Income Tax and the Musician
July 31, 2018 in Doing Business
Taxes! You always want to think ahead of what you can do to maximize the benefits you could receive by properly claiming your musical activities. Many musicians don't claim music related activities on their taxes because they haven't made a net income, and they think any money spent on musical expenses is just "gone". STOP that thinking! Start keeping records and saving receipts now. You may be able to reduce your overall tax bill by doing so, even if you didn't make a cent from being a musician this year...
DISCLAIMER: Everyone's tax situation is unique. This article is intended as an example and applies to the current tax year ONLY. Consult with the Canada Revenue Agency and/or a professional accountant (preferably one with industry knowledge) before filing ANYTHING you are unsure of.
Music income (teaching, gig and session work revenue, royalties and mechanicals received) is usually defined by the government as self-employment income. You, as a musician or songwriter, are considered a business as soon as you start earning revenue. However, by applying music expenses to your other sources of taxable income (for example, the day job), you could reduce the overall amount of income tax you pay.
In a partnership or proprietorship situation, your "loss" as a musician can be as large as the total amount of tax withheld by your regular employer, or day job. (If over the year you paid $4000 in taxes through your day job and have musical tax credits adding up to $6000, you could get the $4000 you've already paid in taxes back, NOT $6000.). In some cases, you can even carry forward tax credits/inputs to use again future years' taxes.
There really is no specific maximum amount that you can get back like this, but you want to make sure you are only making authentic deductions. Plus, if you take the highest possible number of deductions in one or two years, you will have nothing left in the future years to reduce your income (more on this later), which is hopefully going to increase as time goes on. Then you wind up paying, and if you didn't plan ahead you won't have the cash to cover it.
If your band (collectively) earns more than $30,000 GROSS per year, it's important that you register for a GST number and collect the GST on all goods and services (gigs and merch). The government can come after your group after-the-fact for GST owed and the burden will be on YOU to prove you were not operating as part of a group that earned $30,000 or more.
Example: Your group, which isn't incorporated, earns $33,000 in a calendar year through live shows and merch sales. Even if your expenses for that year were $34,000, you will still be required to register for the GST, collect, and submit it. (You should incorporate at this point.)
This STILL applies if you are splitting revenue equally among say 4 band members. Example: Your band earned $40,000, split that 4 ways, and each of you took $10,000 in revenue to claim on your income tax, with receipts/expenses of $5000.
When you file a GST return (because you collected the GST), you also get credited (as a corporation) for all the GST you paid on things used in your music business (otherwise known as Input Tax Credits).
Since you don't charge PST on gross earnings, you cannot write off any PST you pay. Make sure you keep your receipts!!!!
Most of us will fall under Sole Proprietorship (that is, we're individually responsible for declaring our musical income on our personal income tax). Here's a breakdown of some common tax "groups":
This is an unincorporated business owned by one person. It's the simplest kind of business structure. The owner of a sole proprietorship has sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business. You pay personal income tax on all revenue generated by the business. You also assume all the risk of the business. This risk extends even to your personal property and assets. (If someone sues you for being a no-show on a solo gig, copyright infringement, etc., your car/house/guitar could be seized).
As a sole proprietor, you have to register for the GST if your annual taxable revenues are more than $30,000.
It's easy to set up a sole proprietorship. Simply operate as an individual or as a registered, unincorporated business. If you operate as an individual, just bill your customers or clients in your own name. If you operate under a registered business name, bill your clients and customers in the business's name. If your business has a name other than your own, you'll need a separate bank account so you can process cheques payable to your business.
A sole proprietor pays taxes by reporting income (or loss) on their personal income tax return (due April 30 each year). The income (or loss) forms part of the sole proprietor's overall income for the year. As a sole proprietor, your income tax return must include financial statements, a Statement of Business Activities, and/or a Statement of Professional Activities.
A partnership is a relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business. Each partner contributes money, labour, property, or skills to the partnership. In return, each partner is entitled to a share of the profits or losses in the business. The business profits or losses are usually divided among the partners based on a partnership agreement.
Like a sole proprietorship, a partnership is easy to form. A simple verbal agreement is enough to form a partnership. But if money and property are at stake, you should have a written agreement.
