This article, written by Marisa Coulton, was originally published by the National Post on April 16, 2023, and features insights from Brent Soucie, Private Wealth Advisor and Associate Portfolio Manager.
The cost-of-living crisis has caused Canadians of all ages to become hustlers in order to make ends meet.
A March survey by H&R Block Inc. revealed that 28 per cent of Canadians have picked up side hustles such as grocery delivery to pad their incomes, up from just 13 per cent in 2022.
Inflation grew faster than wages last year, so the impulse to pick up extra work is clear. What’s less obvious is whether the newest wave of gig workers is fully aware that the Canada Revenue Agency will expect a cut, too.
“The survey indicates that many Canadians feel tempted to avoid declaring all their income from a side gig, and many lack an understanding of the tax implications,” Yannick Lemay, a tax specialist at H&R Block’s Canadian unit, said in a March 2 press release.
That matters because inflation only partially explains the growing interest in gig work, since half of Canadians plan to continue hustling well into their 60s, working a part-time side gig instead of retiring, H&R Block reported in a survey released last week.
So, it’s not a short-term thing. Under the strain of the most severe inflation in four decades, and perhaps a general disillusionment with the system, side-hustlers are less than keen to give up their extra income to the tax man. Around 50 per cent plan to hide some or all of their side earnings from the tax man, according to the survey.
There probably are better ways to offset inflation than running afoul of the law, said Vern Krishna, professor of common law at the University of Ottawa.
“Yes, the cost of living in inflation is high and is affecting all of us in various different ways,” said Krishna, who is also counsel at Toronto-based Tax Chambers LLP. “We need to address the cost of living. And the way to address it is not to not declare income.”
Canadians might be taking the saying “hustle in silence and let your success make the noise” a little too literally.
Not declaring income is riskier than people think, said Brent Soucie, private wealth adviser and associate portfolio manager at CWB Wealth Management Ltd., a division of Edmonton-based Canadian Western Bank.
Soucie offered a hypothetical. Let’s imagine that a side-hustler — let’s call him Kevin — chooses hide $10,000 of income, and his marginal rate is 30 percent.
Kevin would owe $3,000 in tax on the unreported income, plus a penalty based on the “intent” of the misfiling. If it was a mistake, Kevin would have to pay a 10 per cent, or $1,000 penalty, but if the Canada Revenue Agency finds it was deliberate, the agency would hit him with a 50 per cent, or $5000 penalty, instead.
Then, the CRA would charge Kevin five per cent interest on the $3,000 of unpaid tax.
This means that Kevin could owe roughly $4,600 — or $9,200 in total — depending on the intent of the misfiling. But this the extent of the CRA’s leniency. Tax evasion, in full or in part, is a criminal offence, said Krishna. “The law requires one to declare all of one’s income, whether it is from your main hustle or your side hustle or from your legal hustle or from your illegal hustle,” he said.
The odds of Kevin being criminally prosecuted are “remote,” however, said Krishna.
That Kevin could be penalized for pocketing money he earned might seem unfair to some.
“I am not a specialist in morality. I’m a lawyer and I believe in the rule of law,” said Krishna. “Having said that, I, like anyone else, sometimes feel that certain rules may be unfair or that they may give disproportionate benefits to some and not to others and so on. Well, in order to make the system better, you have to change the law. And simply saying, ‘Oh… in my view, this is unfair, I’m not going to pay,’ is not is not the solution.”
Not declaring income would actually reinforce the unfairness, not alleviate it, Krishna said.
“What’s bad about it is you are really, in a sense, undermining the legal structure within which we function. And you’re causing, if you like, a disproportionate load to be borne by some and avoided by others.”
The temptation to underreport might not be coming from a place of malice and amorality, but rather, a lack of understanding. H&R Block found that one in five gig workers didn’t have a clear understanding of the tax implications of having a side-hustle.
For example, our freelancer Kevin might not be aware that he doesn’t need to pay GST or HST on income under $30,000. If he made more than $30,000, he would need to register with the CRA and pay more taxes when he files. But if he drives a taxi or works for a ride-share service, he’ll need to register with the CRA regardless.
“I’ve always been a little shocked at how little Canadians know about our income tax system,” said Soucie. “I acknowledge that it’s not necessarily a subject area of interest but I’ve always been kind of dumbfounded that we don’t teach high school aged kids how to do a tax return, or what’s involved with a tax return, or how our tax system works.”
Soucie said we have a responsibility to teach kids about taxes. “We teach them how to drive, we teach them how to tie their shoes, things you need to know for your everyday life, and income tax is something you need to know for your everyday life,” he said.
Though it might seem an “incomprehensible mystery” at first, said Soucie, it’s just something that requires a little time and attention.
Learning about the tax system amid a cost-of-living crisis might feel like a waste of time when one could be doing something more lucrative, like cultivating a side hustle. Canadians feel like they are running in place, with 85 per cent concerned that their income is not increasing with the rising cost of living, according to H&R Block’s research.
Soucie agreed. “I don’t think wages have crept up with inflation,” he said. “I believe that inflation has outpaced wage growth, and therefore, if these brackets are moving up with inflation, but our wages are not, it’s bad in the sense that we’re not making more money, but it’s good in the sense that we’re paying less tax.”
He added that knowing about the system and the different investment vehicles available, like RRSPs or TFSAs, is a surefire way to get ahead.
Half of the 18- to 54-year-olds surveyed said they didn’t have any money left over at the end of the month to contribute to retirement savings, while one in 10 said they hadn’t saved anything for retirement at all.
“What we’re seeing now is that the vision for retirement has evolved dramatically, fuelled by shifts in tax-friendly savings plan options, evolving workforce realities, the gig economy and the prevailing economic environment,” Peter Bruno, president of H&R Block Canada, said in an April 3 press release.
Over half of gig workers surveyed admitted that they did not know how to use RRSPs or TFSAs to save for retirement, according to the survey by H&R Block. Soucie said people should try to put their money away into both vehicles, but if they have to choose, “it’s very important for you to understand the mechanics between the two, and choose the one that is best for (you).”
The best option largely depends on whether an individual is making more money in the beginning of their career, versus later in their career, Soucie added. For example, a pro athlete typically earns the most when they are young, so their tax rate is high early in their career. They should go with an RRSP before contributing to a TFSA, because the deduction they are offered saves them tax which would otherwise be imposed at a high rate. They should withdraw from their RRSP later in life, as retirees, when their tax rate is lower.
However, for most people, taxable income will increase as their careers mature, so a TFSA would be best early in their career, over an RRSP, because their tax rate is going to grow with their income. They would better off saving their RRSP contribution room until later in their careers.
It will be worth it in the long term, because the tax system pervades our lives “from morning to night, from birth to death,” said Krishna.
“There is not a single aspect of life that it does not touch or influence; from the time you go shopping to the time you buy gas, to the time you go to the movies, to buy a bottle of wine, or to how much of your income you keep after you earn it, how much of it you save, how much you can put together for your retirement, how much you can do anything,” Krishna said. “There’s not a single decision in this world that involves an exchange of goods, services or transactions that does not have tax implications.”
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability or its contents or for any consequences arising from its use.