Basically an Internet business is taxed just like any other business. The Canada Customs Agency (CRA) doesn't collect income tax based on how your business operates, but on what form of business you have. (This applies to all taxes, by the way, not just income tax. An Internet business has to register for GST and PST, if applicable, just like any other business.)
In other words, if your Internet business is a sole proprietorship, you will report your Internet business income by completing Form T2124 (Statement of Business Activities) or Form T2032 (Statement of Professional Activities). These forms are included in the T1 income tax form package.
If your Internet business is incorporated, you will report your business income on a T2 income tax return.
And, like any other business, you will be able to claim business expenses relevant to the operation of your Internet business, including perhaps the Home-Based Business Tax Deduction if you operate your Internet business out of your home.
