14 January 2011 External T.I. 2010-0381591E5 - Self Employed Artist Expenses

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Can an artist claim previously unreported expenses against future income?

Position: Question of Fact

Reasons: The determination of whether a taxpayer has a business activity throughout a period without earning income in any year is an objective determination to be made from all the facts.
Where it is determined that the taxpayer's activity is a business, amendments may be made to the ten (10) prior Income Tax and Benefits Returns to include any otherwise deductable unclaimed reasonable business expenses.
Generally speaking, where reasonable business expenses are greater than income, a non-capital business loss may be created. Interpretation Bulletin IT-232, "Losses - Their Deductibility in the Loss Year or in Other Years" provides general guidance for applying the non-capital losses created in one taxation year to net business income in prior and subsequent taxation years.

XXXXXXXXXX
									2010-038159
									Brenda White
									519-645-5454
January 14, 2011

Dear XXXXXXXXXX :

Re: Artist Expenses

This is in response to your letter of September 18, 2010 wherein you asked for clarification on claiming previously unreported expenses relating to artistic endeavours.

You advise that you have been an artist since 1992. For the years 1992 to the present you have not earned income or deducted expenses relating to your artistic endeavours. You refer to expenses such as art materials, framing supplies and the use of a portion of your home as a studio. You have asked whether these previously unreported expenses can be applied to potential future income.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

In order to be able to deduct business expenses incurred in a particular year, it must first be concluded that a business exists in that year. The CRA's Guide T4002 "Business and Professional Income 2009", states that generally, a business is an activity that an individual intends to carry on for a profit and there is evidence to support that intention. In determining whether a business exists, we follow a principle established by the Supreme Court of Canada in a case called Stewart v the Queen. In Stewart, the court recommended a two-stage approach to determining whether a taxpayer's activities constitute a source of income under the Income Tax Act (the "Act"). The first stage is to determine whether the activity of the taxpayer is undertaken in pursuit of profit, or if it is a personal endeavour. If there are elements which suggest that the activities could be considered a hobby or other personal pursuit (as may often be the case in respect of artistic undertakings), the venture will be considered a source of income for the purposes of the Act only if it is undertaken in a sufficiently commercial manner. Paragraph 5 of Interpretation Bulletin IT-504R2 "Consolidated, Visual Artists and Writers" provides a list of factors that would be relevant considerations to the question of whether the activities have been carried out in a commercial manner.

The second stage of the test from Stewart then categorizes the source of income as either business or property. Although we have insufficient information to arrive at a conclusion about your situation, the following comments are based on your assumption that as a self-employed artist you are carrying on a business activity.

Where it is determined that a taxpayer's activity constitutes a business, income from that business is the profit for the year determined by subsection 9(1) of the Act and in accordance with various specific rules. Note that IT-504R2 discusses certain aspects of computing income from an artist's business. For example, ¶8 and ¶9 discuss the valuation of inventory and ¶10 discusses deducting expenses related to a work space in the home. There is additional discussion of this latter issue in Interpretation Bulletin IT-514 - "Work space in home expenses". Further, chapter 3 of Guide T4002 (at the discussion of Line 9945) describes suggested methods for apportioning work space in home costs, where part of a home is used for both business and personal living.

Generally speaking, where reasonable business expenses are greater than income, a non-capital business loss may be created. Interpretation Bulletin IT-232, "Losses - Their Deductibility in the Loss Year or in Other Years" provides general guidance for applying the non-capital losses created in one taxation year to net business income in prior and subsequent taxation years.

Where a prior year's income or expenses were unreported, the CRA provides an individual with two options (electronically or by mail) for requesting amendments to prior T1 Income Tax and Benefits Returns. The CRA website, www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/chngrtrn-eng.html provides details on how many prior years may be amended and the documentation required for each of these options.

We trust these comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch