Tax tips for the sharing economy

Joe Wolchock bought his first PC in 1996 for the same reason the rest of us did—he wanted to see what this internet thing was all about. During one of his web surfing sessions he came across a site called eBay, which amazed the Winnipeg-based antique collector. He was already going to garage sales to buy hard-to-find items for himself, and if he took some of that stuff and put it online for others to bid on, then maybe he could make a few bucks, he thought. He couldn’t have imagined then just how much dough he’d bring in over the next 20 years. Wolchock, co-owner of the Neon Factory, a company that restores and sells neon signs, started selling Canadian versions of board games to Americans, but changed course after a friend asked him to sell an old box of tractor manuals online. He thought they were junk, but soon saw the bids for these manuals rise into the hundreds of dollars. Turns out that when farmers buy equipment second hand, as many do, the instructions don’t come with it—and since many want to repair their vehicles themselves they’re willing to pay a pretty penny for those old 600-page books. In fact, at his peak in 2001, he was making upwards of US$5,000 a month, more than double the US$1,500 to US$3,000 a month he brings in today. “I had been going to auctions and kicking this stuff aside,” he says, “but I didn’t realize I was kicking the gold trying to get the silver.” He didn’t know it then, but Wolchock was participating in an early version of the digital consumer-to-consumer economy, a precursor and direct link to the sharing economy where we moved from selling each other goods online to renting services to strangers who find us on smart-phone apps. Why stop at selling old stuff in your basement when you can actually rent out the whole basement (or your whole house, car or parking spot) to strangers for extra income?

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The sharing economy has exploded over the last couple of years, with sites like Uber, Airbnb, Turo and JustPark leading the way. While it is still in its early stages—Uber, for instance, only got its start seven years ago—it’s growing exponentially. Statistics from Juniper Research reveal that sharing economy platforms will see revenues explode from US$6.4 billion in 2015 to US$20.4 billion in 2020. Not surprisingly, people want a piece of it. And so does the taxman—whether you’re selling tractor manuals online, or driving for Uber, or renting out your house on the weekends. The odds are we all know someone who is making some extra coin in the sharing economy and the odds are many of those people are not declaring it on their taxes. That could prove to be a dangerous move. “People are going to be prosecuted,” says David Rotfleisch, a lawyer and tax expert with Toronto’s Canadian Tax Amnesty Lawyer. “It’s a given that it will happen.” As many participants in the early online auction and classified services discovered, the bean counters in Ottawa eventually catch up and, tax experts warn, they are keeping a close eye today on unclaimed income from activities like Uber driving and Airbnb renting.

Making money in the Internet era

The sharing economy may be all the rage, but it’s hardly a new concept. Babysitters, tutors and homeowners who rent out their basement to offset their mortgage, are all people who have long been trading goods or services for cash. What’s changed, though, is just how much easier it is to connect people who want something to those who have it. “Interactions between people have scaled considerably,” says Alex Stephany, author of The Business of Sharing. “And that’s because of several things—the Internet, increasing smart phone penetration, better broadband speeds and social media, which has made it easier to trust strangers.” Stephany defines the sharing economy as something that creates economic value, capitalizes on underutilized assets (such as a car or a house), can be accessed online, fosters some sort of community, and reduces the need for ownership. And it’s for all these reasons that David Brown decided to join Turo in June. The San Francisco-based company, which came to Canada in April, connects owners of cars with those who want to drive them; essentially, it’s a peer-to-peer car rental business. Brown, who sells dental equipment mostly out of his home in Toronto, owns a Tesla that usually sits idle during the day. Rather than keep the car in his condo parking lot, he decided to make some money off of it by renting it out to electric-car-loving drivers for $179 a day.

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At first, Brown was nervous about letting strangers ride around in his beloved Tesla, but in many ways, these people aren’t ‘strangers’ at all. Everyone who uses the service has a rating, and those with poor ratings won’t get his ride. He’s been happily surprised by how people tend to treat other people’s property better than a typical rental car. “They’re more respectful because it’s a community,” says Brown. Other safeguards exist, too. For instance, no one under the age of 30 can use the service, the person’s driving history is examined and if something does go awry (Brown has found two minor scratches on his Tesla) it’s easy to submit an insurance claim through the Turo website. That’s why Brown didn’t have to pay a dime to fix those two nicks, though the renter did have to cover an amount over the deductible. Brown often rents to business people from India, China and the Ukraine as well as to couples who want to go for a ride in a fancy car. For his own personal use, he drives around in a Volvo XC90, but he rents that out on occasion as well—for $149 a day. The bottom line? Brown earns about $2,000-a-month for his car rentals, which he uses to offset his $3,500-a-month car payments. “I basically get two nice cars for the price of one.”

