I received an email from a relative who had hosted a dinner party. Nothing unusual in that, and it sounded like fun. One of the topics of conversation was an article posted by CBC News. The dinner guests included an artist who wanted to know what happened to the subject of the news article. Did he win his case? Would this case set a precedent for other artists who may not make much money in the course of a year?
If you don’t want to read the original article, I will summarize it here. Mr. Higgins is a longtime sculptor who also teaches part-time at the Nova Scotia College of Art and Design (also known as NSCAD University). He received grant money from various sources to fund a large project in 2013. If you read the comments from the Canada Revenue Agency, they indicate that Higgins’ expenses were more than his grant revenue. This means other income, such as his salary from his part-time teaching, would be reduced by the expenses from the installation. It also means he would pay less income tax.
You won’t see a follow-up story anytime soon, if ever, because it will likely take months for this to be resolved. However, I can tell you where CRA is coming from. They look at an unincorporated business, Higgins’ sculpture endeavour, and decide if it has a reasonable expectation of profit (REOP). If it doesn’t then you can’t claim expenses. The content of CRA’s letter, published by CBC, states they removed both the income and the related expenses from his 2013 tax return. So, his income taxes are based on his part-time teaching income and any other non-sculpture income he may have. It’s not like he had to pay income tax on the grant money and was denied expenses.
People often think they can have a little hobby and rack up expenses, sell some stuff, and use the expenses to reduce other taxable income. This is not going to fly.
I suspect in this case, Mr. Higgins’ expenses were a lot more than the grant income and that’s why he was flagged by CRA. They looked at his income flows and said, “what is this guy’s principal source of income?” It may have been the part-time teaching - which makes the art work a secondary source. So, this relegates him to a hobby farmer. (Farmers are the example CRA uses to determine the amount of expenses you can have.)
Since CRA removed the grant money and the expenses from his income tax return, what ultimately caused the high tax bill was the removal of the expenses which were reducing his other ordinary income.
So, I think the arts community looked at this as a “wha???” Grant money isn’t income? But what I think it really means is that grant money is income but CRA is going to question your ability to generate a profit (REOP) if all you have is grant money and a whole boatload of expenses.
If you actually earn a profit from a sideline business, that is taxable income and it needs to be reported.
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