Artist Taxation Briefing Note*

The Canadian Arts Coalition is a collaborative non-partisan movement spearheaded by a group of national arts service and membership organizations. We are united in the belief that the future of our citizens, their towns and cities, and the nation itself depends on a rich, vibrant and diverse arts and heritage community.

Consistent with our mandate to strengthen Canadian cultural policies, we have an interest in all taxation policies that impact cultural workers, and an Artist Taxation subcommittee of the Coalition has been struck to evaluate current tax policies and trends as they related to self-employed artists.

The National Arts Service Organizations have heard clearly from numerous members that the Canada Revenue Agency has been reassessing and auditing artists at an increased rate over the last four years. Notably, many artists’ tax returns are reassessed when they claim Canada Council for the Arts project grants or awards. The grant amount received is initially reported in Box 105 on a T4A form. However, reporting grant income in Box 105 equates artist’s project grants with scholarships and does not facilitate the reporting of both revenue and expenses on grant-related projects (which helps establish that an artist is involved in a professional practice, as outlined in IT504R2, section 5 for visual artists and writers, or IT-525R, section 7 for performing artists). Professional artists are more likely to report grant revenue on a professional or business return, where both revenue and expenses are more explicitly itemized.

Although the CRA has confirmed that they are not specifically targeting artists for audit assessment, we believe it is happening more commonly lately because of confusion in the way that grants are reported by the Canada Council and interpreted by the CRA. We want to clarify that Canada Council project grants are part of an artist’s business income, and by receiving a grant they have already met the Council’s requirements for status as a professional artist. Using Box 105 to report grant income appears to result in an increase in reassessments that are an unnecessary use of resources on both sides. It is important for artists to deduct related expenses as any other business would, and we recommend that CRA’s procedures be reviewed to better align with the realities of professional contemporary artists accessing public funding.

The Artist Taxation committee is working closely with senior management at the Canada Council and CRA on this issue. The Canada Council is also in contact with their provincial and territorial counterparts, some of whom report grant income in other boxes on T4As (for example, Box 28). On May 15, the Canada Council issued this statement about grant income for artists.

The Canadian Arts Coalition recommends that the Canada Revenue Agency develop clearer guidance for all granting bodies, and to agree upon which box (ie: Box 28 Other Income) to use with better interpretation when recording amounts for individuals, to keep the distinction between student scholarships and Artist’s Project Grants clear, and to facilitate the reporting of gross revenues and expenses on business returns of professional artists.

We are also concerned about some of the decisions that CRA officers have taken while reassessing artists’ tax returns recently. In some instances, it seems that the officers reviewing the tax return have misinterpreted CRA’s own rules and bulletins. For example, in contradiction to Bulletin IT-257R, an artist was told he could only deduct $500 of related expenses from grants even though his expenses were much greater. In another instance, an artist who claimed professional membership dues had the dues disallowed from her eligible expenses because the officer was not familiar with the association. It may not seem significant to have a few business-related expenses disallowed, but depending on what is excluded, it can have a major impact on an artist’s bottom line. For example, in several instances, senior artists we have heard from have not only had to pay additional taxes, but their Canada pension payments were also reduced. Any taxpayer should have greater confidence that an officer reviewing their file will have done reasonable research into what should be allowable.

When a tax return is being assessed by the CRA, the taxpayer is given the opportunity to send information or explanations that they want the CRA to consider. The Taxpayer Bill of Rights says that taxpayers should speak to CRA if they are not in agreement with an assessment. It further states: “after talking to us, you may not be satisfied with our explanation, or you may think we have misinterpreted the facts or we have not applied the law correctly. If you find yourself in one of these situations, you have a legislated right to object, appeal, or request a second–level review of your concern…For more information about what to do in specific situations and to find out how to send an objection or an appeal, or to ask for a second–level review, go to Complaints and disputes or call us.” Additionally: “the Office of the Taxpayers’ Ombudsman (OTO) reviews complaints when any of your taxpayer service rights, as outlined in the Taxpayer Bill of Rights appear to not be respected by the Canada Revenue Agency (CRA)”.

