15

Income Taxes for Affiliate Marketing Business in Canada 🍁: This Is How I Do It

Every year around this time I get emails from different people who ask me pretty much about the same thing: How I do taxes for my affiliate marketing business.

I live in Canada🍁 and it seems that there is not much info about how to do it for this particular type of business.

I decided t write a post about it with all the details I learned while having my own business.

👉🏻👉🏻👉🏻 Disclaimer: This post is for informational purposes only and it is not a legal/accounting advice. Please consult with your accountant before filing taxes. 

First of all, you need to choose the proper structure for your business.

Sole proprietor vs Incorporated⚔

In Canada, you can have your business structured in multiple ways that include sole proprietorship 👩🏻‍🎨 and corporation 👩🏻‍💼

Let’s talk about them since I feel these are the two most common ways that entrepreneurs choose.

What is the difference?

By being a sole proprietor 👩🏻‍🎨, you share your personal finances with the business ones. It makes paperwork more simple and accounting expenses low but might not be the most optimal structure for taxes.

According to the Government of Canada:

With this type of business organization, you are the sole owner, and fully responsible for all debts and obligations related to your business

By being incorporated 👩🏻‍💼 (having a corporation), you get a separate financial entity for your business. It leads to high accounting fees, more paperwork, stricter regulations but have tax benefits as well as separates you as a person from your business from the legal point of view.

Again, according to the Government of Canada:

When you incorporate your business, it is considered to be a legal entity that is separate from its shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation

Let’s look at two major from my point of view differences: Taxes and liability.

Tax benefits

If you are a sole proprietor 👩🏻‍🎨, you file your business taxes along with your personal ones.

This, and the fact sole proprietorship is not tightly regulated, make your business paperwork quite easy to do.

Also, if your income is not very high, it’s better to be a sole proprietor since you may get extra tax benefits. For example, you can deduct your business losses from your personal income and thus, hit a lower tax bracket.

If you are incorporated 👩🏻‍💼, your business is legally separated from your personal finances.

It means you need to file two taxes: For yourself and your business. You will also have to do more of other paperwork for your business since corporations are regulated much more than a sole proprietorship.

However, if your business is highly profitable, it may make sense to incorporate to take advantage of small business taxes that are much lower than personal taxes for the same income.

According to taxtips.ca:

The combined federal + provincial small business tax rate varies from approximately 10.5% to 18.5% in 2017 for the first $500,000, depending on the province, and from 26% to 31% for income over the threshold

Now, compare it to 49% of personal income tax on the same $500,000 😱😱😱

Being incorporated 👩🏻‍💼, you can then pay yourself a salary and control your personal income and taxes.

This article “Jumping from Sole Proprietorship/Partnership to Corporation in Canada” has a good example of how differently taxes are calculated for each of these business structures.

Liability

Another advantage of being incorporated is to separate business liability from your personal one.

What does it mean?

If you are incorporated 👩🏻‍💼 and your company gets hit by a lawsuit or you decide to default on the business debts, your personal finances won’t be affected by that.

If you are a sole proprietor 👩🏻‍🎨, the bankruptcy of your company equals your personal bankruptcy.

But is this important for you as an affiliate marketer?

Personally, I am not sure my business may encounter a big liability ⚖

What could it be? Let’s see.

I am thinking of content copyright infringements and things like GDPR.

With copyright infringement (for example, if you used somebody’s else image), it usually comes with a warning. You resolve the issue amicably (for example, by removing the image that does not belong to you) and everybody is, technically, happy. No lawsuit.

With things like GDPR, it is a bit more complicated, I imagine. There would be no warning, just a penalty. In this case, I prefer to rely on technical solutions that implement the law(s) when applicable.

As of loans, I personally do not plan to take any for my business (it’s fully bootstrapped). In general, I think it’s not very wise to take loans at the beginning of your affiliate marketing journey since the risks are high due to many factors including a lack of experience, Google algorithm changes, affiliate commission changes, etc. Plus, the entry barrier is pretty low in terms of money.

That’s why I hope that I won’t need liability protection in the near future.

But you may think otherwise and it can be a different story for you.

Which one to choose?

Given all the above, I don’t think it’s viable for you as an affiliate marketer to become incorporated until you hit a certain level of income.

My accountant says that becoming incorporated 👩🏻‍💼 starts making sense when your business income goes above $70,000CAD. This article from 2014 mentions $50,000CAD net income as a threshold for considering being incorporated.

Don’t forget that being incorporated👩🏻‍💼 comes extra paperwork and expenses. It may cost about $1,000CAD per year with government fees, accounting fees, etc.

So it makes no financial sense to become incorporated if you make less money than mentioned above.

