Financial Essentials for Visual Artists
Copyright © 2013 Jessie Parker. All rights reserved. Except as permitted under the Canada Copyright Act of 2012, and except for use in any review or critical article , no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of its creator. This copyright is a worldwide copyright.
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I will be referring to the Canadian tax department variously as CRA (Canadian Revenue Agency), the tax dept., and the taxman.
Now that we’ve got that legal stuff out of the way, welcome to my eBook Financial Essentials for Visual Artists (Canada). This eBook combines the general Financial Essentials and the bonus eBook, “What If You Are Audited?”
The concept came from considering what I could do to help artists by filling in the gaps with what they need to know but don’t usually get at art schools. This eBook is about how to save time, money, and hassle, and still get all you deserve, while keeping on the good side of the taxman. The info is from an artist’s point of view and in plain English, NOT in accountese or legalese. You are benefiting from my many years of experience, and things I learns the hard way, by leaning on me…
I assume you are taking advantage of this eBooks because…
1. You are a Professional visual artist in any media (such as painting, photobased art, sculpture, fibre, fine crafts, etc), at any stage in your career... or…
2. You are considering making the big leap from hobbyist to being a professional fine artist and wanting to get off on the right foot ..or..
3. You are a Self-employed graphic designer, illustrator or other category of commercial artist.
With no issues such as winter weather, travel time, distance traveled, sudden illness, ,etc. to consider, you can absorb this material at your leisure and convenience, as often as you need to, whenever you need, in bits and pieces, whatever works for you.
You now have the full 2.5 hours of seminar material at your fingertips, in the comfort of your own home or wherever you want to access it, online on any computer, as well as on your tablet or smartphone. Since we don’t use Flash, the content automatically re formats to whatever device you want to use.
>>I have an unusual background for doing these eBooks. A short recap (for full bio, see “About me” page on my website www.ebooksforvisualartists.com)
In a nutshell: Professional artist 48+years; art teacher many years; public speaker at National Gallery several years; professional photographer 40+years, including for National Museums. Most pertinent: Financial Planner several years; accounting courses and own accounting 40+ years; successful audit.
See my website www.ebooksforvisualartists.com for up to date news on this and other eBooks planned or published.
In this eBook, we will cover the following:
· The “when, why and if” re using an accountant
· What you can and should claim in expenses for your business
· What different types of expenses are, what they mean and how to deal with them
· HST/GST/PST/QST issues
· Donations of art, when, why, how and if
· The best/easiest software to use for accounting and taxes and how to adapt them for artists
· How would you spot any errors?
Bonus eBook: What If You Are Audited? :
Your rights, the procedures, how to survive, what to avoid
First things first: Some general advice
Keeping good records: what you need…
The days of the proverbial shoebox stuffed with disorganized receipts is over. If you give such a thing to an accountant, remember you are paying them the big bucks to do what you could have easily done yourself. This could run to hundreds of $$ !
An easy way to start is put your receipts into piles by month, use a paper clip to hold each month’s receipts together, then put them into a large envelope (the size that will hold a full sheet of paper). Depending on how much paperwork you have, you may be able to use 2 or 4 or 6 such envelopes. Put the months, year on the outside of each envelope (such as, Jan, Feb, Mar, 2012). Now you are ready to record your expenses, and revenues.
You don’t need to do your records weekly, or even monthly, unless you really want to. Quarterly, or half- yearly is fine. Annually in time for taxes works too. I find it takes me an average of up to 2 hours per month, to keep my records, using Quickbooks®. More on that later..
The info here is based on unincorporated artists, which is the case for most artists. Generally you are referred to as a “sole proprietor”, meaning you are a one person business. You would generally refer to yourself as the “owner” of the business.
To Incorporate or not:
I have come across a few sculptors who are incorporated. The rules are basically the same ,but with a few refinements. If you are incorporated, once you get the hang of the basics here, see an accountant re the differences. In that case, you will be using the incorporated version of the accounting and tax software, and you will likely need an accountant.
If you are incorporated, you can pay yourself a “salary” but remember that you must declare that amount as income for yourself as a “person”. So you are really not saving any tax in most cases. An Incorporation is considered a separate entity which is separately taxed at lower rates than personal. You, the corporation, would generally appoint yourself, the person, as the “President” of the corporation. In Canada it does not make much sense to be incorporated as an artist unless you are netting well into 5 figures after all expenses. It could, however make sense if there is a liability issue concerning your particular medium. That is why sculptors often incorporate. Talk to your accountant about this.
Remember that there are fees involved with getting incorporated and for the ongoing process over the years. The whole thing is a somewhat more complex affair than being a sole proprietor. DIY is not so practical for those who are incorporated. It may or may not be to your net advantage to be incorporated. It is a permanent change, not one you can undo easily, so consider carefully if you want to go this route.
Personal vs Business Records
It is wise to keep your personal finances separate for your business expenses: it is easier for keeping things straight, and the taxman likes it. You should have a bank account which is just for your business, and ,definitely, a credit card especially for business. These do NOT need to have a business name on them, as long as you keep them just for business and are consistent about that.. Bank accounts that are “business” accounts incur larger fees and are optional for your purposes. If you are 60 or over, you may be able to find a “no fee” or lower fee account for the 60+ age.
To Use an Accountant or Not;
Accountants are a very valuable resource. If you are earning sufficient revenue to afford one, that can be great for you. But I often hear artists say, “Oh, I just hand my stuff over and forget about it, I don’t have time for all that”. In other words, they just play ostrich with their heads in the sand, often with no understanding of what the accountant does.
But if there was an error, would you know it and could you find it? Just because the forms, and accounts look neat printed out, does not mean there are no errors. Could you find something that could be a problem and ask about it and understand the answer according to tax law? Do you know what reports you need from your accountant in order to check things out? (Most will not give you many important reports unless specifically asked for them.)
Even if you use an accountant, by the time you organize your records properly and check all the resulting printouts from the accountant, it would have taken very little more time to do it yourself. Remember ,ultimately, you are responsible for checking everything and correcting anything needed. Using an accountant does NOT get you off the hook legally.
Here is what you need in reports from your accountant:
All ledgers of expenses that you have (such as supplies, office expenses, advertising, travel, etc.) plus your credit cards, Bank, cash, any liabilities, revenue. Just the summary of income and expenses is not anywhere near enough.
That said, the accounting and tax software nowadays is so easy to use, that you will wonder why you ever did without. It does the math for you, and corrections for you. More on that later …
I do recommend to use an accountant for :
1. general advice,
2. getting news of any changes in tax law that would apply to you,
3. what to do about any special situation that is specific to you, like an audit
4. double checking to see if you fully understand all you are doing with your books.
5. An annual review meeting.
Meeting with an accountant annually can be very valuable to keep you on track and avoid any potential future issues. Usually an hour will suffice if you are well organized. This is an excellent use of your money. Why spend $1000’s on something you can do yourself, which is mostly just data input, or for work that you could have a bookkeeper do? Using your accountant mainly for advice and to keep you on track is very wise use of both your time and the accountant’s time and expertise.
If you believe you need help, consider these points:
1. Bookkeepers charge $30 to $40 an hour, while accountants charge a lot more, often over $100.per hour. Some bookkeepers will come to your home or office, and get you set up with your software, and some will even teach you how to DIY. Ask around.
