Side Hustle at a Loss? Claiming Business Losses Against Other Income – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Many Canadians start side hustles—consulting, tutoring, online selling, gig work,
handmade goods, fitness coaching, photography, etc.—only to find that in the early
years, expenses exceed income. The good news is that business losses can often be
deducted against employment or other income, reducing your overall tax bill. But CRA
carefully scrutinizes losses from small or part-time ventures, especially when they
resemble hobbies more than real businesses. A business loss can save you thousands
in tax—but only if CRA agrees that your activity is a real business with a reasonable
expectation of profit. This guide explains when self-employed losses can be deducted
in Canada, the legal tests CRA applies, how to document your side hustle properly, and
how to avoid reassessments.
Legal and Regulatory Framework
The ability to deduct business losses is governed by the Income Tax Act, including:
• Section 9 – income or loss from business must be calculated using normal
commercial principles.
• Section 18(1)(a) – expenses must be incurred to earn income.
• Section 18(12) – limits on workspace-in-home deductions.
• Section 67 – expenses must be reasonable.
• CRA Interpretation Bulletin IT-504 – reasonable expectation of profit test (now
modified by case law).
A legitimate business loss occurs when:
• business expenses exceed business revenue,
• the business is carried on with commercial intent,
• proper records are kept, and
• the activity is capable of generating profit over time.
Losses can be applied against employment income, investment income, or carried
forward/back according to tax rules. These laws form the basis for claiming business
losses as a self-employed individual in Canada.
Key Court Decisions
Several landmark cases define CRA’s ability to challenge side-hustle losses.

1. Stewart v. Canada (Supreme Court of Canada)
   This is the most important case. The Court ruled:
   • CRA cannot deny losses simply because the business was not profitable.
   • The key question is whether the taxpayer engaged in a business in a commercial
   manner.

2. Walls v. Canada

Losses were denied because the taxpayer kept no records, making the business appear
non-commercial.
3. Leblanc v. The Queen
A side photography venture was deemed a hobby, not a business, because the
taxpayer had no marketing plan, no clients, and minimal revenue.
4. Rogers v. Canada
Losses were allowed because the taxpayer demonstrated organized operations, a
business plan, and clear revenue intent.
These cases show that documentation, organization, and commercial behaviour
determine whether a loss is deductible.
Why CRA Targets This Issue
CRA frequently reviews loss-claiming side hustles because:
• many taxpayers start “businesses” with no profitability plan
• personal hobbies (cooking, crafts, travel blogging, fitness, photography) are often
disguised as businesses
• large expenses relative to small revenue raise red flags
• vehicle, travel, and home office expenses are often inflated
• GST/HST registration inconsistencies signal incorrect reporting
• repeated losses over multiple years suggest the activity is not commercial
CRA applies the commercial-intent test to determine whether the activity is a business
or a personal venture. When CRA denies the business loss, the taxpayer may face
additional taxes, interest, and possible penalties.
Mackisen Strategy
At Mackisen CPA Montreal, we ensure clients maximize legitimate deductions while
meeting CRA’s business-intent requirements. Our strategy includes:
• reviewing whether your activity qualifies as a business under Stewart
• building a business plan demonstrating commercial intent
• ensuring proper invoicing, receipts, contracts, and bookkeeping
• helping you track marketing efforts, client outreach, and revenue models
• organizing T2125 filings with audit-proof documentation
• allocating expenses correctly to avoid excessive or personal-use claims
• advising when to register for GST/HST
• preparing a defence package if CRA challenges the loss
• correcting filings if CRA has previously denied deductions

We strengthen the commercial legitimacy of your business so losses are fully
supported.
Real Client Experience
A client running a part-time baking business claimed losses three years in a row. CRA
challenged the activity as a hobby. We documented her customer orders, marketing
plan, ingredient costs, and pricing model, proving commercial intent. CRA allowed all
losses.
Another client operated a photography side hustle with minimal income and large
equipment purchases. CRA denied the losses. We rebuilt his documentation, developed
a revenue plan, and successfully appealed through a Notice of Objection.
A third client drove part-time for gig platforms but failed to keep mileage logs. CRA
reduced his allowable expenses. We implemented proper vehicle tracking and corrected
future filings.
These cases show that the side hustle must be treated like a business—not a
pastime—to defend losses successfully.
Common Questions
Self-employed Canadians often ask whether CRA automatically denies losses.
No—losses are allowed if the activity is commercial.
Others ask whether you can deduct a loss in your first year. Yes—new businesses often
have start-up losses.
Another question: How many years can I show a loss? CRA may review repeated
losses, but if the activity is commercial, losses are still valid.
Some ask whether hobbies can become businesses. Yes—once structured
commercially with intent to profit.
Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps
self-employed individuals defend their business losses, stay compliant with CRA rules,
and structure their side hustles for long-term profitability. Whether you have a new
business or a recurring loss, our expert team ensures precision, documentation, and full
CRA protection.