The side hustle

A lot of people are participating in the sharing economy as a side business, often referred to as a “side hustle” because it is difficult to make a full-time salary renting out a single car or apartment. Most, like Brown, use the cash to offset car or apartment payments. However, the ones who do make the most coin are the people who treat it like a business. When Rachel Chanthaboury first got into Airbnb in 2012, she’d rent out a room in her Vancouver condo for $50 a month. She quickly realized, though, that the happier her “clients” were, the better reviews she’d get. And the better the reviews, the more inquiries she’d receive, and the more she could charge. So she started getting a cleaning lady to tidy up her apartment after every Airbnb booking, bought better linens for her bed and purchased more items to beautify the room. She even started buying personalized artisan-made gifts for her guests. “Giving my guests something worked business-wise,” says Chanthaboury. “The little touches really hit well. I wanted to get in the top 95% rating and that helped.” Like any good business owner, she also increased prices during peak periods. Initially, she charged between $80 and $120 per night, but during a recent international conference that descended upon the city, she jacked the nightly rental rate to $250 a night. “People were happy to pay it,” she says. Chanthaboury’s attention to these kinds of details allowed her to generate enough income to cover her mortgage every month and to buy a second property. In fact, for about a year she was renting out two locations and brought in more than $30,000. And she believes that if she had more places to rent, she could make a lot more money. But even though technology has made it easier to rent a room out for a night, it hasn’t solved the problems that come with being a landlord. Someone has to let guests in, Chanthaboury has to make sure her place is in tip-top shape and it takes time to manage online bookings and communicate with potential renters. These reasons were, in part, why she took her condo off the market last year. “It’s tiring,” she says.

Pay your taxes

Since the sharing economy is a side gig for many, it likely doesn’t come as a surprise that many people hide—or don’t completely reveal—the income they generate. Last year, Statistics Canada reported that $42.2 billion was generated in the underground economy in 2012—money made that’s not claimed as income, and not taxed. While that would encompass contractors who get paid in cash, it also applies to eBay, Kijiji and Craigslist sellers who don’t declare income. With these eye-popping numbers, there’s someone else taking notice—the taxman. In theory, every dollar made by any Canadian must be declared every April. That goes for babysitters and tutors, too. While sharing economy participants might think they can get away with not claiming their income, they should think again, says Rotfleisch. In 2009, the Canada Revenue Agency (CRA) cracked down on thousands of eBay sellers who were not declaring taxes. It estimated that $5 billion in revenues was going undeclared so it got a list of users from eBay and then started going after Canadians who were hiding their online income. Rotfleisch says the expectation is that the CRA will do something similar with the many sharing economy sites that are now in Canada. Unlike with a cash-only contractor, explains Rotfleisch, it’s easy for the CRA to identify who’s using these sites. All they have to do is get a list of users, see how much they’ve brought in (it’s all tracked by the companies) and then start their audits. In the eBay case, they mostly went after the top so-called “power sellers,” but hoped that from all the press the audits received, smaller sellers would start claiming as well. “It’s going to happen again,” says Rotfleisch of an impending crackdown. “And all these records are available.”

Think like a small business

So what does that mean for anyone selling through the sharing economy? It’s simple: People need to think of their ventures as small businesses, says Tova Epp, a tax preparer at Artbooks, a Toronto-based bookkeeping and tax preparation company. That means that any money earned from, say, Uber should be treated exactly the same way as if you were running your own small widget-selling company. “With Airbnb, home owners would claim any money as rental income, not business revenues,” says Epp, though it is taxed at the same rate as regular income. The truth is there’s no excuse not to file taxes. Since these sites are automated, you have a built-in bookkeeper, at least on the revenue side, which makes tallying up income easy. That’s a big reason why Howard Petrook likes using Uber. The retired technology consultant wanted to stay active in retirement, do something with his now work-free days and earn a little money for nice dinners out with his wife.