2. If an accountant says, “Let’s try this”, or “you might get away with that”, be very leery, as it usually means they don’t know the answer (but won’t admit that). If you end up in doo-doo over it, it’s on your dime to correct the situation, (unless you can prove it was really the accountant’s fault, in which case you may be able to get the accountant to cover the time it takes to make the correction) They should have “Errors and Omissions” (called O&E insurance), same as Financial Planners and Lawyers do. Remember that even if an accountant gives you erroneous advice, you usually will still have to pay the bill for it!
3. Finding an accountant:
Someone who impresses you in a workshop, or in a networking group, or someone a friend knows is a good place to start. I recommend to interview a few before deciding. This is a major decision. CGA’s (Certified General Accountants) generally work out of a home office, and are used to small businesses. CA’s (Chartered Accountant) generally work for larger firms, and hence charge somewhat more. For your purposes, they both should have the knowledge and skills you need. It is great if you can find an accountant specifically used to working with artists. If you can’t, the info in this eBook will give you the background you need to DIY and/or to “train” your accountant…
So, whether you DIY or use a bookkeeper and/or accountant, the following information in this eBook will be a huge advantage to you !
What you can and should claim:
All businesses claim expenses, and income. So do you as an artist, and yes, you ARE a business, for tax purposes, even if you don’t think of yourself that way.
You are allowed to claim all expenses that are necessary to the running of your business. It does not matter if you will be in the red on paper. In fact if you only claim some years and not others, this will ring red bells at the tax department, as they will assume rightly or wrongly that you are hiding something in the years that you do not claim. Consistency is king for accounting.
I have come across artists who think they only need to file tax forms in years that they make a profit. Not so. In fact the losses of any one year carry forward to other years, so not claiming is literally leaving money on the table. The time will come when you will be glad you have those old losses to claim against your profits in the good year that you make the big bucks. Remember, the taxman expects and requires that you file every year, whether you are in the red or in the black. Also, if you have income claimed on your general T1 form, from say, salaried job(s),or pension, your loss will automatically claim against that in the year of the loss, saving you tax that year, and any unused loss will carry forward as a “non-capital” loss indefinitely until you decide you want to use it. It is literally “banked” for you. (No interest paid however.)
So if you did not claim for this year when you should have, is it too late? No, you can back-claim anytime going back up to 3 years. If you have net income, not claimed, you should contact an accountant who will be able to back-claim for you and do the special forms to claim amnesty . These forms are only available through accountants. This will avoid penalties or at least lower them. You will usually still have to pay any accrued interest, though. So the longer you wait, the more interest on tax you owe.
If you have losses you did not claim, you can back-claim yourself and again this can go back up to 3 years including this year. Just do the T2125 yourself, one T2125 per year. You will, of course have to have receipts for all your claims (though you don't need to send them in), so only claim what you have receipts for. Read all the info following re how to do everything before you start.
It will of course be necessary to do your accounts first, starting with the first (earliest) year your are claiming and going forward. Get help from a bookkeeper if you need it, to help get it all sorted out. Remember that your losses will result in refunds as the losses will claim against any other income (job, self-employed, pension) . Expect it to take 3 or more months for the taxman to redo your returns to generate what the refunds will be, and send you the money. After this, always file even if you have a loss. Remember if you don't, you are paying more tax than you need to..losses are literally "money-in-the-bank". If you have not been keeping your receipts, be sure to keep them from now on, so you don't lose out. Also keep in mind that any receipts that you may be able to request a duplicate for later could be claimed, as you could contact the vendor later if audited.
So.. if you need the purchase in order to
produce your art,
to store it,
market it or
then you can claim it.
Multiple Income Sources
You can claim the income from all self-employed activities on the same form (the T2125). That includes any self- employed thing you do to help pay the bills as an artist (commercial photography, commercial art, free- lance teaching, giving seminars/workshops, public speaking engagements, etc.) Also, art grants are taxed as “income”. As are monetary prizes for your art which are paid by an organization/institution which is not a registered charity.
Despite what the tax department may like you to think, you do not need to keep each and every income source as a separate business. Think of it as various departments of your business. It is just the same as a roofer who is doing lawn care and snow removal as well, all under the same business name. This is done all the time. It makes life simpler, easier, is practical, and there is lots of case law supporting that. Don’t let them tell you otherwise. I have fought that fight and won. So have many others.
What You Can Claim
I recommend that you obtain the Sole Proprietor tax forms (The T2125) so that you can follow along .
Now let’s look at some of the specific things that you can claim as an artist:
First: the first page of your T2125 form, which you use for claiming your expenses and revenue from you art and any other self- employed income (like part time teaching, commercial photography ,commercial art,etc). is where you put an industry code. The code for visual artist is 711511. The code for graphic designers is 541432, and for photography services is 541920. There may also be others that could be appropriate for you. Search around Help in Turbo Tax. It is OK to switch once from something else,but avoid switching back and forth year after year. The tax man likes consistency.
You would use Part I (Business income) for your gross revenue, on the sales, commissions, fees line (Professional income is for doctors, lawyers, and such.)
Your total gross income will automatically show up at the bottom of page 1.
You do not need to use the Part 4 Cost of Goods Sold section, as artists are allowed to value their inventory at zero, so this section is irrelevant for you. That is one concession that the tax dept. has made for artists specifically, and saves us lot of work.
If you have been using this section to value your inventory, I recommend to confer with an accountant as to the appropriate way to switch over to the inventory at Nil method. Our national organization CARFAC fought and won this battle with CRA many years ago. Take advantage of it as it will save you many hours of needless work.
Now we skip to Part 5 on Page 2
Part 5 is where most of your expenses go so we will spend some time on it.
Each line has a special number, so I will refer to both the category and the line #
#8521 Advertising is used for both advertising and marketing. This will include not just ads, and paid profiles in magazines and books, but also your brochures, bookmarks, postcards and any other promotional stuff you have printed. Also fees for art show booth rentals + all other attendant fees like electrical, internet, cleaning, etc which may get added to the main show booth fee. All of this is marketing expense as you are promoting yourself and selling your art via the art show event. In addition this is where you could put fees for networking events, even though food may be provided to attendees. Again, this is under “advertising” because you are promoting yourself via these events, and you have to pay the fee even if you don’t eat anything, and even if you do not attend. DO NOT put this under meals.
# 8523 Meals and Entertainment is not used much by artists. This is mostly for local meals where you must buy your meal, such as at a seminar that you attend or where you might treat a potential gallery owner while “selling” yourself and trying to get representation at that gallery, for instance. The amount is reduced by 50% on the theory that you have to eat anyway. Entertainment could include an event that you finance in order to get buyers of your art, such as a private showing of your works. Be very careful not to overdo it on this. See Audit section for more on this. Meals while on trips are under travel now. More on that later.
