Here is a question we got this week along with Anthony’s reply.  We get this type of question regularly, so I thought I would include it on our blog.

Dear Anthony,

I dropped off the paperwork for my income tax. As you’ll see, this is the second year in a row that I’ve made peanuts from my freelance work. I did very little freelance work in those years because I became a mother. My question: Is it a problem to write off expenses when my self-employed income has been so low? I believe someone once told me it’s ok to operate at a loss for only two or so years. My 2015 earnings are already up, and I’m collecting GST, so there won’t be a third year of such low income. I’m just paranoid and want to be sure I’m not doing anything that will flag me for an audit.

Also, thank you for your efficiency with my returns last year.

Anthony’s reply was:

You are allowed to have business losses for a few years while starting a business.  CRA understands this.  There are no black and white rules for how many years, or how big of a loss.  The strongest guidance I can give you is to apply a reasonable link between your revenues or expenses, in the context of what you do.  For example, for most people in your line of work it could be reasonable in the early years to have $3000 in expenses but only earn $500 in income.  On the other hand for most people in your line of work, it’s probably not reasonable to spend $40,000 so you can earn $500.  And always remember it’s not us you have to justify this to, it’s CRA.  They’re the ones who would contact you to document and explain why you had X amount of losses, and you need to be able to explain why.  Always imagine sitting in a living room with a CRA employee having to explain your expenses.  That’s how I look at it.

When we start work on your file, we’ll take a look at your situation.  If we believe your expenses are too high, we’ll contact you.

tax advice