From the CBC:
An established Halifax sculptor says he was shocked and insulted by a Canada Revenue Agency ruling demoting him to the status of “hobby artist” and giving him a $14,500 tax bill.
Installation artist Steve Higgins, also a part-time instructor at the Nova Scotia College of Art and Design, was notified his expense claims from a 2013 art project were rejected because the work was funded by public grants and not sold for profit.
. . . .
“When I received the declaration that I was a hobbyist, I was at first disgusted by that and insulted by it. It just seemed like a slap in the face after how many decades of exhibiting that I’ve been involved with,” Higgins said.
“To have to pay the government $14,500 on my limited income is indeed a terrible hardship.”
. . . .
The artist’s troubles started with a CRA audit of his 2013 tax return.
At the time, he was not worried.
Higgins said his deductions were routine expenses.
“I’ve been exhibiting since 1974 in North America, South America, Europe, Japan, Australia. And all of the grant money I received to sponsor those exhibitions are considered income and when I declare expenses against that, then it cancels out the amount of money I received.”
. . . .
In 2013, Higgins received more than $20,000 in public grants for a large sculptural installation called Beyond the Terminating Vista, which he exhibited at the Mount Saint Vincent University Art Gallery in the spring of 2013.
The lion’s share of the grant money came from the Canada Council for the Arts, which gave Higgins $13,600.
. . . .
The installation work was recognized later that year when Higgins won a $25,000 Lieutenant Governor of Nova Scotia Masterworks Arts Award in recognition of “outstanding artistic contribution.”
. . . .
However, the CRA rejected his claim that the grant money was business income and denied his claim for expenses against the grants.
“It is the determination of this audit that the taxpayer operates as a personal endeavour (a hobby), not a business,” CRA said in its Jan. 26, 2018, reassessment letter to Higgins.
. . . .
“Most of the income generated is from grants, honorariums and awards, and not the sales of artwork. Therefore, all income and expenses related to the business has been removed.”
. . . .
Some observers say the Higgins reassessment reveals a profound misunderstanding about contemporary art in Canada.
“For me, that definition of sale as a key to artwork misses the vast majority of artistic practice in the country, particularly contemporary art, media art, performance art where people rent works,” said Ben Donoghue, executive director of the Media Arts Network of Ontario.
“Works are shown in public centres, in artist-run centres and theatres. Artists are paid a contracted fee for that time. That’s actually where we see professional arts in Canada.”
Link to the rest at CBC and thanks to Tudor for the tip.
I wouldn’t even begin to try to sort out the legal and accounting facets of this, but it seems unfair. If a grant is taxed as income, just seems right that the artist’s contribution to the project, in the form of expenses, ought to be deducted from the taxable income. I’m not a lawyer, accountant, or Canadian, but it still violates my sense of fairness.
From the parts of the article posted here, if you take it at face value: “Therefore, all income and expenses related to the business has been removed.”
I’ll agree that taxing the the grants as income without allowing the expenses would be unfair…… but that’s not whats happening here.
Yeah, if you’re not showing a nice profit doing something you’re just a hobbyist – no matter how skilled you think you are.
My mother used to do ceramics, but molds, kilns, paint, mud, and paying to attend events meant that the cost of her ‘business was in the red all but one year; so yeah, she was a hobbyist, but she was having fun doing something she loved to do.
Come to think on it, I’m just a hobbyist writer. 😉
The IRS take:
“FS-2008-23, June 2008
The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or is engaged in as a hobby.
Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”
Taxpayers may need a clearer understanding of what constitutes an activity engaged in for profit and the tax implications of incorrectly treating hobby activities as activities engaged in for profit. This educational fact sheet provides information for determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit.
Is your hobby really an activity engaged in for profit?
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.
The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:
Does the time and effort put into the activity indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).
If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations. “
So… remvoving both the *Income* (grants and awards) as well as expenses from his Art leaves him with a 14K tax bill….. obviously, he was using Art (greater than his grants) to reduce his taxes on *other* income not mentioned in the article…
Obviously, CRA will have an issue with that if the Artwork is not even expected to turn enough profit to recoup expenses.
I think the problem is with how the grant income was categorized. My understanding of this story is the CRA is still counting it as “income,” but not allowing it to be “business income.” If it’s straight income, there’s no opportunity to write off expenses against it, so all of it becomes taxable. If it’s business income, he can write his expenses off, which essentially cancels it out.
While I no longer apply for grants (for many reasons, and this story just adds one more), I have received them in the past, and they are one of the more complex things to claim on Canadian tax returns.