#8890 Insurance: This is only for special insurance for your art (a rider on your general insurance, usually) for in your studio or at an expo show. If you have a rented studio, and have to insure it, the insurance for that would go here. Also Insurance for a rented art expo show booth would go here (This is quite often a required expense, and is mostly for liability, as well as theft). Most arts organizations will have a disclaimer that says that the artist is advised to insure their work that is at a group exhibition. (Most artists don’t , just taking a chance on it.) It can be very difficult to get any kind of reasonably priced insurance for art at group exhibitions. It is advised to bite the bullet and insure, however, if you are having a solo show or a two-person show as there are many more works involved, and therefore somewhat more risk..
#8710 Interest: this also includes all bank charges, including bank fees, Paypal charges, interest on a Line of Credit or other loan for your art production/expenses/equipment. “Interest” even includes exchange on the dollar for USD to CAD.
#8760 Business tax, fees, dues, licenses, memberships: Of these, just fees, dues and memberships apply to you. This is for your art association membership dues, small exhibition fees, annual dues for networking groups, CARFAC annual dues, bookkeeping fees, website hosting fees, domain name fees, and any fees that don’t fit into advertising per se (Business tax should only be required if you rent a commercial location for your studio. Licenses are usually irrelevant for you)
#8810 Office expenses:: This includes any expense except the above and travel and supplies. Such as, having framing done for you, photocopies, digital fees for services, software under $200, ,printing costs for art, etc. Also here you could claim educational expenses that relate to your art practice, such as books, CD/DVD’s, monthly access fees for educational services. However your general internet bill cannot be claimed here, as they will NOT believe that it is only for business. More on that in Audit section.
#8811 Supplies: This is for anything that you can touch and see that is art and business related. This is art supplies, anything used in the production by you of your art. Like paints, mediums, canvases, brushes, papers, inkjet inks, drawing tools (pencils, pens, pastels, etc.) ; any small furniture, equipment, cameras, photography accessories under $200; framing stuff (frames, glass, backing, matts, hammer, brad inserter, pliers) labels , etc. Also general office supplies would go here (paper, envelopes, etc.)
#8860 Legal, accounting, and other professional fees: This is fees you pay your lawyer, accountant, etc. for their services to you related to your business.
#8910 Rent; You would use this only if you rent a studio separate from your home.
#8960 Maintenance and Repairs: This applies to your studio only. Such as blinds, special lighting for studio, special flooring, paint for walls, fixing leaks, etc Do not use this for the house in general.
#9060 Salaries, wages ,benefits: Wages could include model fees, someone you pay to help with framing, or producing a sculpture. These are generally casual labour, so you are not paying them benefits, EI, etc. One caution here: If you hire and pay a relative or friend , you may claim the amount as expense here as long as it is “reasonable”. However it is very important that they claim the same amount as income (likely under “other income”.) The taxman watches for this. If the income is not claimed by the recipient, a fine of as much as $25000 can be levied to the recipient of the casual labour pay. It is wise and kind for you to inform your relative or friend about this as you could be saving them a huge penalty. Then if they choose to ignore your information, at least you did your duty, so then you are off the hook legally.
#9180 Property Tax: This only applies to a separate studio, not one in your home. (We will get to the home studio stuff later.)
#9200 Travel: (includes transportation, accommodation, 50% of meals)
This includes air, train, bus, taxi, car rental, hotel, B&B, apartment by the day/week, etc. and 50% of your own meals (not meals for your family)
You can claim all your accommodation if it would cost the same if you were alone. If the accommodation is charged at so much per person, then only claim your portion. You should also adjust for how much of the trip was actually for business (a suitable percentage). People who claim all of what is actually a vacation for the family usually get caught. They watch for that. More on that in the audit section.
#9220 Telephone and Utilities :This is only used if you rent a separate studio and have the telephone under a business name ,and for hydro for that is billed separately. This does NOT apply to business use of home. We’ll get to that later. Usually, you may NOT claim your home phone, or even your cell phone for business, unless it is registered as a separate business phone and invoiced separately under a business name. That likely would not be economically viable as the business phone will be at a higher rate, so there would actually be no savings for you. More about this in the Audit section.
#9224 Fuel costs (except for Motor Vehicles) This is rarely used for artists. It could apply to a separate studio, such as heat for rented studio (wood chips for a wood chip stove,etc.).
#9275 Delivery,freight,express This applies to shipping costs of your art by post, bus, Fedex, UPS, etc. both to and from any art show or gallery or art buyer.
#9281 Vehicle expenses will pop in here from Chart A page 5, more on that later.
#9935 Allowance on eligible capital property It is unlikely you would use this. Ignore.
#9936 Capital Cost Allowance (from Area A on page 4) This will automatically pop in when you fill in the CCA part on page 4. More on that later.
#9270 Other Expenses This is for anything you can’t find a place for in above categories. Only use sparingly. Ideally there should be nothing here if you have done a good job finding places for all your expenses.
Part 6 will automatically fill in for you by the tax software. This is also where your business use of home total will appear if you had a positive income (not a loss). More on this later.
There are 2 sections about Partnerships. This is only relevant if you are in a formal legal Partnership. If you are a sole proprietor (a one person business), then you can ignore these bits. You only need to fill these in if you have a formal legal partnership for your art business. This is very rare for artists.
Now we go on to the Home Studio, Vehicle, and Capital Assets (Equipment).
The Biz Use of Home , Vehicle claims and the Capital Cost Allowance will all be done as yearend expense, not ongoing through the year. I recommend that you keep all statements and receipts for these in a separate envelope, so you can find them easily when you do your yearend stuff. I will explain each type of expense as we go.
Business Use of Home Expenses
Here is where you can claim the portion of your home that you use for your studio. In order to claim the space you use for your studio , it MUST be only for your business. So a dining room table, living room chesterfield, kitchen table, corner of a bedroom, rec room also used for weight lifting DOES NOT COUNT. The room must be ONLY for a studio or computer room/office or art storage. Or at least a portion which is physically separated by a room divider or curtain.
In order to calculate what percentage of the total home applies to your biz use of home, you will need to do some measuring. Once done correctly , you will use the same percentage every year (unless you add or subtract from the space for some reason).
1. Measure the space you use as a studio and/or office and/or storage space for art. Include any hall area that is essentially part of that space.
2. Now calculate the overall square footage for the total home. Only count the garage if you use it entirely for art storage or other art use. If you have a newish home you may have builder’s plans. Otherwise, or if you have changed or added anything, measure all the rooms, including baths, and halls. Ignore the garage if it is used for general storage or the vehicles and unfinished parts of the house (furnace room, cold storage, etc) to get the total area of the house or apartment/condo.
3. Divide the small number by the large number. Bingo you have the percentage for your studio/office. If per chance the number is above 25%, I recommend to reduce it to no more than 25%, then jig the numbers to fit. This is nothing to do with taxes, but it could affect your zoning and get you in dutch with the city by-laws. Most cities have a limit for having a home business, and it is usually 25% with no formalities. The only exception would be if you are zoned commercial or live far out in the country. Inquire from your city about this. It is OK to inquire anonymously. Better safe than sorry. Also jig the percentage to a full number so you don’t end up with tiny fractions that won’t agree with the way you do it on your accounting software. More on that later.
4. On the T2125, you put the square footage of work space on the first line (A), and the total square footage of the house, as below on second line (B). The software will calculate for you the right amount. Here is what the form looks like: Do NOT use the “rooms” option. It is easy but usually very inaccurate.