The partnership is bound by the actions of any member of the partnership, as long as these are within the usual scope of the operations. (If John books a gig and signs a contract, Jim is legally bound by it too.)
A partnership by itself does not pay income tax on its operating results and does not file an annual income tax return. Instead, each partner includes a share of the partnership income or loss on his or her own personal, corporate, or trust tax return (again, due April 30). Each partner also has to file either financial statements or one of the forms referred to in the section on sole proprietorship. You do this whether or not you actually received your share in money or in credit to your partnership's capital account.
For GST purposes, a partnership is considered a separate person and must file a GST return and remit tax where applicable.
A corporation is a separate legal entity. It can enter into contracts and own property in its own name, separately and distinctly from its owners. Since a corporation has a separate legal existence, it has to pay tax on its income, and must file its own income tax return. It must also register for the GST if its taxable annual revenues (including those of associates) are more than $30,000.
You set up a corporation by filling out an article of incorporation, and filing it with the appropriate provincial, territorial, or federal authorities.
A corporation must file a corporation income tax return (T2) annually, within six months of their fiscal year end, even if it doesn't owe taxes. If taxes are owed, they are actually supposed to be paid within 3 months of their fiscal year end. Fiscal year-ends can be set at a time that makes the most sense for the corporation, ie to fall in a slow time of the year. Corporations typically pay their taxes in installments, just like they remit the payroll deductions for EI, CPP and employee income taxes. The personal liability of corporate directors is also a consideration for payroll deductions and/or GST if for some reason the corporation does not remit them, Revenue Canada can "bill" directors of a corporation personally for all amounts owing (another complex issue).
For GST, corporations have reporting periods for which a return has to be filed. As a shareholder of your corporation, you have limited liability. You and the other shareholders are not responsible for the corporation's debts. However, limited liability may not always protect you from creditors. For example, if a small corporation wants to take out a loan, the creditor may ask for the shareholder's personal guarantee that the debt will be repaid, and if you agree you'll be personally liable for that debt if the corporation does not pay it back.
For a corporation, loss amounts can swing widely. This gets really complex, and it is unlikely that many musicians or groups not on a major label will register as a corporation. Corporations typically try to write down income to zero, incurring no tax liability. When a corporation's directors know that future years will be profitable (or if they paid taxes in past years), they may be able to report a loss for the current year and carry it forward (or back) to reduce taxes payable from a future (or a past) year. See how tricky this gets? Best to hire a good accountant if you operate as a corporation.
Employment Insurance Premiums:
As a self-employed individual (this extends to members of partnerships as well), no EI premiums have to be deducted. If the group, or band, is run as a corporation, EI premiums need to be withheld from amounts paid to "employees", plus the corporation has to pay 1.4 times the amount deducted from the employee. However, the corporation itself would not have to pay a premium on its earnings. Also, if you own more than 40% of a corporation, and are employed by the corporation, you do not pay EI premiums, and you cannot collect EI. For all intents and purposes, most musicians will work as sole proprietors or partnerships. Therefore no EI premiums need be paid.
Canada Pension Plan Premiums:
Every "natural person who is a Canadian resident" is eligible for CPP, so everyone pays the premium, self-employed or not. The rate (as a % of income) changes from year to year, so it is best to check with the local CRA office. If there is going to be a financial loss for the year, CPP premiums do not need to be withheld from your income as a proprietor or partner. If there were a profit, then you would have to pay the employee and the employer share (or twice the % amount to be withheld from the individual). Corporations again need to withhold and match CPP premiums deducted from wages paid, but the corporation itself does not pay CPP premiums on its earnings.
Federal and Provincial Tax:
In the cases of proprietorships or partnerships, taxes are only payable if there is income after considering all expenses and revenues. In the case of a corporation, when money is paid to "employees," the appropriate amount of tax must be withheld from their paycheques. Check with the CRA office for the percentage rates applicable in the current year.
