Tax time

Found it! is an occasional blog series by ArtsPond Founder, Jessa Agilo. In this article, Jessa shares her personal experiences and suggested remedies after running afoul of Canada Revenue Agency in the reporting and taxation of individual grant income for arts professionals. Trigger warnings for the Stories section to those wary about issues arising from economic and mental health challenges, including thoughts of suicide. In this case, you may prefer to skip to the Suggestions at the end.

Stories

Taxation in arts and culture

As the year comes to a close, are you starting to ponder all the things you need to do to prepare for tax time?

For many in the arts and culture industry, the end of year tax season often brings a sense of trepidation, fear, and anxiety — and for good reason.

For example, artists and arts professionals have frequently been faced with the very real threat of running afoul of the Canada Revenue Agency due to misunderstandings about how taxation of public sector grants to individuals in the industry should be applied.

Despite clear guidances from the Canada Revenue Agency’s Income Tax Folio S4-F14-C1 (which confirms how grants to professionals from public funding agencies like Canada Council for the Arts are to be treated in terms of taxation), these misunderstandings appear to stubbornly persist. I was caught up in this myself in 2023 and am only now, nearly two years later, able to fully contend with the post-traumatic stress of my experiences and share what I learned in a more public way.

Drawing from my own personal struggles with the Canada Revenue Agency, this article explores the issues and shares some recommendations and actionable steps to avoid future pitfalls. While the strategies I discuss were instrumental in eventually resolving my case in 2023, I strongly encourage consulting a qualified professional for personalized advice. I am not a certified tax lawyer or accountant, and expert guidance can ensure your unique situation is handled correctly.

Public funding to professional arts workers

Hill Strategies Research has noted there are more than 202,000 professional artists in Canada, representing 1% of the total Canadian labour force, or 1 in every 102 Canadian workers. Many of these professional artists receive income from a variety of sources, including grants from federal agencies like Canada Council for the Arts or provincial agencies like Ontario Arts Council.

In 2021-22, I estimate that more than 2% of professional artists in Canada received a grant from Canada Council for the Arts, while more than 3% of professional artists in Canada received a grant from a provincial arts council. In that same year, the average grant awarded to individuals appears to have ranged between ~$4,350 to ~$10,500 provincially, and ~$27,000 federally. A rough estimate could be in the range of 11,000 to 12,000 individual arts workers that must correctly report their financial information from grants to Canada Revenue Agency each year. If a small segement of just 0.1% (120) experience challenges with Canada Revenue Agency, that is still 120 too many.

These figures are drawn from a non-exhaustive sample of seven public agencies in arts and culture that have published information related to their support of individual grantees in 2021-22, including:

A troubling pattern

Within my personal networks, I have heard colloquially that artists and arts professionals are being audited, reassessed, or penalized for unexpected and unlawful tax liabilities on revenues from public sector grants and either lack the resources to appeal, or face prologed battles to resolve their cases. Everyone I spoke to expressed a preference not to share their experiences publicly. I understand this completely, but it does mean it is not entirely understood how much the sector is being impacted.

One notable example that is publicly available is the case of professional artist Steve Higgins, reported by CBC News in 2019. Higgins successfully appealed a Canada Revenue Agency ruling that had erroneously designated him as a hobby artist (and not a professional), resulting in a $14,500 tax bill after receiving grants from multiple arts councils. The Canada Revenue Agency initially rejected his expense claims, stating his artistic project “was funded by public grants and not sold for profit”.

This case underscores the challenges faced by professionals in obtaining fair taxation treatment for grants to arts workers. At the time, the Canadian Arts Coalition formed a Committee on Taxation and the Artist, and the work of several tireless individuals, organizations, and funders helped to spearhead awareness of these and other issues and work toward solutions. Unfortunately, these types of problems seem to keep popping back up again.

For example, in 2023, I also won a long and personal appeal against Canada Revenue Agency where the $135,500 I had received in grants as an individual arts worker in 2018 were designated as educational scholarship income rather than professional arts income. This meant I was assessed with only $500 in total tax credits available instead of up to 100% of grant amounts received when correctly treated as professional income. This resulted in a tax liability exceeding $42,000 plus an additional $9,800 in accumulated interest, fines, and arrears. While Canada Revenue Agency garnished all my liquid cash assets to collect on this debt, all the monies were eventually returned to me eight months later following a successful appeal.

What went right and wrong

To state it clearly, the erroneous tax assessments and actions described above by Canada Revenue Agency were unlawful. When an individual grantee has otherwise reported their professional activity, grant income, and expenses correctly, then, like any other business or professional activity, they are eligible to pay taxes on net income only after deductions for eligible expenses.

In my case, I will openly admit that I am partly to blame for what happened to me. However, there were many missed opportunities where Canada Revenue Agency could have corrected the course on my file that I found extremely difficult to negotiate. Let me try to explain.