In many cases, following this process is a relatively simple and inexpensive way to resolve any issues that a taxpayer may have. However, it does not always resolve all issues, and occasionally the decisions taken give all artists cause for concern. A recent assessment against established visual artist Steve Higgins is one such case. While the Coalition does not typically comment on an individual artist’s tax assessment, the reasons for this audit are of particular concern to Canadian cultural workers because the CRA declared his practice is a personal endeavor, or hobby, rather than a business.

This is based on a CRA officer’s assertion that income generated from grants,
honorariums, and awards rather than sales of art are not eligible to claim related expenses against. This decision is worrisome for the sector for several reasons. Firstly, Bulletin IT504R2 states factors used to determine if an artist has a reasonable expectation of profit and has achieved professional status. In this instance, the artist adequately provided evidence proving he meets these criteria. Moreover, the disregard of public funding as an eligible income source from which expenses can be deducted not only shows a fundamental misunderstanding of how contemporary artists work in Canada, but it is inconsistent with CRA’s own advice on artist’s project grants.

While CRA cannot comment on specific taxpayer assessments, they have said that one specific case does not set a precedent, and one ruling does not indicate that there has been a change in policy. Nothing has changed in legislation or CRA bulletins. The Coalition also notes that CRA information bulletins have been “archived” on their website as they do not meet accessibility requirements, but they are still in use until they are replaced by CRA Tax Folios.

Several artists have appealed their reassessments and audits in recent years, and some have been successful. However, the time and financial resources required to do that can be unreasonable for many artists, and it can often be avoided if CRA provided better oversight of its case officers handling the reassessments. This could also reduce expenses for CRA and time spent conducting wasteful audits, increasing efficiency in the audit system.

The Canadian Arts Coalition recommends that the National Arts Service Organizations take initiative in maintaining closer contact with the Canada Revenue Agency, that CRA officers review relevant CRA bulletins when reassessing an artist’s tax return, and that they consult with relevant NASOs if there are questions about what may be considered a reasonable expense.

Further, we recommend that all Archived Bulletins, such as IT-504R2 and IT-257R be restored to active status on CRA’s website, and that criteria to establish the professional status of artists (eligibility used by the Canada Council to receive a grant, definitions in Status of the Artist legislation, membership in professional associations, etc) be featured more prominently in those bulletins.

Additionally, we would like to take the opportunity to recommend that the federal government consider adopting taxation policy changes that affect self-employed artists and cultural workers. It is the responsibility of all taxpayers to file their taxes accurately, and it is especially important for self-employed workers to educate themselves about the rules that apply to them. The Canadian Arts Coalition will continue to have a dialogue with its members and community about taxation issues that are common in our sector, and to examine policy changes which consider and compliment artists’ unique working conditions.

Many self-employed artists have sporadic employment opportunities and irregular annual incomes, and as such, they may be more susceptible to being audited. We are aware of tax concession mechanisms that exist in Quebec and other countries, such as (but not limited to) income averaging, transfer of art in lieu of tax payments, and tax breaks on grants, awards, and copyright royalties. Many NASOs have requested implementation of these policies in past Pre-budget submissions, additionally based on research conducted by the Canadian Conference of the Arts and the Canadian Council of Chief Executives. We would welcome the opportunity to work with relevant federal government committees, public funders, arts organizations, and other stakeholders to examine how these mechanisms work, and to determine if any policy changes may be implemented to the benefit of Canadians.

The Coalition will also work with National Arts Service Organizations to discuss various policy options in the coming months. In partnership with Mass Culture, we will invite stakeholders to regional meetings to talk about taxation policy issues, so that we may engage in dialogue and be able to present an enhanced picture of the issue.
The Canadian Arts Coalition recommends that the Standing committees of Finance and Canadian Heritage investigate tax concession mechanisms that affect artists, and to implement those that align with the priorities of Canadians.

* This briefing note, produced by the Artist Taxation Committee of the Canadian Arts Coalition as an informational service, provides a summary of issues of interest to Canadian artists and cultural workers. It does not replace professional legal or accounting advice, which may be required before taking action in some circumstances. The Canadian Arts Coalition does not assume liability for problems that may arise from use of these materials, or any errors or omissions contained herein.

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