Income or Loss from a Business or Property — Complete 2025 Canadian Guide

1. Why this topic matters

Whether you drive for Uber, rent a basement suite, buy and flip sneakers online, or own a full-scale corporation, you fall under the same three core sections of Canada’s Income Tax Act:

• Section 9 – tells you that profit is the key number for business or property income.
• Section 10 – tells you how to value inventory so that profit is measured fairly.
• Section 11 – tells sole proprietors how to match a fiscal period with the calendar year.

If you grasp these rules, you will

• pay the right amount of tax (no more, no less),
• cut your audit risk, and
• keep more cash inside your venture.

This post turns the legal jargon into plain English you can act on today.

2. Business vs. property income (quick overview)

Remember: the CRA will treat income as business if you show a clear profit motive and a reasonable level of activity—even a weekend resale hobby.

3. How the Income Tax Act defines “profit” (Section 9)

Section 9(1) says:

A taxpayer’s income from a business or property is the taxpayer’s profit for the year.

“Profit” = Revenue – Expenses (following ordinary commercial practice). There is no fancy formula, but courts have laid down three core principles:

1. Realistic picture – Financial statements must reflect true economic results.
2. Consistency – Apply the same methods year after year unless you have a solid reason to change.
3. Reasonableness – Deduct only costs that have a clear link to earning the income.

4. What really counts as revenue

• Sales of goods or services (including deposits you become entitled to keep).
• Rental income (gross before expenses).
• Interest earned on business bank accounts, loans to customers, or late-payment fees.
• Royalties or licensing fees you charge others to use your creative work or patents.
• Subsidies or grants that replace lost revenue (COVID-era wage subsidies, for example).
• Barter value — if you trade web-design work for free meals, you must include the fair-market value of those meals as revenue.

Tip: Keep a single spreadsheet with monthly totals for all revenue sources. The CRA loves clear, consolidated records.

5. Common deductions you can claim

Below is a short but powerful checklist. All items must be reasonable and incurred to earn income.

6. Expenses you may not deduct

• Personal living costs – groceries, clothes, life insurance premiums.
• Fines and penalties – parking tickets, CRA interest.
• 50 % of most meal and entertainment costs – you can deduct only half (unless you bill the client separately).
• Capital payments – the principal portion of a loan, or the purchase price of long-life assets.
• Landscaping for home-based business – unless the yard is integral to earning income (rare).
• Expenses for earning tax-free income – like TFSA investment fees.

Knowing what never flies keeps you out of audit trouble.

7. Capital items vs. current expenses – easy test

Capital items go on the balance sheet and are written off over time using CCA. Current expenses hit the income statement right away.

8. How to handle inventory (Section 10)

Inventory = items you hold for sale, supplies for production, work-in-progress (WIP) for professionals, even packaging.

8.1 Valuation choices

At year-end you must choose one of three CRA-accepted methods:

1. Lower of cost or market (common)
   • Cost = purchase price + freight + duty
   • Market = fair-market value on 31 Dec
   • Choose the lower figure item by item.
2. Cost only
3. Market only (rare — you need CRA permission)

Once you pick a method you must stick with it unless the CRA approves a change. Opening inventory next year = closing inventory last year.

8.2 Adventures in the nature of trade

If you buy land, art, or crypto solely to flip, the property is inventory — not capital property — and you cannot write it down below cost unless a loss-restriction event occurs (Section 10(10)).

8.3 Artists’ nil-inventory election

Painters, sculptors, and print-makers can elect to value their year-end inventory at $0 (Section 10(6)). Result: you deduct material costs right away, but sales proceeds are 100 % taxable when the art sells. The election sticks until CRA lets you revoke it.

9. Fiscal periods and stub years (Section 11)

If you are a sole proprietor, the CRA wants your business year to line up with the calendar year. You can pick another fiscal period, but Section 11 forces you to include stub-period income (from the end of your fiscal year to 31 Dec) in your personal return each year until the business converts to 31 Dec year-ends. Most small owners now keep it simple and use 1 Jan – 31 Dec.