In 2018, I had originally submitted my tax return details on time using NETFILE. Regrettably, this method reported net tax details only and excluded the details on income and expenses I had outlined in T2125. I had partially expensed income from three separate grants I received in 2018 and prior years using the work-in-progress method. These grants included two professional development grants under $15,000 each plus a $110,500 grant from the Digital Strategy Fund at Canada Council for the Arts. I reported zero personal income from this large grant over two successive tax years in 2018 and 2019. 100% of this grant was subcontracted to other parties, so the net tax liability I owed was $0. However, Canada Revenue Agency’s T1 Matching office initiated an audit of my file in 2019 when they could not match their accounting of my T4A income with my T1 Tax Return.

This is where things started to go off the rails. I self-identify as a person who is disabled. When the pandemic happened, I was sick a lot with COVID-19 and was overwhelmed with work while caring full-time for two aging parents who both eventually died. As a result, I uncharacteristically fell behind on filing my taxes and did not respond to T1 Matching’s audit of my 2018 taxes until my file was sent to collections.

By that time, it was too late for T1 Matching to review the files I sent in response to their audit including grant letters, invoices, and receipts from eligible expenses. I imagine that a timelier response may have resulted in a more appropriate assessment of my file. However, my late file submissions meant my case was not reviewed by T1 Matching, but instead forwarded onto T1 Adjustment. It was this office that quickly assessed my grant funding not as professional income but as education income which resulted in the very large tax liability mentioned above.

I assume T1 Adjustment either did not review my audit support material (where I had clearly stated in a cover letter that I had received artist project grants) or were unaware of the rules around fair taxation of public sector grant income for professionals in arts and culture.

I submitted a complaint to the Office of the Taxpayer’s Ombudsperson and sought out the help of a Problem Resolution Officer at Canada Revenue Agency who shared my concerns with two additional offices.

Despite quoting the laws outlined in the Income Tax Folio, the Problem Resolution Office said they were not equipped with the knowledge or capacity required to resolve my file. I felt abandoned knowing that the law was on my side and no one was willing or able to do anything about it. I was left to my own devices with the collections officer being generous in understanding my situation while also wanting to resolve my file quickly in their favour. It was only after reaching out to my Member of Parliament that my file was opened again for reassessment (and a resolution in my favour) by the Commissioner of Revenue.

Ripples aplenty

I like to think of myself as a capable and resilient person. However, I was brought to my knees by this experience. After my case was sent to collections, I was faced with the prospect of having to declare bankruptcy and losing my home while I waited eight months for my file to be resolved. During a significant downturn in financial markets, I had to cash out all my meager RRSPs at a 20%+ loss to survive. A lean was placed on all my future revenues and access to my bank accounts were completely restricted for months until I was able to convince the collections officer of my tax rights and was given a temporary reprieve until notice of results on my appeals. I wasn’t in a healthy enough mental state to be able to work properly with my team at the pond. Others had to step in. Progress slowed. Projects were postponed. I became a shell of my regular self. In my darkest moments, I seriously considered leaving the arts and culture industry for fear of having this happen to me again. I also contemplated suicide when there appeared to be no resolution coming to my file.

While all of that was incredibly harmful, looking back, the hardest part of this entire experience has been contending with an apparent lack of appreciation, understanding, and respect for the work that I (and by extension, other artists and arts professionals) do; namely, a lack of care for the professional commitments and risks I (we) take to sustain our lives and contribute to society through arts and culture.

Our lives are already financially precarious enough that many of us have been warned since childhood not to undertake a career in the arts.

I (we) only want to be treated fairly by our heads of national revenue while doing our part to grow a vibrant culture and economy in Canada.

I (we) only want the staff of Canada Revenue Agency to be aware of (or where to look for) the tax laws that have been put in place to protect the integrity of our rights as professionals in arts and culture.

Why do we always have to take the fall when the system fails us?

Suggestions

Collectively, our industry and the public funders that support us have tried to steer ourselves away from the negative impacts of misunderstandings in the taxation of grants to individuals in several ways.

For example, to reduce our risk of unlawful taxation, individual grantees can request some arts councils to break up their professional grants into smaller installments that span multiple tax years. However, by doing so, we give up the promise of earning net investment income like other businesses do via the judicious investment of deferred grant revenues into GICs or other safe investments. This holds back our potential and strengthens perceptions that we are not engaged in professional activities with the same protections and opportunities as other industries.

Going forward, I recommend that professional artists and arts professionals continue to take a cautious approach to reporting their grant income for the purposes of taxation. However, there are several things that can be done to reduce the risk of unlawful taxation penalties without giving up the benefits we have the right to exercise as professionals in arts and culture.

These include:

Do not submit late returns

Submit a late tax return no more than 9 months after the deadline if possible. T1 Matching is one of the offices at CRA that appear to know the most about artists grants, and they will be the ones asking for more information from you related to your grants. However, they can only respond to tax files for so long. Eventually they will age out and be forced to forward your file to another office where representatives may be less familiar with tax laws relevant to arts workers. So, if you submit late, your file may be reviewed by people who do not understand your rights.