Sole proprietor👩🏻‍🎨

I own my business LivingOffCloud and all other websites as a sole proprietor 👩🏻‍🎨

If you have not yet registered your business but are already making money, I would advise you to do it now to make your business legal.

Here, you can find some kind of FAQ I got from the readers of my blog.

How to register

To become a sole proprietor 👩🏻‍🎨, you may need to register your business. It costs something around $35-80CAD a year.

Why may?

Well, for example, in Quebec, it is not required if you name your business after yourself and make less than $30,000CAD a year (thus, being a small supplier).

But if you want to, you can. I did.

It is possible to do it online.

It’s a provincial matter so you register in the province where you conduct your business (where you live):

👉🏻 register in Quebec
👉🏻 register in Ontario
👉🏻 register in BC

Industry code to use

In your tax return, you need to specify an industry code that describes your business.

All the codes are listed in the appendix of the guide T4002.

I use (well, my accountant does) this one: Computer systems design and related services (except video game design and development) 541514.

How to add freelancer expenses to your tax return

If you outsource some work to freelancers such as writers and virtual assistants, you can deduct it as a business expense.

In my federal tax return, I put it into Part 3D – Cost of goods sold and gross profit, the line Subcontracts. I have an accountant who does my taxes and this is her interpretation of this particular expense.

Bought a website? Claim capital cost allowance

When you buy a money-making website, it is considered to be a capital expense.

Having capital expenses allows you to claim capital cost allowance (CCA) due to the fact that the property you bought is usually depreciable and wear out or become obsolete over time.

Websites are like buildings: They tend to deteriorate and lose their value with time if not being taken care of 🏫

Thus,  CCA is applicable here and you can use it to reduce your taxes.

I did it when I bought my websites in 2015 and now, in 2019, I still claim CCA in my taxes.

Sold a website? Here’s how to file this income

According to my accountant, when you sell a websites, there are approximately two cases:

1. you sell a website you built yourself;
2. you sell a website you purchased from someone else

In the first case, it is considered to be a business income. You built a website meaning that your business created value from scratch.

In the second case, when you resell a website, the income you get can be considered as a capital gain. In this case, you did not create value from scratch but rather improved the existing entity.

Why is it important to distinguish between these types of income?

It’s because you pay less tax on capital gains 🤷‍♀️ Business income gets included in income at 100% but a capital gain is only included in income at 50%.

In general, it seems like, for tax purposes, websites can be treated the same way real estate is treated. However, in the real estate world, it’s rare that you build a construction from scratch. Usually, we buy and sell buildings that already exist.

That’s said, these are only rough guidelines. Real-life cases might be more complicated than that. For more details, ask your accountant!

Incorporated👩🏻‍💼

As I mentioned above, I am not incorporated (yet) because my net revenue is still below $70,000 CAD.

Once I decide to change my business structure, I will update this part of the post.

For now, you can read more about it on the Canadian government website.

Sales taxes GST/QST 💸

What CRA says

In general, if the total amount of your all revenue (before expenses) goes above $30,000 CAD, you will need to register for a sales tax account (GST/HST) 😒

However, CRA says (the emphasis in mine):

You have to register for the GST/HST if: you provide taxable supplies in Canada; and you are not a small supplier

It means that only the part of the revenue you receive in Canada (and your province) should be counted towards the amount required for the GST/HST. If you as an affiliate marketer receive most of your income from the sales outside of Canada (for example, from the US) you, probably, never reach that threshold.

Read more about it on the website of Government of Canada.

My situation

In 2020, I made over $50,000 CAD in net profit and thus exceeded the threshold of a small supplier. Following the advice of my accountant, I applied for GST/QST at the beginning of 2021.

The GST/QST period for me starts on April 1, 2021, and the taxes get calculated based on a trimestral period. CRA gives you a month to complete the sales tax report after each period finishes. It means that I need to submit my first sales tax report no later than July 31, 2021.

As I mentioned above, I do not collect any sales taxes because I do not sell anything 🤷‍♀️ So it means that I can simply file an empty GST/QST report.

Also, if I pay any GST/QST on purchases for my business, I can claim them back 😉

Affiliate marketing income taxes, Canada: Final words🌟

Choosing a business structure and filing taxes for your affiliate marketing business might not be as straightforward as we wish it were.

I hope you found my post about affiliate marketing income taxes, Canada 🍁, useful. I will be updating it every year with more information I find while gaining more experience in this area.

I will also be very happy to hear your thoughts and questions about the subject. If you have any, hit the comment form below or shoot me an email!

Otherwise, stay tuned 😜

Don’t miss a post – subscribe to my newsletters!