These are things to keep track of to reduce your tax bill. Generally speaking, if you spent money in order to try to earn money as a musician, it is a deductible expense. Any business expense claims must be verifiable with a sales invoice, receipt, or some other voucher that supports the expenditure. So, if you pay cash for any business expenses, be sure to get receipts or other vouchers. Receipts must include the vendor's name and the date. Keep your cancelled cheques and credit card statements as well, as proof that the bill was paid or the asset purchased.
These expenses can make the income you earned as a musician go below zero, or create a 'loss'. A simple way to think of it: if you could explain to a classroom full of Grade 3 students how the expense is related to your music activities (and they understand it), you're probably safe to deduct it. This ability to justify your claimed expenses is important should you ever be audited! When you create a loss using these expenses, it reduces the taxable income you report on your tax return. In the end, that means lower taxes.
- union dues (CFM locals)
- business licenses/professional association fees or dues (i.e. SaskMusic, Songwriters Association of Canada, CARAS, etc.)
- lessons/courses you take to develop your skills (i.e. online classes, workshops, BreakOut West conference)
- legal and accountant fees (music related only - not things like speeding tickets!)
- promoter/publicist fees, agents' commission, etc.
- instrument insurance
- supplies/materials (paper, stamps etc) used in your music business
- CDs, MP3s purchased (ie to practice to/learn new tunes)
- a representative portion of automobile expenses (only if the car is used directly for music purposes at least part of the time). Mileage write-offs are simpler to calculate than trying to depreciate a vehicle, and keeping all the receipts for maintenance and gas, etc. You are allowed to write off approximately $0.45/km (the rate varies from tax year to tax year and is set by the CRA - check current rates), which is also the standard rate that people typically get reimbursed by their employers for business travel in a personal vehicle. Just keep a logbook of all destinations and the kilometres traveled for music.
- a portion of your rent/property taxes, mortgage interest, power, heat, water, home insurance, cleaning materials, and some repairs, if there is an area designated in your home for your music studio/business. It should be either the principal location of the business (i.e. your teaching studio), or space/room used solely for music purposes (songwriting, practicing). To calculate the portion you can deduct, use a reasonable basis, such as the area of the work space divided by the total area of your home. For more information, see the income tax guide called Business and Professional Income.
- cost of (rehearsal) rental space
- industry-related magazines, subscriptions, etc. (research)
- child care expenses (when child care was needed while you pursued musical activities). Child care receipts must include the name of the daycare and/or the SIN of the babysitter in order to be claimed.
- interest paid on loans taken out for music purposes
- money paid to fill-in players and accompanists
- travel expenses - hotels, flights, etc. (Also see automobile expenses and entertainment expenses.)
- SD cards and the like (for recording your shows)
- Minor equipment/supplies such as strings
- partial costs of hair styling, stage makeup, cleaning/repairing clothes - when specifically for a gig. For example, getting your hair styled for a photo shoot.
- Wardrobe items that are only used for stage. (Only claim items that you ONLY wear on stage.)
- PA rentals, gear rentals, etc.
- photographer, developing, photo duplication fees
- advertising fees
- office supplies - costs of photocopying, labels, business cards paper, etc. used to promote the band (posters, mailouts, press kits). Supplies are only those materials you use directly in your work, and for nothing else, such as pens, pencils, paper clips, stamps, and directories, but do not include items such as briefcases or calculators.
- postage and courier fees
- telephone/internet (long distance)
- 50% of your entertainment expenses, including business lunches (taking an agent out to supper) and meals while you on the road for performance. Rule of thumb is did you do this to try and earn/while you were in the process of earning music income? Entertainment expenses include tickets and entrance fees to an entertainment/sporting event, movies, movie rentals, gratuities, cover charges, and room rentals such as for hospitality suites.
Your Gear: A different type of deduction
The cost to repair, maintain, insure and generally upkeep your instrument is deductible in the year that you spend the money under the above sections. For larger items that you purchase for music, from computers to guitars, you can also deduct depreciation (known as Capital Cost Allowance) on a yearly basis.
These expenses directly related to your instrument can be deducted up to a maximum equaling the amount of money you made as a musician that year. You cannot create a loss with these expenses (if you ONLY have these kinds of expenses you will not get a tax refund).
- insurance payments on gear
- equipment repairs
- supplies and accessories (strings, cables, duct tape, etc.)