All the amounts on the 'Business Use of Home' form are the total for the house/condo. The software does the percentage and puts your biz percentage total on the form for you. If you have a negative income (line 9369,pg 2), then the software will NOT allow you to claim any Business Use of Home for that year. But never fear, you have not “lost” it. The unused Biz Use of Home carries forward to the next year. This is like money in the bank (no interest paid , however), and some year when you make the big bucks, that banked amount from all those negative years will get claimed automatically for you.
Canadian tax law says you may not increase a loss with biz use of home, you can only reduce a net income to zero with it (while still carrying forward any amount still not used). In case you forget that, the tax software will remember that for you. You do not need to do any calculations about that yourself.
As you can see in this form, the things you can claim are; heat (gas, coal, propane, whatever); electricity, general home insurance (not your art insurance), maintenance if any, mortgage interest (look on your last statement of the year, they will have that amount on the bottom.),property taxes, and “other” where you would put water/sewer, and water heater rental.
There is a line that says “capital cost allowance (biz part only). DO NOT CLAIM THIS. If you do, and then sell your home, you would be liable for capital gains tax on that part of your home. Just because you can do something does not necessarily mean that you should do it. This is one example of that.
Details Of Equity
Details of equity section is sort of optional, as it has no real bearing on the totals or tax. But ,if you want, you could include that stuff: total business liabilities, drawings for the year, and capital contributions for the year. This gives CRA a general idea of whether your business is generally viable or not.
To explain: Liabilities are your debts at yearend (line of credit, credit card debt, etc.)
Drawings are total $$ withdrawn for personal use.
Capital contributions are total $$ into the business (capital) from elsewhere (pension, salary, savings, etc.)
This info could be requested later if not filled in so it is good to keep track of it. It is useful to you in analyzing your business in any case. For instance, if you need to add a lot of $$ from personal sources to keep afloat, that could be a danger signal. And of course high liabilities could indicate trouble.
Skipping to page 5, Chart A –Motor Vehicle expenses. You would claim this even if you are not claiming CCA on the vehicle. Here is the form: There is room for 2 vehicles.
The only way you can do the simpler percentage system based on x cents per kilometer is if you are incorporated. There is nothing in the unincorporated software to accommodate this method, although some accountants will often claim there is.
So if you are unincorporated, you will enter the kilometers you drove for business in the year (you need to keep track of this over the year). The easiest way is write on a calendar where you went as you go along, and number of kilometers, then add it up for the year. Or keep a log book or diary, if you are the organized type.
Line 2 is total km you drove for the year. If you did not record the starting mileage for this year, look at whatever maintenance records you have that are yearend last year or near beginning of this year and estimate. The software will calculate the percentage that you will be allowed. I recommend to tinker a bit to end up with a whole number. (Tinker down not up) If you did not keep track for last year, estimate based on known errands with receipts, known meetings, etc and do better from now on.
You can claim fuel, and oil; interest if buying the auto on credit (see chart B); insurance; license and registration; maintenance and repairs; leasing if applicable (Chart C); parking fees, and any supplemental business insurance (unlikely for you). You enter the full amounts for the year and the software calculates the total for you based on your percentage. Again, as for the Business Use of Home, you enter the totals and the software calculates the amount you can claim.
It is unwise to claim over 50% as it might be hard to justify and may be challenged. Things that would be justifiable: going to art events and meetings, getting art supplies, trips by auto that are directly related to your art (such as you are showing at an art fair in another city), trips to do art/photography for your artistic output (and which you can prove),etc. As with the Business Use Of Home, use a round number, so you don’t end up with awkward fractions . More on this in Audit Section.
Back to Page 4 Calculation of Capital Cost Allowance (CCA) claim The total claimed will magically appear on your page 2,line 9936.
This is where you enter all items that cost over $200, that you claim gradually over time. These are called capital expenditures for fixed assets. This means that these are major expensive items that will last a long time, and that you claim over the years as they depreciate in value. That is why it is an “allowance”.
It is actually optional to claim this. If it would increase your net loss, then it is legal but may not be advisable to claim. In order to not claim, change the % column to zero for any Class you don’t want to claim. More on that in the Audit webinar.
General: the 50% rule: This is applied to all new purchases over $200. The software works this out automatically for you , but it is good to understand it: The first year of a purchase, you can only claim 50% of the amount you would otherwise claim. That is because you might have purchased at the beginning or end or anywhere in between, so 50% is an average. The next year and thereafter, you may claim the full amount you are allowed.
On the form you will see the first column is which class (10, 8, 45, etc.), next is the UCC (Undepreciated Capital Cost) that you start with at the beginning of the year, left over from the previous year. Next is cost of additions in the year (detail of that goes in Area B and auto inserts from there). Next is Proceeds of Disposition, meaning you sold something second hand and got something for it.
Details go in Area D, and auto-insert. All classes except motor vehicles go in Area A.
Actually you only fill in the additions (what you bought in the taxation year) and dispositions (second hand sales). The software works out everything else and pops it into the right places.
There are many Classes of assets but only a few Classes that would apply to artists:
Class 10 is for old computers bought before March 23, 2004, at 30%.
The newer classes you would use are Class 12 for software at 100% (it takes 2 years to write off due to the 50% rule)
Class 45 (at 45%), 50 (at 55%), 52 (at 100%) are for newer computers and systems software (Windows, etc.), also peripherals that physically connect to the computer like printers and scanners. Which one you will use will depend on when the computer was bought. See your tax software for dates and details. These Classes can change from year to year, so be sure to see your software (under Help, CCA Classes) to be sure you have it right for you. The exact date you purchased is what makes the difference.
Class 8 is for anything that doesn’t fit into the other classes. Like furniture, cameras, studio equipment, expensive tools, etc. at 20%, This is used a lot by photo-based artists, and sculptors.
Your motor vehicle is Class 10.1 or 10 depending on the description, both at 30%.
The last column is UCC (Undepreciated Capital Cost) at end of year and is the amount that carries forward to the next year.
Remember that the percentage claim is based on the UCC remaining from the year before, not the percentage of the amount paid, so it can take many ,many years to write anything off.
Terminal loss can only be done at end of the business (retirement) or death or when there is absolutely no physical thing that is functional in the Class. The only class you might be able to do a terminal loss on while in business is Class 10 when eventually nothing is left in it (that is, your old computers have all been disposed of, or are non-functional). The details for how to do this is in the help section of your software.
You likely won’t deal with building dispositions, unless it is a separate studio building which has been sold..
Yearend tasks for accounting:
These are done at yearend or whenever you do your taxes.
1.Compile your Business Use Of Home statements, receipts, and add up totals for each category. Make accounts in your accounting program for each category, such as “electricity” or “hydro”. Use a “cash” account for the category part. Remember since you have already paid these amounts for the household, this is a paper-only transaction to facilitate your business accounting claim. “Deposit” the total needed to cover all Biz Use Of Home into your Cash account ,(described as “to cash to cover yearend” and to Capital, and “draw” from your paper “cash” for each paper transaction. Ex: say ,your claim is 20% of the house for studio. You would add up your hydro bills, and take 20% of that and claim that amount into Hydro account, and out of cash. In your accounting software you are using the paper cash. On the tax software, remember you put the full amount for the year, and the software calculates the percentage for you. Two different methods.
