but you cannot forget about its tax implications.

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Did you know that about 40% of millennials in Canada are part of the gig economy? The number is mixed between millennials who seek gigs or freelance work for passive or part-time income or people who rely on it for their primary income. It includes freelance office work, babysitting, house sitting, personal assistance services, paid work through online platforms, etc.

But that doesn’t even come near the full spectrum of what you might call a “side hustle.” Earning income from things like Airbnb, ride-sharing, renting out your vehicle, parking space, and others might all come under the definition of a side hustle … and the CRA wants its cut.

The CRA wants its due

The CRA is worried about all the new ways of earning income (and potential income tax dollars) that might be slipping through the cracks. The tighter observation and a closer eye on crypto traders is one example of how the CRA is tightening the circle around taxpayers who might be under-reporting their income.

Now, the department might do the same with freelancers and gig workers. It might be quite easy for the CRA to track the income and contract details when freelancers leverage platforms to connect with potential employers. These platforms, by design, keep their own cut (usually around 20%) from a freelancing job. The taxation on top of it is a variable that freelancers will have to “plug in” when pricing a job.

These platforms are relatively easy to “police” for the CRA. However, many freelancers focus on cultivating direct relationships with clients in order to cut the platform fee out of the equation. These are the people the CRA might have to devise specific policies for. The good idea is to report all your side hustle income to the CRA.

If you are unsure or fear that you might be prosecuted for late reporting, consider the Voluntary Disclosure Program. The good part about reporting all your side hustle income is that you might also claim expenses.

Balance it out with tax-free income

You can balance out your taxable income stream (from a side hustle) with a tax-free passive-income stream by adding a decent dividend stock like Canadian Utilities (TSX:CU). The company is currently offering a juicy yield of 5%. If you can invest a sizeable sum like $30,000 into the company, you can expect a slowly rising monthly tax-free income of $125.

Canadian Utilities has been operating for over 90 years. It now comes under the ATCO sphere and has two major business lines: electricity and natural gas. The company is also gearing up to serve hydrogen — the clean fuel of the future. The company operates 75,000 km of electric lines, 64,000 km of pipelines and has a decent water infrastructure and gas storage capacity. The assets are valued at about $20 billion.

The balance sheet is strong, and though the revenues and profits are slipping now, the company has the potential and presence to turn this around.

Foolish takeaway

It’s never a good idea to hide things from the CRA. You might be able to save some tax dollars until the CRA catches up, but if it decides to penalize people for not sharing all their income details (including the income from side hustles), you might lose more than you saved.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned.

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