Expensive mistakes that artists make with income taxes
When it comes to personal finances, some artists are very creative. For instance, an artist once told me that to record a video for her song, she rented out her couch and worked 12-hour shifts for few months to save enough to make the video. While they are creative in some aspects, many still make expensive mistakes relating to income taxes. Since the personal tax season is here, let’s review some common mistakes that artists and musicians should avoid:
1) Not filing a return on time
Many artists and musicians don’t file their personal tax returns on time, which can be a very expensive decision.
It’s important to file your tax return by the annual deadline to avoid late-filing penalties and interest. The annual deadline is:
April 30th for individuals who are not self-employed
June 15th for self-employed individuals (most unincorporated artists are in this category)
Either way, if you have taxes payable, they’re due on April 30th.
The late-filing penalty is 5% of the balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months. This means that the penalty could be as high as 17% of the balance owing.
If you have a balance owing, the Canada Revenue Agency (“CRA”) charges compound daily interest starting on May 1, on any unpaid amounts owing. The rate of interest the CRA charges can change every three months. See the prescribed interest rates.
In some circumstances, some artists don’t file for years, then they discover that they owe a substantial amount, not just because of the taxes, but because the penalties and interest have accumulated over the years.
Another important reason why you should file your income taxes on time is that in most circumstances, you might have a refund due -- one you might use to invest in your music business.
In some circumstances, not filing a tax return might be considered as tax evasion, which could lead to some criminal charges and serious fines.
2) Not hiring a professional
Many people, artists or not, file their own personal taxes using free or paid tax software, or they’ll use low-cost, non-designated tax preparers to save a few hundred dollars on the cost of filing. Some people who try to save a few hundred dollars in preparation costs end up paying thousands in tax or, worse, fail to take advantage of a tax strategy that could have saved them thousands of dollars.
For instance, I have had band members who weren’t filing their income taxes incorrectly, as they were not accounting for business losses incurred in their partnership. At the end of the day, we were able to refile amended tax returns and recover approximately $10,000 in taxes (combined). That’s the cost of recording an EP!
Many professionals will review your tax situation at no cost. If your accountant or tax preparer doesn’t deal with artists on a regular basis, or they are unfamiliar with the music industry, reach out to one of the many music industry accountants who will talk to you at no cost.
3) Not reporting your music-business activities
Many artists don’t think it’s necessary to report their music business activities. This could be a serious problem – after all, it’s against the law -- and in most circumstances you could also be leaving money on the table.
Canada’s tax system is based on self-assessment, which means that individuals complete their income tax returns and voluntarily report their annual income, deductions and credits. Many artists make the mistake of not reporting their music-business activities. If you earn cash or self-employment income, you’re required to voluntary report it on your personal tax return. If you don’t report it, then you’re committing tax evasion, which is a criminal offense and subject to serious fines and penalties, even jail time.
While the fact that you don’t want to commit a crime should motivate you to report your music-business activities, in some circumstances (especially for emerging artists), reporting your activities could lead to a significant refund. Most artists who are starting out don’t realize that while they might have not earned any income, they might still claim expenses that could net out against other income and save on income taxes. Read my earlier blog on this subject (Click here).
4) Keeping poor records
Many artists don’t organize or keep good records of their expenses and revenues, which leads to them reporting incomplete or incorrect information on their tax returns. As result, some artists lose out on deductions or find themselves unable to provide supporting info for a CRA audit.
5) Not responding to CRA queries
From time to time, the CRA will send out queries and requests to file. Usually they’ll set a certain date for the response. If they don’t receive a response by the specified date, they will arbitrarily assess you or deny a deduction or tax credit you were claiming. This could be very expensive. To reverse these assessments, you might need to hire a professional, and it might take up to a year for them to resolve or reverse the issue.
Send me an email at firstname.lastname@example.org, and I’ll be happy to give you some free tax advice.