2.For vehicle(s), again use paper “cash” for the paper claim in your accounting software, and set up accounts for each category under “Vehicle”. Total the expenses you are claiming, and enter the percentage into those accounts (example: Suppose your percentage to claim for vehicle is 30%. :gas total @ 30 % = amount to claim for gas).
3.For your CCA if you choose to claim it: you may claim one Class and not another. To get the biggest bang for your buck, claim software first, then the better classes of computers, as the claims are higher. You may NOT change the percentage from, say,30% to 10%. You must claim all of a class at the full rate or not at all. Again use the paper cash method to record, and the expense goes in "Depreciation Expense" category. Remember you are using double entry in accounting. More on that later.
When you use the tax software you will be putting the full amount for house and vehicle sections, and letting the tax software do the calculation for you. So that you don’t end up with tiny errors of less than one penny, I recommend to work out your percentage claimed to a round number: like 20%,not 20.45% It will make life easier for you, when you get to the tax form part in the tax software.
HST/GST/QST: To register or not:
Please note, the QST is only in the province of Quebec, and is the equivalent of the HST elsewhere in Canada.
You are required to register as soon as you gross $30,000 in any 12 month period. This could happen at any time in a year. Watch your revenue receipts. This would include all self-employed income claimed on the tax form T2125. Once registered ,you can’t switch back and forth.
There is the paperwork, BUT it is very simple and is done automatically by the accounting software, and only takes a few minutes a year to file. You can ask to file annually. It is best done at tax time, although the deadline is actually June 30.
Once registered , you must charge GST/PST/HST/QST on your artwork, and other services. BUT you can also claim the tax back (GST or HST or QST) on all of your purchases, and this can be a substantial refund if you are in the red or have a low taxable income. It will also reduce your taxes on net income. Decide if it would be useful for you. This is most useful for photo-based artists, and sculptors, due to high costs of their media.
Out of Province Sales:
If you make an out-of-province sale, and you are registered, you would charge whatever the HST is or GST for the province to which you are selling . If the province you are selling into charges PST, you would not charge that however. The list of taxes in all the provinces is on the CRA website and this is kept up to date. Here is the summary: QST:14.975%; HST ON/NL/NB 13%; PEI HST 14%; HST NS 15%; All other provinces, territories are on GST/PST (GST is at 5% for all of them).
Also, if registered you are claiming the amount without tax as the expense amount. If you are not registered, you are claiming the expense including the tax. This means, in practice that you can claim more items in full (not amortized via CCA) if you are registered.
If you are NOT registered, you do NOT charge HST/GST/PST but you also may NOT claim any sales tax back. Some provinces are currently still on PST/GST as of now. They may be changing to HST at some point in time. Watch the news about this. Generally you would charge PST (in any province that is still on that system) regardless of gross income.
Is it advantageous tax-wise to give art to charities? Not really, when you look at the money. Yes, you can claim the charitable deduction, however you must claim the same amount as “income” even though you did not receive any money ! In effect one cancels the other out. And if the donation is to an institution that is not a registered charity, you would have “income” on paper, but no deduction, which would result in net tax to you. It is debatable whether it is worth the paperwork. If you feel inclined to be generous to a charity, one approach is to just give the work, no claim for charity, no income.
Here is the procedure, should you want to do it: You invoice the charity for the work. They write you a cheque. You donate the exact same amount back to the charity. They issue you a charitable receipt. No kidding! That is how it is done. Of course they need to trust you enough to wait for the donation back.
There may be, on the other hand, some non-monetary advantage to you if you feel the record of a theoretical “sale” would have some professional advantage for you, from the point of the fact that your work is now at a prestigious museum, gallery or institution. Also, there may be the consideration that your art would be, hopefully, well housed and cared for after your passing, which could be some comfort concerning estate planning.
That said, there is the situation wherein the artist’s work is accepted by an accredited museum or gallery under the Canadian Cultural Property Review Board (CCPRB). There a huge rigmarole to do this, however, then you do not have to claim the “income”, which is a tax advantage, as there is an offsetting tax credit. In order to get this setup, your work needs to be “defended” as culturally important to the institution and /or the nation. In other words, this is for mid-career and senior career artists, not emerging artists.
Software for your accounting and taxes:
The best software for general accounting that I have come across, and the one I use is Quickbooks®. It is easy, intuitive, and you don’t need to know account-eeze to do it. It allows you to add in an item that you missed, and it will recalculate everything after that for you automatically. It also lets you correct mistakes and recalculates everything again.
Quickbooks® uses terms like Money in and Money Out. The accountant language is debit and credit. For each debit (Dr) there is always and equal and opposite credit(Cr). In other words, every transaction has 2 sides, called double entry.
1. you take $ out of the bank and spend it on supplies (out of bank (Cr), into supplies Dr)).
2. $ comes out of the bank (Cr) to pay your cc bill (Dr).
3. Into Supplies (Dr), out of Credit Card (Cr)
4. Someone pays you for a painting, and you put it into the bank (into bank Dr) and into Revenue (Cr).
You will get the hang of it as you use the software. I recommend, if you are nervous about trying all this yourself, get a bookkeeper to help you set up your accounts and show you how to start. A half hour lesson is likely enough as it is really very easy. Then as you print out your ledgers (supplies, office expenses) and reports to show your accountant if you choose to have one, it will be easy to see if there are any problems with which you need help.
To adapt for artists, most accounts are usable as is, and are already set up by default, but you can always add custom accounts (like “Art Supplies”, instead of or in addition to “Supplies”) It is useful to include the line of the tax form as part of the description ,so you know where to put the total when you go to do your tax return (like “Art supplies ,line 8811”)
I do NOT recommend ACCPACC Simply Accounting® for artists as it is overkill, and not easy to customize for your specific needs. It is fine for more complex and larger businesses that have employees, and I used it with difficulty for many years. But when I tried to upgrade, I did not like the new version, so I switched to Quickbooks® which is very easy and much, much better. There may be other brands of software out there that I am unaware of.
For Quickbooks, you only need the Standard Easy Start version. The upgrade versions are overkill for your needs. There is no need to upgrade annually as it stays the same basically anyway, you can do dates backwards indefinitely, in case you want to go back and do previous years. You can also go forward indefinitely so you can continue onward each year. You would only need to upgrade when something major happens, I upgraded when Ontario went to the HST system.
For taxes, The same company (Intuit) does a great job on what used to be called Quicktax®, and is now known as Turbo Tax®. You will only need the Standard Unincorporated version. There are other brands of software , as well, for taxes, but I am not familiar with them. I only recommend software with which I have personal experience . And no, I do NOT sell any software.
How To Find Errors:
So, how would you know if an error was made ,by your bookkeeper, accountant or yourself?
The most common errors are the result of fatigue. Garbage in, garbage out. I recommend not to do more than 5 hours on your accounts/taxes per day, as your head may get muzzy, and your eyes go wonky after a while.
