EARLIER THIS YEAR, STEVE HIGGINS found himself faced with a large and unexpected tax bill. The sculptor’s 2013 tax return had been reassessed by the Canada Revenue Agency (CRA), and the award-winning artist from Halifax was told he owed $14,500 in back taxes. The CRA had disallowed deductions commonly claimed by those in the creative sector and deemed Higgins, a part-time instructor at NSCAD University (formerly the Nova Scotia College of Art and Design), to be a hobbyist rather than an artist.
The issue sparked an outcry from the arts community and led a national arts group to establish a special committee to examine the way the CRA deals with artists.
For financial professionals, the uproar underscores the complexity and the distinctive nature of the financial issues that can be faced by visual artists, musicians, actors and others in creative industries.
“On the one hand, artists are no different from any other client,” says Stan Tepner, first vice president and portfolio manager with CIBC Wood Gundy in Toronto. “On the other hand, there can be notable differences.”
A key difference is lack of predictability in these clients’ incomes, says Diana Bahr, a graduate of OCAD University (formerly the Ontario College of Art and Design) in drawing and painting.
“One of the specific challenges artists face is planning their finances with an irregular income,” says Bahr, who also is a former employee in the university’s financial aid department, where she provided financial literacy and professional practice workshops to student artists and designers. “Some months may bring in decent money and other months may be dry. So, it’s hard to determine when it’s OK to spend and when to be frugal.”
Finding ways to deal with the feast and famine reality is one of the biggest challenges artists face, says David Sharp, a financial literacy educator in New York and the author of The Thriving Artist: Saving and Investing for Performers, Artists, and the Stage & Film Industries.
“Putting a financial plan in place that helps to control and even out constantly fluctuating income patterns can help [people] to redirect energy into doing their art rather than worrying about having the funds to pay the bills,” Sharp says.
As a financial advisor, you need to ascertain how your artist clients keep their financial houses in order, says Tepner, certified financial planner and chartered professional accountant (CPA): “Just because they don’t have a steady paycheque doesn’t mean they can’t be organized.”
Being a professional artist not only makes budgeting a challenge; it also may make the client more susceptible to scrutiny from the CRA.
“Many self-employed artists have sporadic employment opportunities and irregular incomes and, as such, they may be more susceptible to being audited,” says a public briefing note from the Artist Taxation Committee of the Canadian Arts Coalition, a group of arts organizations that advocates for support for the arts at the federal level.
April Britski, national executive director of Canadian Artists’ Representation (CARFAC), a non-profit corporation in Ottawa that represents visual artists, points out that the vast majority of financial information and advice available today is geared toward workers with steady salaries who expect to work consistently for many years before retiring.
“Most artists will not experience that kind of work lifestyle and steady income,” Britski says. “Their challenge in tackling their own financial wellness is to first understand the nuts and bolts of saving and investing, and then to figure out how to apply it to the reality of their artistic lifestyle.”
Helping artists understand cash flow – what money comes in and what expenses are necessary – is an important role for advisors, Tepner says. Then, the goal is to help artist clients understand how to manage their money, and that means assisting them with a budget.
“An emergency fund is more important to someone in the gig economy than anyone else,” Tepner says. “You don’t know how long [artists] will need to rely on [that fund].”
Bahr holds financial workshops for artists during which she recommends that individuals set some money aside when they’re earning some to help cover less affluent periods. A financial plan for artists, she notes, should include “saving for emergencies, working toward paying themselves a salary from their art practice, planning for retirement and securing health and dental insurance.”
Many artists lack employee benefits such as health plans and company pensions. But there are benefits plans out there.
If you have artist clients, find out what resources are available to them. For example, the Artists’ Health Alliance, in partnership with the Al & Malka Green Artists’ Health Centre at Toronto Western Hospital, offers free, low-cost or fee-for-service health services for artists. Check if similar programs exist in your community.
Health and dental coverage also is available for artists through the Arts & Entertainment Plan, a health insurance plan for artists offered by Actra Fraternal Benefit Society, a non-profit insurer owned by artists. For self-employed artists, the medical premiums and expenses could be claimed as a business expense.
