In the songwriting business, “reasonable expectation of profit” can be significantly different from other businesses. The Canadian Revenue Agency (CRA) admits that there’s often a longer ramp-up period before a songwriter starts making a profit. That’s why it’s important for artists to work with an accountant who knows the business.
An experienced entertainment accountant knows how to ensure that your losses are allowed by the CRA year after year until you make a profit, or until you stop trying. But let’s hope you keep trying! Jae Gold (rocknrollaccountant.com) has worked with many of the songwriters you hear on radio, and graciously offers his expertise by answering questions posed by S.A.C. members.
What are the most common mistakes made by artists when filing taxes? Missing filing deadlines; under-reporting income; not claiming allowable expenses; claiming expenses that are too personal in nature to qualify as business deductions; not keeping receipts; and not hiring a professional accountant.
Where do you claim grant revenue when filing taxes? Generally, grant revenue is claimed as income in the year it’s received. However, it does not make sense to claim the grant in the year you receive it if you don’t actually spend the grant money until the following year.
If you receive a forgivable loan from FACTOR, when do you declare it as income? How do you deal with repayments? If a loan is forgiven, the loan becomes income. If you make repayments before taking the loan into income, they’re considered a reduction of the original loan. If you make repayments after the loan has been taken into income, they’re treated as an expense.
Do I pay tax on foreign sales of CDs or downloads? All worldwide sales must be reported on your tax return.
What rate of HST do I charge a Canadian purchaser versus a purchaser outside Canada? The rate for Canadian purchases is the rate deter- mined by the purchaser’s mailing-address province. (Consult the CRA website for rates.) No HST is charged for out-of-country purchases.
An independent songwriter sells a CD for $15. What taxes should be paid? The $15 is reported on your tax return, along with all self-em- ployed income. For sales in Canada, you also collect GST/HST on behalf of the government.
When should an artist get an HST number? After your sales total more than $30,000, registration is mandatory. All songwriters should register for the GST/HST system right away because SOCAN collects the tax on their behalf on all royalties. All SOCAN royalties are GST/HST “taxes paid” by the time the songwriter gets the royalty cheque. Therefore every GST/HST return filed by a songwriter typically results in a refund of all the taxes paid on their business purchases.
Do artists need to pay tax on earnings from playing abroad? All Canadian residents must report income no matter where in the world it’s earned. International tax treaties help ensure that taxes you pay abroad are credited on your Canadian tax return. (Seek accounting advice before touring the US in order to obtain the correct tax ID numbers. Unless each individual Canadian in the tour files a Central Withholding Agreement with the IRS, the payer must withhold 30% tax.)
How does an artist prove CD sales from live shows? Keep accurate records. All income needs to be reported.
I had my deductions refused by the CRA. What should I do? Hire an accountant to determine if the CRA made an error. If so, the accountant will set in motion a Notice of Objection. The case will be as- signed to an appeals officer.
When should I consider incorporating? By incorporating, you can benefit from a lower rate of tax (about 16% on the first $500,000 of profit). A general rule of thumb would be to incorporate when you’re making more money than you need to live on.
D. Jae Gold is a Chartered Accountant & Certified Fraud Examiner with principally entertainment/cultural industry clients. www.rocknrollaccountant.com
Reprinted from a previous edition of Songwriters Magazine.