The most common errors:
1. Transposed numbers: 19 vs 91, etc.
2. Decimal points: $970 vs $97, etc
3. An item in twice
4. An item missing altogether
5. An item in the wrong category
6. Item with wrong date/even year
For the most part, all the above can be found or verified using your ledgers (Supplies list for the year, etc.) The first 3 types of errors are easy to spot, the last 3 more difficult. Check your receipts against anything you are not sure about, usually that will do it.
Quickbooks® is very easy to correct: just make the correction in the journal, and bingo QB will recalculate everything for you. What used to take hours the old way, now takes seconds.
If you are using an accountant to do your books, do not be satisfied with just the income/expense statement. That is just totals, and you have no way to tell if there are any errors, nor even how you are really doing at your business. Ask for every expense ledger that applies to you. Make sure that the right things are going into the right categories, as well as looking for the above types of errors. Again, remember, you are legally required to approve all accounts, and so you are ultimately responsible for any errors. Also ask for ledgers for “Bank”, "credit cards", and "cash". These will help you spot errors.
Now that you know what you can claim and not, you should have all the info you need to DIY or DIY-with- advice from an accountant or bookkeeper.
Bonus material: “What If You Are Audited?”
Here we will cover the following topics concerning being audited:
1. Why are you being audited?
2. How to avoid being audited
3. Your legal rights in the audit process
4. The audit process itself
5. Use of an accountant
6. NETFILE : why and if to do
First of all, I am assuming you have read the Financial Essentials material above, so you know what you can and can’t claim on your expenses. If you did not do that yet, please go back and do that first, so that what we will cover will make more sense to you.
I understand that the very thought of being audited can send chills down your spine. It surely scared me a few years ago. But knowing your rights and the process takes a lot of the stress and fear away. That is why I created this section of the eBook, to help you on that.
A few years ago, I was audited. I did the first 2 stages myself, then got the help of an accountant for the third stage. I contested about 90% and successfully appealed all that I contested. I learned a lot from the process. If I had known up front what I know now, it would have taken a lot of the fear and stress away. Hopefully, my experience will help you if you ever need that help.
Why are you being audited: or what triggers an audit?
There are many possible reasons, or sadly no reason at all (just the luck of the draw)
Here are some reasons:
1. You have been in business as an artist for several years but have never filed your expenses before, or have been filing off and on.
It does not matter whether you are in the red or in the black. You are expected to always file your income and expenses every year. It is very important to be very consistent about this. Rightly or wrongly, CRA tends to be suspicious of inconsistent filing. They may assume that you are hiding something in the years you did not file.
If you did not keep good records in the non-filed years, you may be in a position of trying to prove something that does not exist, especially if you did not keep your receipts.
So, if you have been in business for years, but have not filed at all, or inconsistently, I recommend you get to an accountant pronto and see what you can do. They can apply for amnesty for you if you own up voluntarily before the audit ax falls. This is one case where you really can’t DIY !
2. Some of your expenses are deemed to be unreasonably high. This is a very common situation. For artists there are some danger areas: travel, car and biz use of home.
a. Travel: This is the biggest area for over-claiming: For instance, an artist and her family of 4 takes a vacation to Florida for, let’s say,10 days. They have fun and relaxation for 9 days, and she does some sketches, or photos for one day or equivalent. She claims the entire trip for her whole family as a business expense. No – no ! This is NOT REASONABLE. Since, in that example, she only did “business related activities” for 1 day of 10, she should only claim 10% of only her portion of the airfare, or mileage if she drove down, or car rental, and accommodation. Say the airfare was $2000 for the 4 of them, and her part was $500. She would, in this example claim $50 (10% of her portion) for the airfare. For meals, she should only claim 50% of one day’s worth of meals for herself only. (Remember, meals are at 50% as you have to eat any way. And you don’t claim the tip.)
Accommodation which is very luxurious could be challenged as unnecessary. You are expected to live modestly, not high off the hog. Also very expensive dining out could be challenged. This is not to say that you must rent run down, shabby, places in bad parts of town. Or eat at greasy spoons. But middle class accommodation and meals are considered normal and reasonable.
Meals at the usual government rates are deemed OK. Groceries for making your own meals where you rent a condo or apartment for the trip, are claimable as long as they are reasonable (lobster and caviar would not be considered “normal’ grocery items.) Do you notice that the word “reasonable” comes up a lot?
By the way, you may not claim trip cancelation insurance or travel health insurance, or extra life insurance. You are expected to live dangerously: extra insurance is considered an optional perk!
I know that some people joke that as long as you do some little thing that is business, you can claim a whole trip, but that is NOT the case. Be very careful about this category of expense as they tend to watch it very closely. Better to under-claim,than over- claim..
For local trips in your province or nearby, where you travel in your vehicle, only claim the part of mileage that pertains to the business portion. If part is personal, and part is business, 50% or less would be business mileage. If most is personal (home for Christmas, but you went out and did some lovely photos of the snow one afternoon, which will later be used for paintings, etc). only claim the local driving that specifically applies to your art.
b. The CAR: It is wise to keep your percentage of the vehicle(s) to a total of no more than 50% of all your driving, even if it should be higher. It is hard to justify more than 50%, unless you are in a position where you are required to travel extensively for you art, and you can prove that. Then, just be prepared to plead your case. For instance, travelling extensively to work on a photo book, or series of lectures, or art shows in far flung places, or a travelling exhibition would be good examples of where you may be able to go over the 50% for the vehicle, assuming you or your partner is driving.
c. Claiming over 25% of your home as business use of home has implications re city by laws re zoning, and could trigger capital gains tax on sale of the home. For CRA, there is no problem re the 25% but it is not wise to go over 35% even if you zoning might allow it. (such as, where you are in a commercial zone or way out in the country.) Check with your municipality about this. It is OK to find out anonymously. This is one case where a bit of tinkering may be necessary to keep both levels of government in sync.
3. Non allowable expenses are claimed. Look back to the Finance Essentials for what you can claim. I have heard of some strange ones:
A whole case of champagne for a private art selling event in the artist’s home. A smaller amount would likely be accepted, but likely a whole case is a bit extreme as it might not be seen as “essential” or “reasonable”.
Special wardrobe and makeup for a performance art event (this could be defended, depending on the exact language used and the details. This is a good place for help from an accountant)
…..I could go on, but you get the idea.
As an aside: One category that is usually challenged, as mentioned in the Financial Essentials section, and this will be a shock, is home telephone, your personal cell phone, and the internet service. One would think that the phones would go under “telephone and utilities”, line 9220, and that internet could go under "office expenses". That line 9220 is for phones and hydro for rented studio spaces, that is, business rated extra service, and for phones that are under a business name separate from the family phones. These would be at business rates, which would be higher than family rates. One would think that alternately one could use “other” on the Business Use of Home section, where one would then be claiming only the business percentage (for “cell, internet business portion”).
However I was told by my accountant, that they may not allow that either, and to concede the telephone and internet altogether. It does not seem realistic given that many artists have websites where they promote, even sell their art, and use a cell for business, and list it on their business cards.
It seems that the reality is, so far,( and this could change), that CRA considers internet and home related phones to be entirely personal. This is a topic you may want to discuss with your accountant. I daresay that opinions differ on this point. It could be worth the fight if most of the rest that is disallowed is unfounded, while you could concede on some other points.
On the bright side however, long distance charges that can be logged via statements, and verified as definitely “business” may be claimed . Be sure to keep the appropriate cell or phone statements. Claiming under “Office Expense” would make sense for that.
CRA will not accept expenses that are not properly proven. There must be an acceptable receipt. They will, for instance, not accept cancelled cheques as receipts. If paying by cheque, you must also get a written receipt of some kind, with the item, amount, date, who you purchased from or paid for a service, and preferably the address of the vendor if possible.
The other thing not accepted is those tissue credit card receipts (the ones you get when the old fashioned click machine is used.) In addition to that receipt you would then also need a written receipt like the one described above. When you get the double receipt, like you sometimes get for the thermals, the one you need is the one that itemizes the goods purchased. The short one with the CC info is not needed for the audit.
By the way, I believe that it is still OK to claim small purchases under $5 without a receipt. This is intended to facilitate items like parking under $5 where no receipt can be obtained like the old fashioned parking meters..
5. A very large item: Something claimed in full that they would see as odd, and very expensive may not pass the sniff test and ring bells. It depends what it is. It may be something that is not obviously part of your art related expenses, or may be related to other self-employed income making ventures, in an effort to support you art expenses. Quite often, this can be defended, depending on whether it is “reasonable in the circumstances”. It may be useful to get an accountant to help with the language here, if challenged.
6. You have been negative for some time, and there is concern that perhaps you are not a viable business. This could first trigger a quiet visit by a representative of CRA to an art show you are in, to see your prices. If this happens, they do NOT introduce themselves, they will seem to be just another ordinary person looking at your art. This is usually done late in the day near the end of the show. Some quick calculations done after they walk away, could reveal your prices are so low that even if you sold all or most of your output, you would never break even. In that case, all your expenses could be disallowed and you could officially be designated as a “hobbyist” and no longer permitted to claim any art related expenses. You need to have a “reasonable expectation of profit” to be allowed to continue to claim expenses. If you think it is possible you could be in this situation at some point in time, I recommend you read my “The Art of Pricing: What Is Your Art Worth?” eBook coming out later this year. ..
7. It’s time: You have been audited before or this is your first audit: the number of years since last audit is 4 to 10 years (or maybe never, if all is well). They assume it could take several years to start getting a positive net income so you don’t need to worry the first few years. I have heard as low as 5 and as high as 20 for a first time audit. In other words, no one really knows, including accountants.
8. Inconsistent claims; you claim one way one year and another way another year: being consistent is very important. Once you get straightened out on how to do things, stick to one way to claim. Don’t keep changing what categories you use for a particular expense, unless the tax law requires it (such as all meals used to be separate, now meals while travelling are under “travel”.)
9. Your ‘Number’ came up: Unfortunately, sometimes you get audited for no apparent reason, like all artists in a geographic area, people whose name starts with S, or artists of a certain age range, or just no reason, pure chance: Enee-Meenee-Minee-Mo. Usually it’s one or more of the first 8. Or several small things over a period of years could build up a picture.
How to avoid being audited
Do it right, as per the ‘Financial Essentials’ part of this eBook. It is useful to take ongoing seminars on bookkeeping since by taking advantage of such topics you will pick up more pointers. Even though I have been doing my own accounts for over 40 years, starting with pencil and ledger books the old fashioned way (I took some accredited accounting courses ), I still grab any accounting related seminar I can find, just in case there is some gem I did not know that would be helpful. You never finish learning.
That said, I often find, however, that "free" seminars are basically sales pitches for whatever accounting firm, and often the info is incomplete or more attuned to incorporated businesses than sole proprietors. Also it is usually aimed at the general public, not artists. I have rarely found a financial/bookkeeping seminar that is attuned to the needs of artists in particular, with the exception of seminars run by CARFAC.
As an aside, I highly recommend joining CARFAC (Canada's national artists 'union') if you are not already a member. I have belonged to CARFAC since 1968, am one of the founding members, and have found it a very valuable source of advice over the years. It is well worth the modest fee (which is tax deductible under “Fees”). CARFAC is the national organization for artists in Canada. They lobby the government for legislation that affects artists (such as parts of the new Copyright law) They also give free legal advice to their members via their Legal Clinics. For more info see www.CARFAC.ca .
Your legal rights in the audit process:
In Canada we are fortunate that there is a reasonable, rational, and fair process in place. One hears of horror stories, but usually there are 2 sides to any story and sometimes it is not so much what is challenged by the artist but how it is challenged. More on that later.
· 1. Sometimes the artist has tried DIY but should have gotten advice and help from an accountant.
· 2. You have a the right to Rebuttal to the first challenge of your submission, and also an Appeal process after that. If done appropriately, the results should be fair and equitable to you in your situation. They will tell you about the rebuttal process, but they may not necessarily tell you about the appeal process. I found out about that when I consulted an accountant, and it made all the difference in the world. I wish I had known about the appeal process at the beginning. It would have saved me a lot of worry and stress. More on that later.
· The audit process:
1. If/when you get that dreaded letter in the mail, that you are being audited, you will be given 30 days to file your paperwork, with clear instructions on what they want to see.. If it is December, and you have the 30 days to file, ask for 60 days. They will usually give you that as they will be away over Christmas anyway, so that would be considered reasonable. It is not uncommon to get The Letter late November or early December, and related to the latest tax year filed, or even a previous year.
2. Technically they can audit back a far as 7 years. So it is required to keep all your paperwork back 7 years, including the current taxation year. I recommend to always keep records of the purchase of all fixed assets (the ones you claim over time as CCA), and all in one envelope, so you can find them easily. I recommend to also keep all your ledgers, software files and print outs indefinitely, but receipts for consumables that are claimed in full can bite the dust after 7 years. It is also good to print out all your journals, ledgers, tax returns, and keep them in binders. This is great for quick reference.
3. You will be required to provide all your ledgers of expenses (not the bank, cash, credit cards) together with all the receipts that are on those ledgers. A ledger is a list of all expenses in a category, like Supplies or Office Expenses, etc. Your software will have a way to print those out.
4. A Caution: Those thermal receipts that many big box stores give nowadays: they will fade to white in a year to 2 years. Remember that CRA requires original receipts that are legible. So ask for a paper receipt where possible. If that is not available, scan or photocopy your thermals while they are still readable. Also use a ballpoint pen and on the thermal, trace over the name of the store, the main item, the total, tax and net total. That way you could provide the original + the scan which is fully readable. I know, it is a pain in the butt but that is the problem with the thermal receipts. Thank modern “progress”! Scan them by category (gas, office supplies, etc) as that is the way you would need them later, if ever audited. I recommend doing this little chore at least twice a year . If you scan as opposed to photocopy, there is no need to print out until needed for the audit as you can save them with appropriate file names so they can be found later. Put them all together in a folder on your computer labelled a way that makes sense to you.
Now you will need to scan (or photocopy) all your other receipts that you have not already scanned. This is because you have to send them the originals for every single purchase, including your gas receipts, so you will want to have copies in case the originals get lost in the mail or at CRA. You need to find all the original receipts that show on all the expense ledgers, including the thermals+scans as above, and arrange them in calendar order, staple them together, with each expense ledger. This is the most time consuming part of the whole exercise. This includes Business Use of Home and vehicle expenses.
