Income reporting, the $30K HST threshold, Etsy's marketplace facilitator role, and every deduction available to Canadian Etsy sellers
Selling handmade goods, vintage items, or digital downloads on Etsy in Canada comes with real tax obligations that the CRA takes seriously. Whether you're a hobby seller or running a full-time Etsy shop, understanding when your activity becomes taxable business income, your GST/HST responsibilities, and what you can deduct is essential for keeping more of what you earn.
Not all Etsy activity is taxable. The CRA distinguishes between a hobby (personal interest with occasional sales) and a business (carried on with a reasonable expectation of profit). If you sell a few handmade items a year with no intent to profit, it may be hobby income — generally not taxable. But if you operate your Etsy shop with business intent (regular sales, reinvesting in materials, marketing your shop), the CRA will consider it business income regardless of profitability.
Factors pointing to a business: consistent sales activity, purchasing materials specifically for resale, tracking expenses, marketing your shop, and dedicating significant time to production and selling. Most active Etsy sellers in Canada are running a business and must report accordingly.
Business income from Etsy is reported on Form T2125 (Statement of Business or Professional Activities) as part of your T1 personal return. Report your gross revenue — the total amount you received from buyers before deducting Etsy fees. Etsy fees (listing, transaction, payment processing, advertising) are then deducted as business expenses to arrive at your net income.
The standard $30,000 small supplier threshold applies to Etsy sellers. Once your gross revenues from all commercial activities (including Etsy and any other business activity) exceed $30,000 in four consecutive calendar quarters, you must register for GST/HST within 30 days.
As of July 1, 2021, Etsy is deemed a "distribution platform operator" under Canadian GST/HST rules. Etsy collects and remits GST/HST on sales made through its platform to Canadian buyers on behalf of non-registered sellers. However, once you are yourself a GST/HST registrant, you take over responsibility for charging and remitting HST on your Canadian sales — Etsy should stop collecting on your behalf. Coordinate with Etsy's settings when you register to ensure no double-collection occurs.
Sales to non-Canadian buyers (US, EU, etc.) are zero-rated exports — you charge 0% GST/HST on those sales but can still claim ITCs on your Canadian supply purchases. This is a significant benefit for Etsy sellers with a primarily international customer base.
| Expense | Deductible? | Notes |
|---|---|---|
| Materials and supplies (yarn, fabric, clay, wood, etc.) | Yes — 100% | Cost of goods sold — deducted through inventory tracking |
| Etsy listing fees ($0.20 USD per listing) | Yes — 100% | Convert to CAD at rate on date paid |
| Etsy transaction fees (6.5% of sale price) | Yes — 100% | Platform commission is a fully deductible business expense |
| Etsy Payments processing fees | Yes — 100% | Payment processing is a business cost |
| Etsy Ads / offsite ads | Yes — 100% | Advertising expense on T2125 |
| Shipping and packaging materials | Yes — 100% | Boxes, tissue, tape, bubble wrap, Canada Post/Purolator costs |
| Photography equipment / props | Yes — CCA | Camera and lighting depreciated via CCA Class 8 (20%) |
| Home office (craft room/workspace) | Yes — business % | Part 7 T2125; see home office guide |
| Tools and equipment | Yes — CCA or 100% | Under $500 per item = Class 12 (100%); over $500 = Class 8 (20%) |
| Pattern purchases, design licenses | Yes — 100% | Directly related to product creation |
| Courses on craft techniques or Etsy SEO | Yes — 100% | Professional development for your Etsy business |
| Currency exchange fees (USD payments) | Yes — 100% | Bank or PayPal FX fees are a business cost |
If you sell physical products, you must track inventory. At the start of each year, record the value of materials and finished goods on hand (opening inventory). Add all material purchases during the year. Subtract ending inventory at year-end. The result is your Cost of Goods Sold (COGS), which is deducted from revenue on T2125 Part 3 before you get to gross profit. Accurate inventory tracking reduces your tax and protects you in a CRA review.
Etsy pays Canadian sellers in CAD converted from USD at the time of each payment. Your Etsy payment account statement in CAD is the easiest basis for income reporting. If you receive USD and convert it yourself, use the Bank of Canada daily exchange rate on the date of each conversion, or the CRA-permitted average annual rate.
Etsy income is self-employment income — it goes on T2125, not Line 10400 (other income). This means you owe CPP on net self-employment income above $3,500 at 11.9%, and all the rules about quarterly installments and GST/HST registration apply once thresholds are crossed.
KOHO's business account helps Canadian Etsy sellers keep shop revenue separate from personal spending and set aside funds for HST and income tax automatically.