Capital Cost Allowance (CCA) items:
Acquiring a depreciable item, such as a building, furniture, or equipment (in this case perhaps a guitar or computer), to use in your business/professional activities. You cannot deduct the total cost of the item when you calculate your net income for the year. However, since these properties wear out or become obsolete over time, you can deduct their cost over a period of several years. The deduction for this is called capital cost allowance (CCA).
CCA also applies to sheet music, scores, scripts, transcriptions, arrangements, stereos, CD/cassettes and wardrobe (to qualify, the wardrobe must be acquired by the artist specifically to earn self-employment income).
See below for examples of how CCA is used.
Where to Start
Get yourself organized and record everything in one of those "accounting" books from a stationary store or on a computer spreadsheet. Record all expenses and income, and itemize the usage...
You can then use this, or take this to an accountant, to prepare your taxes, rather than hauling around a pile of receipts. Your accountant will love you.
The bottom line here is to keep all receipts for money you spend, as well as copies of contracts, a log of mileage, and detailed records of the items you own and use in your business. You should try to keep everything grouped by type of expense. Make a separate envelope or file folder for each and put all your pieces of paper together. This will also save you time and money if you take the papers to an accountant at year-end. At any point in time, CCRA may decide to audit you. Not necessarily because you've done something wrong ¡ it could be completely random. But you do need to keep records to prove all your expenses are legitimate.
It makes sense to use a bookkeeper or an accountant to do your taxes (unless you really understand and are sick enough to enjoy this kind of thing). There are a number of reasons why. First, the Income Tax Act is about 3,000 pages long. Second, it changes from year to year. Third, it's really easy to miss something unless you have a lot of time to dedicate to it and finally, you can write off the cost of your accountant, even if all he or she does is complete the business tax return for you.
This is how your logbook might look... Income 2000
Date Description From Amount Balance
April 13 solo pianist Brooks-Howdey Wedding $375.00 $375.00
April 30 fill-in keyboards Glacier Band $150.00 $525.00
April 30 piano lessons (4) Ted Smith $60.00 $585.00
May 5 vocal track @ studio Glacier Band $100.00 $685.00
May 29-30 the band (2 nights) Saskatoon club $1100.00 $1785.00
May 1 20 CDs @ $10 Indie Records store-on-consignment $200.00 $200.00
May 29-30 15 CDs @ $10 off stage sales $150.00 $350.00
June 5 2 t-shirts @ $15 Jack Smith $30.00 $380.00
(It's probably a good idea to break income into separate pages for performance, teaching, studio, merchandise sales, etc.)
Date Description To (Total Amount) Claimable Amount
April 11 entertainment Lunch for Miss Brooks re. wedding gig $40.00 $20.00
April 15 professional dues SRIA (annual) $25.00 $25.00
May 2 (2) instrument cables Mostly Music Inc. $55.00 $55.00
May 15 photography shoot & first proofs Better Look Photography Studio $200.00 $200.00
May 30 Professional gear insurance (monthly) SGI $15 $15
You should separate your "expenses" records into separate areas for gear-related expenses (which have a maximum claimable amount) and other expenses that don't (entertainment, promotion, performance expenses, etc.)
Detailed Tax Example #1
Here is an example of the ways expenses might work:
You earned $1,500 playing shows last year, but your strings ($275.00), professional insurance ($350.00) and that repair bill when you threw the guitar to the roadie (who was up at the bar instead of where he was supposed to be - $1,175.00) totalled $1,800. Because these are all directly related to your instrument, you can only write off $1,500 - what you earned from gigs. The other $300 is lost - you can't carry it forward or backward. Or can you?