5. The taxman will reply to your mailing of the receipts, usually several months later with a very long list of what they are contesting and disallowing and a bill for what they claim you owe. It is important to pay whatever they charge you, as that will stop the clock on the interest they would otherwise charge. The whole process from A to Z can take 12 months to 24 months, so you definitely don’t want interest to be piling up all that time as it can greatly increase what you may have to ultimately be responsible for paying, and can also result in penalties, which can be substantial.. So, even if you are sure you are 100% right and they are 100% wrong, pay up and go through the process, after which you will get back whatever they owe you.
6. Go over the list very carefully. This would be a good time to get an accountant to help understand what you are up against, and how much of it is founded in law and what is contestable. That is, what mistakes have you made, and what can you fight them about. Don’t just assume it is all OK. Sometimes they “go fishing”, to see how much they can get away with. I heard recently of someone who was charged tax on loans, which are liabilities, not income ! If you know the law, and if you read the Financial Essentials part of this eBook, you know most of it, you should be able to spot the parts that don’t make sense. Note these down, as best you can, before seeing an accountant. I waited to the next phase (Appeal) before contacting an accountant and hence made some errors in procedure in the Rebuttal. I recommend you get an accountant at the Rebuttal stage to avoid mistakes. It could save you a lot of work later. Remember, you can do the grunge work yourself, but get professional advice, so you know you are on the right track.
7. Try to stay calm. I know it is very stressful and you may be very angry. I’ve been through it myself. Your accountant will usually help you though the mess and point out what you have to give them and what you can contest.
8. Through the whole process, when replying to CRA in the Rebuttal and the Appeal, it is critical to be polite, diplomatic and respectful and accurate re the tax law. This is extremely important!! The accountant can help with the tax law, but the tone and words you use are ultimately up to you. I have heard of many messes that artists get themselves into, mostly because they are allowing their emotions to run away with them and they say unfortunate things. That can escalate something small into something much bigger, and make whoever they are dealing with at CRA dig their heels in and perpetuate something that could have been resolved in a reasonable way much sooner. Most disputes can be resolved amicably with a calm polite demeanor. Like they say, you catch more flies with honey than with vinegar.
9. You will have 90 days to do the Rebuttal, wherein you contest whatever you can, and concede whatever you have to, that you did not do correctly when you filed your returns.
10. Several months after they get the Rebuttal, you will receive another mailing with their reply. You may get some of the things that you contested, but there may be more things that they throw at you at this point. This is where you go into the Appeal process, if all is not resolved. At this point you have another 90 days to appeal. There is a special form this time, on which you can give the name of your accountant. They will confer with your accountant, if needed, and you accountant can get some background on what happened which you would not be able to find out on your own. Your accountant knows people at CRA. They can talk CRA language. A different “tax court” (an office, really) in a different city will be appointed to deal with the appeal procedure. That is a good thing, especially if there is a lot being contested, as it allows you to have a fair hearing that is not biased in any way. Several months later, you will receive a final ruling, and hopefully news that you will get all or part of your money back within a few more months. DO NOT DIY the appeal: you absolutely need an accountant at this stage.
Depending on how long the delays are between the various stages, the whole process can take minimum 1 year to 2 years. The average is 18 months.
11. One little thing that can make a big difference: In Canada we have something called “Access To Information” act, which entitles individuals to find out what is in files on them. You can apply for “Access to Information” on your tax file pertaining to the year in question. It takes about 6 weeks to come and will be a big box, including a lot of stuff copied several times, some stuff blacked out, but you never know, there could be a little gem in there, so look over it very carefully. Where you see numbers added up, add them up with a calculator . Don’t assume they were done with a computer. I had a list of gross and net numbers for 10 years. The gross was correct, but the net column was way, way off: they had ignored many numbers, and came to the conclusion that I was not a viable business. This, of course, made a big difference, once I pointed out in the Appeal, that “an arithmetic error in the addition” had been made (note the low key language).
12. When I went through my audit procedure, I had an advantage in that I knew the tax law well, thanks to my Financial Planner background and all the courses I had taken over the years + over 40+ years of DIY accounting wherein I have learned a lot. So I was not a push-over. I came back with chapter and verse all the way. I did all my replies (initial, Rebuttal, Appeal) myself, but got help with some wording and points of law from my accountant on the Appeal. (Again,however, I recommend to bring an accountant into the picture at the Rebuttal stage) My appeal ran to 14 pages. My accountant said it was the best Appeal he had ever seen. I conceded about 10% including some errors on my part + some tidbits (home phone, and internet) on advice it is wise to “give some crumbs” and those were the ones they like, and contested 90% and won 100% of what I contested.
In my case, if the whole thing had been done by an accountant instead of DIY with advice, it probably would have cost more than the amount contested, to fight it. I suspect some people cave in as it is not economically viable to fight, especially if they feel they need to have an accountant do all the work for them. The problem with that is that if you cave in, you may be doing some things incorrectly ongoing and have a worse mess later. Also, if you cave in, it will be assumed that you agree you were wrong/ guilty on everything and that would be on your record. I recommend to fight for your rights (if you are actually in the right). It is your democratic right to do so. With this eBook, plus some accountant advice, you should be able to do what I did: DIY with a side of advice.
13. I have heard that the previous auditor general was of the opinion that artists are “too small potatoes” to hassle, not worth the taxpayers dollar to chase (although I have heard of several cases of hassling). In my case, I calculate that it cost the taxpayer 100 times in manpower what CRA got out the exercise in my case, so I would agree with her.
14. One extra thing I have heard about: If you are paying a relative to do some work for you in your business, that person needs to claim the income and pay tax on it. Likewise you would claim the
expense as casual labour. If that person does not claim the income (which shows up on your expenses), he/she may be fined $25,000 regardless of the amount actually paid to him or her. Although it could be awkward to tell them that, in the end you are doing them a favor as the bad news could save them big bucks later. Whether they heed your advice is now up to them. You are off the hook.
To NETFILE or not: Contrary to popular myth, Net filing does not trigger more audits. Actually CRA loves it because it saves them a lot of time manually inputting all those numbers. Also there is less chance of error due to inadvertent incorrect input of your numbers, such as a misplaced decimal point.. So I recommend it. Just be sure everything is perfect before you do, as it can take up to 3 months to correct an error.
Both Quickbooks® and Turbo Tax® will print out very nice reports that will be all you could ever need. CRA loves those nice neat reports. Doing anything by hand these days is so fraught with likelihood of errors, that it just sets the teeth on edge. NOT recommended. A bookkeeper can help with data input if you can’t cope with that, but really it is so easy nowadays, I am sure you can learn.
That winds it up for this eBook. If you found it useful and think it would be of value to other artists, please pass the word along, on Facebook, or any other means.. My goal is to eventually help artists coast to coast in Canada with this eBook.
If you have any questions which are on topic and were not covered, drop me a line via my email firstname.lastname@example.org , and I will compile a FAQ for all artists who bought the eBook, which I will post on the secret website where you access the eBook.(generally at the end of the eBook).
My eBook website is www.ebooksforvisualartists.com. It will have an up to date list of eBooks on offer for Visual Artists.