To run a small business on the side you do not need to incur the cost of incorporation. In fact the primary reason for incorporation from a tax perspective would be to minimize your taxes, as corporate tax rates are lower than personal tax rates. Of course, the limited liability afforded to those who incorporate is an important factor to consider as well, but then who is going to lend “Jody Services Ltd.” money without a letter of security from the president, Mr. Jody himself. So in fact the limited liability is effectively circumvented by most creditors of small incorporated businesses by obtaining signatory letters from the owners anyway.

Having said all of this, I would personally report my hobby (which likely is losing money – which is why it is fun and called a hobby) to CCRA as part of my regular T1 General (use a T2032 schedule) and therefore reduce my taxable income. By reducing taxable income the taxes deducted at source on your regular pay will be higher than they should have been for the year. All else being equal this will effectively allow you to receive tax refund in the amount that you were “over-taxed”.

The only real concern here is that you must be engaged in a “going concern” – defined as: engaging in an economic endeavor in which you have a reasonable expectation to eventually earn a profit. CCRA’s thought behind this is that eventually you will make lots of extra income which they will collect their share through your regular personal tax rate.

The only catch here is that you can’t continue to claim losses forever. Eventually even CCRA will become suspicious when you lose money year after year. But they will only become suspicious if you continue to lose money running the same business, so you would need to change hobbies…. I mean economic endeavors every couple of years always in an attempt to find that right money making opportunity which will allow you to pay huge tax bills to CCRA. Hint: at this point incorporate.