Capital cost allowance, or CCA, allows you to write off major purchases over a longer period of time. The logic is that if you expect to earn money with something over a period of time, you should be allowed to write off a portion of its cost in each year that you earn $$. Accountants call this "matching costs to revenues". So the repair in the paragraph above should be added to the cost of the guitar instead. Then you can stretch it out over a number of years. It's called "enhancing capital value", or "cost of making an asset productive". Let's use the same example, but adding the $1,175.00 repair to the cost of the guitar instead:
Less strings: -$275.00
Less insurance: -$350.00
Your guitar cost $2,200. The repair was $1,175. You now have $3,375.00 invested in the guitar. CCA allows a write off of 20% of the value per year (for musical instruments), on a "declining balance" system. Declining balance means that you have the original $3,375.00. You write off $675 ($3,375 X 20%) depreciation, and the remaining (undepreciated) balance is now $2,700 ($3,375 - $675). Next year, you can take $2,700 X 20% = $540 CCA, and so on, and so on. The undepreciated balance is called Undepreciated Capital Cost or UCC. The UCC goes down by the amount of depreciation you claim every year. (That's why it's called declining balance.)
So for the year in the example, you can write off $3,375.00 X 20% = $675.00 against your income:
Less strings: -$275.00
Less insurance: -$350.00
Less CCA: -$675.00
Income after CCA: $200.00
Now your income is $200.00. This is still not great. But you can write off things like mileage, rental of your rehearsal space, lessons, interest on loans for musical purposes ¡ anything not directly related to your instrument. So, now you have the following:
Income after CCA: $200.00
Less mileage to the gig (700km X $0.36/km): -$252.00
Less rehearsal hall rental ($35/month X 12 months): -$420.00
Less guitar lessons: -$200.00
Less interest paid on loan for guitar: -$32.00
Net Loss: -$704.00
This loss can be used to reduce your taxable income from employment for the year. There is actually a section in the tax return for income/loss from partnership in the first section, right by farming/fishing income (see illustration later in this article). But, you may want to think about this some more. Do you really need the refund right now, or are you going to have a lot more musical revenue in future years, and will need expenses to offset that? You actually don't have to take CCA in any given year. You can "save up" your depreciation for the years that you need it.
In the previous example, there are more than enough expenses to create a loss without taking any depreciation (the loss is over $700, and the CCA used is only $675.) You would still have a loss without using CCA, so you can save the CCA for next year. Remember, you can only deduct expenses related to the actual instrument to an amount equalling what you made playing- but things like mileage, lessons & hall rent can be used to create a loss. Just make sure you have bills, or other proof to back you up.
So, instead of claiming all the CCA, just use what you need, depending on what your goal is. Remember that CCA is a declining balance (you can only write off 20% of the UCC per year, which means the amount you can claim next year goes down if you claim this year). If you don't need it all right now, don't deduct it, save it for when you do. Another neat thing about CCA is that in the year you buy or sell something depreciable, the maximum CCA you can claim is cut in half, except for items allowed 100% depreciation. It's called the "half-year rule".
Detailed Example #2
Watch this carefully, because there are several issues at work here:
It's your second year as a musician. Things are looking up, lots of gigs booked, major label interest. The first year was the example above, where you had a loss from self-employment of $704.00, and you did take all of the CCA because you wanted a refund. With your refund and the money your fat cat uncle gave you for Christmas, you bought a swank new rack-mounted tuner for $500 plus taxes (GST = 7%, PST = 6%). You made $10,000 from 20 paying shows, traveled about 4,795 kilometres to perform at various festivals (you have a mileage log), wined and dined the record company execs at a fine restaurant (bill = $325, results = priceless). You spent $500 on strings, $300 on insurance, $1,500 on your stage wardrobe, $6,372 on PA rental/transport and $1,200 on renting rehearsal space. You performed for free at a benefit concert in Moose Jaw, you had colour posters made ($350) and you burned a 6 song demo with 100 units ready for sale. The recording cost you $1,100 plus GST, and manufacturing was $3/unit plus GST (full colour insert). You sold 95 copies at $10/each, so the return was pretty good overall. You are going to make 500 more copies to sell at shows next year.
L. Nino 2000 Statement of Business Income
Merchandise Sales $950.00
Total Revenue $10,950
PA Rental $6372.00
Rehearsal hall rental $1200.00
Mileage (4,795 km @ $0.36/km) $1726.20
Meals ($325.00 X 50%) $162.50
CD Manufacturing (95 sold, cost $3 each) $285.00
CD recording $1100.00
Total Expenses $11,995.50
CCA (see next) $1500.00
NET LOSS AFTER CCA $2545.50
The net loss after CCA (see table) should be put on your tax return in the section for "Income/Loss from Self-employment". A copy of a financial statement like this should be included with your tax return, but do not send in your receipts. Keep them in a safe place, sorted by year, for up to 7 years from the date of the tax return. Subtract this Net Loss from your regular employment income to arrive at your taxable income. A sample tax return is given on the next page to show where the information should go.