Do not NETFILE

Do not NETFILE. Rather send paper with your grant letters and supporting receipts straight away.

Save funds for future troubles

Squirrel away some of your surplus income, if at all possible, in the event the Canada Revenue Agency goes after you. Put as much as possible in RRSPs as they cannot garnish those.

Check your My CRA Account

Check your My CRA Account email folder at least once monthly after you have submitted your documentation to ensure you do not miss any important updates.

Appeal issues fast in paper

Appeal issues fast in paper, do not just call and complain. I submitted all of my appeals documentation online using My CRA Account. I heard from multiple agents that they could not find or access these digital documents. I was requested to resubmit them multiple times which slowed the process down considerably. Until their digital systems are improved, sending in paper copies may help to prevent some of that red tape.

Keep records

Keep records of all your calls and correspondence with Canada Revenue Agency.

Upgrade your cover letter language

When you submit your tax return, clearly state in your supporting material cover letter that you received an “artist project grant” with proof of income and eligible expenses attached, including grant confirmation letters plus copies of contracts, invoices, and receipts for eligible expenses.

In the first paragraph and subject header, include a reference to “Income Tax Folio for Artists, Authors (S4-F14-C1)” which outlines the rights you have to deduct up to 100% of your grant amounts with eligible expenses as professional income. The grants are not education, scholarship, or other types of income.

Talk to your MP

Get your Member of Parliament (MP) on your side as soon as possible. Talk to your MP to ask they educate officers at Canada Revenue Agency to better understand the tax laws that are appropriate to professional arts workers. If your local MP is not supportive, make an offer to educate them and invite community members to do the same. I cannot even begin to imagine what I would have gone through if my MP was not a willing advocate for the rights of arts workers. Every MP in Canada must be prepared to step up to ensure tax laws are managed fairly for everyone.

Know your rights

All Canadians deserve fair treatment from the Canada Revenue Agency, a principle enshrined in the Taxpayer Bill of Rights. Familiarize yourself with the Income Tax Folio S4-F14-C1 referenced briefly above. It was developed with the support of Canada Council for the Arts. It clearly states that it is permissable to:

• Report public sector grants as professional business income (1.27) with eligible deductions up to 100% of the total grants received (1.71)
• Report work-in-progress amounts for grant income and associated expenses incurred into the year immediately before or after the year in which the grant is received (1.72).
• While the title of this Folio implies it applies to grants to Artists and Authors only, this is incorrect. I was able to win my case based on being an arts professional recognized and funded by a federal and provincial arts council.

Familiarize yourself with tax reporting methods

For many, the preferred method for reporting net tax liabilities from professional arts project grants (as described by Generator’s Artist Producer Resource) is to outline both total grant revenues and eligible expenses using form T2125: Statement of Business or Professional Activities. This allows artists and arts professionals to provide a fuller accounting of their activities that is not possible when reporting net income only in Line 13010 of the T1 Return, which includes income from taxable scholarships, fellowships, bursaries, and artists’ project grants.  If you use this method, do not submit your return using NETFILE.  You may be subject to audit if you do so, as the details reported in T2125 is not submitted when you use NETFILE.

This approach also supports the accounting of work-in-progress amounts where grant income and matching expenses are split or deferred across more than one tax year. This method reflects and respects the everyday realities of many professionals in arts and culture where, like any business, their activities may span a period that is greater than the single tax year in which they received their professional grant income. By far, it is much less effective to report net income only in Line 13010 of the T1 Return where there is no easy way to understand where net income amounts stem from in comparison to gross revenues reported in the T4A.

Advocate for tax form changes

It is unlikely to change anytime soon, but I am personally expressing my frustration and attempting to advocate for a change to the T1 General tax forms to better support the needs of individual arts workers.

At present, T1 groups together income from taxable scholarships, fellowships, bursaries, and artists’ project grants into Line 13010. As described above, scholarships, fellowships, and bursaries are treated very differently from the taxation of artists’ grants. In my experience, agents at Canada Revenue Agency only pay attention to the rules for education amounts and then apply them wholesale to project grant income. If project grant income was on its own line, some of these errors by association could potentially be avoided altogether.

As larger strategic and multi-year composite grants of $100,000 or more per year to individuals become more common in arts and culture, it is also becoming increasingly urgent to solidfy and strengthen awareness and support for the genuine financial reporting needs of arts and culture workers. In these cases, the deferral of grant income by one year only is not ideal or even insufficient for some of the professional needs in the industry.

Finally, I am advocating for a greater transparency and standardization of reporting practices for taxation in arts and culture. There are multiple ways at present to report our financials to Canada Revenue Agency and there is not a lot of confidence in the industry about what is the correct or at least most accepted practice. Most of us in the self-employed or gig economy cannot afford to hire accountants to do all the work for us every year or to hire lawyers and advocates when things go wrong. Let’s work together to either help educate everyone on how to correctly navigate the system or to have tax forms changed to be more relevant for the ways we live and work.

Let’s meet half way. We are eager to do our part.