This morning I had a lovely interview with Steve Paikin, host of TVO’s The Agenda, regarding my research on the second-hand economy. Wonderfully, the conversation turned to the tax implications of the second-hand economy and his questions have inspired this blog post. Here I will parse all the tax rules regarding second-hand transactions.
Are second-hand transactions subject to tax? The basic answer is, generally, no; however a detailed answer to that question is actually quite technical and you have to look at different segments of the second-hand economy.
First, traditional bricks and mortar stores(excluding those with a social mission) that specialize in selling second-hand goods account for 15% of the share of the second-hand economy. Because these stores are operating as a business, these transactions are subject to GST (and potentially provincial sales taxes depending on the rules in the province) and the revenues generated subject to income tax. While the second-hand economy survey results do not allow for specific calculations in this area, back of the envelope calculations indicate that these stores could contribute up to $720 million in federal tax revenues. Provincial government would also accrue their share based on provincial sales and businesses tax rates. Again, because most second-hand transactions would not otherwise occur, most of these revenues represents additional revenues that would not accrue to the government if the second-hand economy did not exist.
It is clear from the survey, however, that the bulk of second hand-transactions occur between individuals and there are concerns that the second-hand economy may contribute to tax avoidance. Understanding if these concerns are warranted requires an understanding of the tax rules that apply to second-hand transactions. These rules dictate whether a used purchase is subject to GST/HST and whether the income derived from a sale is subject to income tax.
Generally the sale of what is referred to as personal use property is not subject to GST/HST. Personal use property is an item that people own and use for their own personal use. If you sell a used personal use item then the transactions is generally not subject to GST/HST. There are, however, important exceptions to this rule. One relates to the “small supplier” threshold. If the sales of personal use property in a given year exceed $30,000 then you are required to be a GST/HST registrant and you are required to charge and remit GST/HST. The second relates to commercial property. The personal use exemption does not apply to the sale of used commercial property, which is generally always subject to GST/HST.
The survey results make it clear that most second-hand transactions pertain to personal use property and most the sales of most individuals are well below the “small supplier” threshold meaning that most transactions are not subject to GST/HST. However, there are some commercial property transactions and some sellers may be exceeding the small supplier threshold. In both cases, these transactions are subject to GST/HST. Whether or not these transactions are appropriately taxed and the tax remitted to the Canada Revenue Agency (CRA) is not known. To the extent that this did not occur, means that these transactions were not tax compliant and the sellers would be potentially be subject to fines and penalties, in addition to being liable for the tax owed, if caught.
Whether or not the income generated from an individual’s second-hand transactions is taxable also has set rules. When selling a good, the income generated from the transaction is calculated as being the net proceeds of the sale, generally calculated as being the difference between the price at which the good was sold less the price which the seller paid for the good (also known as a capital gain). Since most used goods are sold for a price below its original purchase price, the good is sold at a loss and it not considered be taxable income.
If, however, you sell personal use property for more than you paid for it, as often happens in the case of items have appreciated in value, the income may be taxable. If the income from the sale, calculated as being the difference between the price at which the good was sold less the price which the seller paid for the good, is less than $1,000 then the income is not tables. If the income is above $1,000 then it is taxable but as a capital gain, the amount above the $1,000 threshold is taxed. However, because the income is considered to be a capital gain, it is only taxed at 50%. Second-hand goods most likely to fall into this category are art and collectibles, which according to the survey account for a small share (1%) of second-hand economy transactions.
The final case concerns individuals from whom the selling of used personal products is considered to be a business activity. Notably, if a person frequently sells used goods, the income derived from this activity is taxable as ordinary income. That said, there are some heavy resellers who may, in fact, whose activities may qualify as business activities. In this case, the income generated would legally need to be reported to CRA and subject to income tax. To the extent that this did not occur, means that these transactions were not tax compliant and the sellers would be potentially be subject to fines and penalties, in addition to being liable for the tax owed, if caught.
Clearly, understanding the tax rules is important for participants in the second-hand economy. While most peer-to-peer transactions in the second-hand economy are not subject to either sales or income tax, there is a small amount of activity that is. Given the increase in the second-hand economy, it is worthwhile for CRA to monitor this marketplace for compliance with tax rules. In addition, sellers should ensure that are sufficiently informed about the tax rules to ensure their compliance, especially given costs of not following the rules.
Thanks Steve Paikin for inspiring this post and helping educate Canadians about the tax rules related to second-hand purchases. I wish, though, that CRA had this information in one spot in an easy to read format for Canadians to refer to. I guess in the meantime, I’ll have to do the job for them.
*NOTE: yes there are unique rules for used cars, and these rules varies by province.