No charitable donation deduction was made for the free show. This is because the mileage and any other associated costs were written off as expenses. It is always way easier to prove that you drove to a show and played for free than it is to establish a "value" for a free gig.
Nothing has been done with the GST and PST paid on supplies and services used. This is because you haven't charged it, so you don't get an Input Tax Credit (or ITC) for it. If you are in a situation where you earn enough to collect GST, do yourself a favour and hire an accountant (remember, accountant fees can be written off).
The CD recording is fully written off in the year it happened. This is because it really only has a useful economic life of one year. You should always write off recording costs in the year you record. Think about it: you'll likely be back next year to make a new disc, and we all know how "flavour-of-the-week" the music industry can be. On the other hand, the cost per disc goes with the units sold.
Capital Cost Allowance Detailed Calculation
Class 8, 20% (instruments)
UCC at Dec 31, 2016 $2700.00
(GST or PST cannot be depreciated, ever) $500.00
($2,700 X 20% + $500 X 10% - half year rule) $590.00*
CCA taken for Class 8
(take only what you need) $0.00
UCC at Dec 31, 2017
(use this as the basis for 2001 CCA) $3200.00
Class 12, 100% (uniforms or costumes)
UCC at Dec 31, 2016 $0.00
CCA Available ($1,100 X 100%) $1500.00
CCA taken for Class 12 $1500.00+
UCC at Dec 31, 2017 $0.00
*In 2018, you will be able to take 20% of the UCC at Dec 31, 2017. The half-year rule will no longer apply to the tuner because 2017 is NOT the year of acquisition. So, in 2018, you will have $640.00 CCA available. CCA was not taken under this Class this year because we already have a loss, and may need the extra depreciation next year.
+ Because you are allowed 100% for Class 12 items, you do not have to apply the _ year rule. You also have to take the full amount of CCA this year. The reason is, 100% depreciation makes this exactly the same as a regular expense. Regular expenses all have to be taken in the year they occur, so this is treated the same. In 2001, there is no UCC in this class. So, unless you buy more wardrobe items, you have no CCA to use up under Class 12 in 2018.
There are also issues when you sell the instrument (or amp, or whatever) for any amount different than the depreciated value. That's a whole other story, and you really should get an accountant for that type of thing.
Reporting Your Figures - T1 General
This is how you might record your figures on a standard T1 (personal income tax) form.
(box 14 on all T4 slips) (your day job) 101 $22,468.00
Self employment income
(see lines 135 to 143 in the guide)
Business income Gross 162 $10,950.00 Net 135 (2545.50) *
Professional income Gross 164 Net 137
Commission income Gross 166 Net 139
Farming income Gross 168 Net 141
Fishing Income Gross 170 Net 143
Total Income Net 150 19,922.50
* Your income or loss as a musician. Gross is ALL the revenue you received, Net is what you have left after expenses.
Now, if you've paid in the proper amount of taxes for your day job earnings, you will be getting a tax refund. Let's say, through tax regularly deducted from your pay stub, you paid $4599.20 in taxes based on an income of $22,468.00 (this would be line 437 of the return, "total income tax deducted from all information slips").
Now that your income has been reduced to $19,922.50, your income tax is re-calculated to be somewhere around $4078.14. That means you've overpaid your taxes in the amount of $521.06, and a refund will be on its way. Yaay! (YEAH, this is really oversimplified, but you should get the general idea.)
So In Conclusion
Keeping careful and detailed records throughout the year will save you from digging through hundreds of receipts at tax time (or if you are audited), and save you (or your accountant) time and money. Remember, you must keep the books/records/receipts for at least six years after the end of last taxation year in which they were claimed.
Yes, it's a lot of work. But wouldn't it be nice if you got a tax refund of perhaps $1000 or more, because you are a musician?