When should you cross the line between a hobby and a business? And what happens if the CRA doesn’t agree with you years later?
In the news recently, an artist was dropped into the hobby category by the Canada Revenue Agency. He’s a professor at a university and has income and expenses from his business. The reason? He was ‘paid’ for his large sculptures by grants, honouraria and awards. He hasn’t ‘sold’ anything in years, if ever. The Canada Council thinks he’s a professional and provides grant money, but the CRA says he doesn’t fit the criteria for a business as there have been no direct sales. The CRA wants over 14K in taxes and penalties. He plans to and should appeal.
What does this mean for you as a small biz person?
This is mostly a problem for artists/performers who are also professors/instructors in secondary institutions. Many of them do large installations and are paid only by grants for those works. They may never exhibit smaller works in a gallery or list them for sale. For creative small business people, it’s worth paying attention to the subject, even though you may never be in this situation.
As a writer, you need to show income and completed works. Or at least show that you are trying to earn income. This isn’t profit -- just income. (The CRA lost that case years ago.) If you are audited, showing that you have rejection letters from submissions, proof that you entered contests, or that your manuscript is in an agent’s or publisher’s in box should suffice. The CRA’s patience is, however, not infinite. Putting your novel, or short stories up on Amazon, Kobo, or other on-line venues will also help earn money. You can claim part of holidays that include research. Use that research/locale in at your writing.
For artists, funding sources like Canada Council might eventually put you in the above artist’s situation. Even exhibiting your works in the local coffee shop, a small gallery or events/festivals might be enough to keep the CRA mollified that you are trying to sell your art. For an illustrator, contracts for covers, posters and so on will provide business income. Portfolios on your website is another way to market your work.
Some grants allow you to claim studio/office and sometimes living expenses against their grant. Still, if the CRA goes after you, they might disallow those expenses as well as the supplies that went into the project.
Technically, start claiming as a business once you have income – that way, expenses won’t be building up in case you are audited. There are ways to build up ‘reserves’ of expenses that are legal. Computers, electronics and office furnishings are possibly the easiest.
Once you have a business running, don’t go overboard on claiming lots of expenses until your income is sufficient to make it worth defraying them. If you have a day job, losses in the business can lower your regular income. This is also where the Capital Cost Allowance (see May’s post) and Inventory costs can be useful. If the business is your main source of income, then why ‘waste’ these expenses if they can’t decrease your tax burden?
The following links are to an article on this artist, and to the CRA’s information for such artists.
As always, consult experts if you have questions.
Fitzpatrick Financial Services