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Petrook only drives about 12 hours a week, billing $180, or about $9,300 a year. Uber then takes a 20% cut of that and the fee includes insurance (the company covers the driver during every ride) but it’s still enough to make the rides worthwhile, he says. He only started driving last April, so he has yet to claim revenue, but even with that relatively small amount, he plans on reporting it. Uber puts Petrook’s earnings into his bank every Monday, and with that comes an itemized statement detailing how many kilometres he drove and how much he earned. That not only makes it easy for Petrook to see how much to claim, but makes his write-offs a snap. Most business owners find it tricky to track their mileage, which Petrook says is critical when writing off car expenses, but it’s easy to do if the distance travelled is already calculated for you. Petrook keeps his gas receipts and repair bills. He and his accountant can then easily determine what percentage of those expenses should be counted as personal and what should be counted as business. “It’s a very easy system for drivers. It’s easy to track and for the rest of my expenses, like gas, I build a file as I go.” The ability to write things off is an attractive part of the sharing economy. Wolchock says he has claimed income on his taxes from day one and puts his income through a registered business. This allows him to write off trips to farming auctions that sell the manuals he needs, as well as a percentage of his vehicle, home office, computer expenses, packing costs and anything else that goes into listing and selling on eBay. Chanthaboury wrote off her cleaning service, sheets, towels and other items that a guest might need as well as the little trinkets she’d buy as gifts. Brown, who isn’t yet sure how he’ll treat income generated from Turo, says his accountant is looking into it—and he himself is keeping track of all of his repair receipts. He also has an assistant, whom he pays $20 an hour to drive his Tesla and Volvo to clients who can’t pick them up from his condo. He writes off her fees, as well. “I haven’t figured all the taxes out yet, but I’m keeping track of everything,” says Brown. “I don’t want to miss out on any write-offs.”

Don’t forget HST

Claiming business income is only one part of tax equation. Anyone who makes at least $30,000 a year must collect HST. In many cases, though, you’ll have to figure out how much you owe yourself, says Epp, the tax preparer. For instance, she has a client who drives an Uber and complains HST and GST charges are not broken out on the customers’ bill. She has to do the math on the gross total to figure out what her client owes. While the calculation isn’t hard for her to do, she thinks that the fact that it isn’t neatly broken out likely confuses drivers. “Many people aren’t getting into this as a full-time job and they don’t consider it a business,” says Epp. “They don’t think to apply business principles to the job and the HST is not transparent in the transaction. It’s confusing.” Not highlighting HST might also cause drivers some disappointment when they realize that they’re not making as much as it may seem, says Epp. If an Ontario Uber driver earns $30,000 a year and that breaks down to $10 a ride, $2 of that goes to Uber, while another $2 goes toward income tax, and yet another $1.15 goes to HST, leaving $4.85 for the driver. When it comes to Airbnb, HST doesn’t have to be collected, says Rotfleisch.

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Claim income now

This all means one thing: Those who are hiding their side hustle incomes, or simply don’t realize that they need to declare their earnings, shouldn’t wait until the CRA comes calling to reveal their sharing economy-related revenues, says lawyer and tax expert Rotfleisch. “Any undeclared income is considered tax evasion whether it’s done on purpose or not,” says Rotfleisch. “If the taxman does find out that you haven’t properly stated your earnings, then he’ll charge you hefty interest payments and large penalties on the amount owning.” Fortunately, the CRA has demonstrated the habit of being fairly reasonable, he offers. They just want to collect what’s owed to them, so they do allow Canadians to declare income after the fact. You’ll have to pay what you owe, but you won’t be charged any late filing penalties and the CRA will typically reduce interest penalties by 4% on any taxes owing for six years prior to when you declared. “As soon as the CRA starts an audit, though, it’ll be too late to come clean,” warns Rotfleisch. At the moment, the sharing economy doesn’t make up a major part of either Epp’s or Rotfleisch’s business, but both think that tax-related questions will increase as more people turn to these websites to earn income. In the future, far more people will have what Stephany calls “portfolio careers,” or several different jobs that add up to one main salary. People could drive an Uber during the day, maintain their Airbnb at night and rent out their car on Turo when they’re not picking up passengers. As technology makes these peer-to-peer connections easier, more things will get rented or shared and people will find new ways to make money. While it has become harder for Wolchock to make money online—his market has become more saturated—he still enjoys hunting for manuals and selling them online. He devotes about 20 hours a week to his eBay endeavours, but he’s usually able to find time to do the work during the day when business at the Neon Factory is slow. To him, the sharing economy makes a lot of sense. Why wouldn’t someone rent out their car or their apartment if they can do it? “That guy renting out his Tesla is brilliant—he’s taking a bite out of the rental car companies,” Wolchock says about Brown. “As for me, as long as there’s a market for these things then I’ll continue on.”