Organizations such as the Alliance of Canadian Cinema, Television and Radio Artists (ACTRA) and the Canadian Federation of Musicians (CFM) offer their members access to group benefits. Both organizations offer a range of group life, health and dental insurance, as well as retirement benefits. ACTRA members can hold personal RRSPs through that organization. Similarly, when a musician is paid under a CFM contract, a contribution is made to the Musicians’ Pension Fund of Canada on that member’s behalf. Ask your artist client if he or she is a member of an arts organization that offers such benefits.
You also need to explore another critical issue with your artist clients: what do they understand about running a business? A self-employed artist is a small-business owner and may need advice regarding HST, keeping track of expenses, incorporation, grant reporting and other business issues, according to Bahr.
Artists may live for the sheer joy of touching paint to canvas or holding a theatre audience in the palm of their hand, but the process of making a living from their art will come down to dollars and cents – and the Income Tax Act.
That legislation, as Higgins discovered, may contradict other federal government statutes. In Higgins’s situation, which involved exhibition expenses being denied because they were funded by public grants, the CRA declared the sculptor’s practice to be a hobby, not a business.
“This is based on [the CRA’s] assertion that income generated from grants, honorariums and awards, rather than sales of art, are not eligible to claim related expenses against,” Britski, co-chair of the Canadian Arts Coalition’s Artist Taxation Working Group, wrote in a statement on the issue.
This decision is worrisome for several reasons, Britski noted. For one, Higgins met the CRA’s criteria to determine if an artist has a reasonable expectation of profit and has achieved professional status.
“Moreover,” Britski wrote, “the disregard of public funding as an eligible income source from which expenses can be deducted not only shows a fundamental misunderstanding of how contemporary artists work in Canada, but it is inconsistent with the CRA’s own advice on Artists’ Project Grants.”
Britski identifies another common tax issue for visual artists: donations in exchange for a tax receipt. When an artist donates a work of art to a charity in return for a charitable tax receipt, the CRA considers the donation to be a gift out of the artist’s inventory – and, therefore, a capital gain. Tax applies to the amount given on the receipt and the tax credit applies to only a fraction of the donation. Therefore, the artist often has to pay income taxes on donated artwork.
“There also are serious financial issues with capital gains taxes on an artist’s inventory when they die, which are rarely planned for,” Britski adds.
When an artist dies, his or her inventory of work becomes a “capital property” for the beneficiary and is subject to capital gains taxes. These issues can be complex and should be handled by a tax specialist.
While you don’t have to be a tax expert to be an artist’s advisor, you should have a network of experts to call on, says Tepner: “Associate with a CPA and legal firms that specialize in working with artists.”
To meet the needs of artists, you will need to be creative, notes Sharp, formerly a professional dancer: “Instead of trying to fit artists into the standard formulas used for clients with traditional work experiences, advisors who work with artists need to listen to their clients’ specific needs and tailor a plan to them.”
Being informed about the arts landscape is essential, Britski says: “I hear from so many artists who say their [financial professional] or CRA agent does not understand what they do, so things are getting reported incorrectly and artists are paying the price.
“If you’re representing an artist and don’t understand their practice or business expenses,” Britski adds, “then do some research or contact someone for advice, such as an artist association.”
SEEKING CLARITY ON GRANTS
Many self-employed artists rely on grants, which can cause complications regarding income taxes.
The Canadian Arts Coalition (CAC), a group representing several national arts organizations, is calling on the Canada Revenue Agency (CRA) to clarify the way grants from the Canada Council for the Arts are reported on artists’ tax returns and the way the tax agency interprets these grants.
In a public briefing note, the coalition’s Taxation Committee states that arts organizations have “heard clearly from numerous members that the CRA has been reassessing and auditing artists at an increased rate over the (past) four years. Notably, many artists’ tax returns are reassessed when they claim Canada Council for the Arts project grants or awards.”
The committee stated it also is concerned about some of the decisions CRA officers have taken while reassessing artists’ tax returns recently.
“In some instances,” the committee states, “it seems that the officers reviewing the tax return have misinterpreted [the] CRA’s own rules and bulletins. Any taxpayer should have greater confidence that an officer reviewing [his or her] file will have done reasonable research into what should be allowable.”