September 21, 2018
(Artist, Author and Composers)
Are you in business?
Often the income of an artist, writer or entertainer will be sporadic. So for any particular year or number of years, their expenses generally exceed their incomes.
How are the annual income and expenses to be reported? How does Canada Revenue Agency view this as a taxpayer?
Canada Revenue Agency views any business carried on is carried on with a goal of profit. There has been challenges that with an artistic endeavor, there may not be evidence of any ability to succeed and without success achieve profitability.
There have been rebuttals by the artistic community defending their position with CRA. They are in business notwithstanding the lengthy and intermittent periods between generating revenues. There is an Interpretation Bulletin (IT) 504R2 where CRA specifically acknowledges that the “nature of art and literature is such that a considerable period of time may pass before an artist or writer becomes established and ultimately profitable”.
The IT bulletin states it will require certain elements proving that you, as an artist are, serious. These elements would include, time spent, special skills, education, investment in costs to advance your profession and financial records that are maintained to support your business venture. If questioned by a CRA auditor, you would likely be asked for verbal explanations of your artistic venture and how this is presented would likely prove vital in your defense.
Valuation of artist’s inventories
Artists may exclude the value of their inventory when calculating their income. Most businesses, have to include the lesser of cost and fair market value of their inventory to determine net income.
This method of reporting income for an artist allows all expenses to be reported as a deduction against income of that year. This is an advantage for an artist in that they can fully deduct expenses immediately rather than at a later date when that work of art is sold. The artist must elect with CRA to state that not valuing inventory is the method they choose, however, it is generally accepted that the filing of a business statement on a tax return will suffice as the method chosen.
Artist’s inventory and donation as a Cultural Canadian Property
An artist can make a gift of inventory that qualifies as a gift of cultural property. The proceeds of this gift if it qualifies is considered to be equal to the greater of the cost amount of the art (if the artist has not inventoried the art as in the prior paragraph, its cost will be nil) and the advantage (any consideration received by the artist for their art).
Generally a donation receipt with a value equal to the FMV was all the artist received. It is reported on the income tax return of the artist in the year the receipt was issued. It is claimed against other income and any unused portion carried forward. This opportunity has proven quite beneficial for those artists who were asked to consider such a donation.
Inventory of an artist at death of the artist
On death of an artist with inventory on hand, there are some options to how to treat for taxation purposes. Art inventory of an artist is considered a “rights or things” the definition which includes inventories where the deceased person used the cash method of computing income.
- The fair market value of the inventory can be reported on a “rights or things’ return. This is a separate tax return at the date of death than the final return of the artist.
- The inventory that is considered “rights or things” of the deceased can be transferred to any beneficiaries. This excludes the value from the deceased’s income tax return. The beneficiaries will have to include the future actual proceeds from the sale of the transferred inventory less any costs incurred related directly to holding and maintaining the inventory on their tax returns.