10. When a loss appears — and what you can do with it

A business or property loss happens when deductible expenses exceed revenue. Section 9(2) links you to loss rules in other parts of the Act:

• Non-capital loss – Carry back 3 years or forward 20 years against any income.
• Restricted farm loss – Special rules (Section 31) limit large farming losses.
• Rental loss – Often triggered by CCA; you can claim it, but remember CCA cannot create or increase a rental loss when the property is passive.

Tip: Avoid large CCA claims that whittle a profitable venture into a chronic loss. CRA may deny losses on the ground that you have no reasonable expectation of profit.

11. Mini case study: side-hustle bakery

Facts

• Chloe runs “Cookie-Gram” from her condo kitchen.
• Year-end 31 Dec 2025.
• Sales: $28 000 (e-transfer and Square statements)
• Opening inventory: $450
• Purchases: flour, sugar, chocolate $6 300
• Closing inventory (cost): $370
• Rent: $2 400 (10 % space dedicated = $240 business share)
• Phone & internet: $1 200 (30 % business)
• Website hosting & ads: $820
• New stand mixer: $700 (Class 8 CCA 20 %)
• Delivery fuel: $1 100 (logbook 80 % business)

Income statement

Chloe reports $19 250 on line 13500 of her T1 return. Because she used the ½-year CCA rule, she still has $630 left to depreciate next year.

12. CRA audit hot spots in 2025

1. Crypto traders showing big “capital gains” but no day-trading business income.
2. Rental losses driven by aggressive CCA on condos.
3. Cash-heavy businesses (food trucks, hair salons) with low reported profit margins.
4. Vehicle logbooks that record exactly 90 % business use every year.
5. Inventory write-downs without year-end physical counts.

Keep tight records and you will glide through any review.

13. Action tips for small-business owners and landlords

Keep one business bank account. Run all income and expenses through it. Easy bank feed → easy bookkeeping.

Do a year-end stock count. Write down quantities and cost vs. market price. Store the sheet with your tax files.

Snap every receipt. CRA accepts clear digital images; no shoebox required.

Use calendar reminders for GST/HST and instalment deadlines. Late-filing penalties hurt more than income-tax interest.

Plan capital purchases near year-end. Buy before 31 Dec and you still get half a year of CCA.

14. Frequently asked questions

Q1: I made $4 000 on Facebook Marketplace selling used clothes. Is that business income?
A1: If you are merely clearing your closet, no. If you buy clothes cheap to resell for profit, yes—that is business revenue.

Q2: Can I deduct mortgage principal on my rental house?
A2: No. Only the mortgage interest is deductible. Principal payments build equity and are not expenses.

Q3: My Etsy shop lost money. Can I deduct that loss from my day-job salary?
A3: Yes, if the venture is carried on with a reasonable expectation of profit. Keep evidence: ads, supplier invoices, marketing plan.

Q4: Do I need to collect GST/HST on residential rent?
A4: Long-term residential rent is exempt. No GST/HST. Short-term rentals (Airbnb) may require GST/HST once you hit $30 000 in annual worldwide taxable supplies.

Q5: How often can I change inventory valuation methods?
A5: Only with CRA approval and a compelling reason. Consistency is key.

15. Year-end checklist

• ☐ Reconcile bank, PayPal, and Square statements to sales ledger.
• ☐ Count physical inventory on 31 December; value at lower of cost or market.
• ☐ Update vehicle logbook and total business kilometres.
• ☐ Scan and file all receipts by category.
• ☐ Collect rent statements, mortgage-interest slips, condo-fee receipts.
• ☐ Run a provisional income statement; plan RRSP or CCA moves before 60-day deadline.
• ☐ Back up your bookkeeping file to secure cloud storage.

16. Conclusion

Sections 9, 10, and 11 of Canada’s Income Tax Act may look dense, but the core message is simple:

1. Track every dollar of revenue.
2. Deduct only real, reasonable costs linked to earning that revenue.
3. Value inventory properly and stay consistent.
4. Use fiscal-period rules to align your bookkeeping with your tax year.

Do that, and you will file an accurate return, keep CRA happy, and know exactly how your venture is performing.

Need personal guidance? Talk to a CPA, Call BOMCAS Canada for Small Business Help at 780-667-5250 pr email info@bomcas.ca.