How would you feel about paying for lunch, only to discover that your bank account is frozen? You're about to embark on a tour you've planned for months, and now it's on hold because your bank account is inaccessible. You run to the nearest branch and discover that all your money has been drained because your silent partner garnished the money and put a lien on the account – and you’re out of business.
You're saying that this could never happen to you, because you don't have any silent partners. News flash! Most people on this earth have silent partners – and they are governments. In Canada, your silent partner is the Minister of Finance, who uses the Canada Revenue Agency to collect his money
A mistake that many artists and entrepreneurs make is to assume they are in business by themselves. If you're doing business in Ontario, your silent partner will expect 0 to 53% of your net profits, or whatever they consider to be your taxable income.
Is this fair? It's hard to say. There are no free lunches. We have great organizations that support the arts in Canada. We also have amazing infrastructure – from roads to high speed internet, a military, police, firefighters, hospitals, schools, homeless shelters and more – that are supported directly or indirectly by tax dollars. Let's face it, your chances were 1000 times higher of perishing on a trip from Toronto to Montreal 150 years ago compared to today. Today, anywhere in the world is less than a 24-hour flight away.
The common areas that get artists and entrepreneurs in trouble are:
1) Operating on gross: If you're generating $150,000 in revenue, it doesn't mean you have all that money to spend. You have to consider taxes and fixed costs. When it’s time to file your tax return, don't be shocked to learn that you owe $40,000 in taxes.
2) Stealing the government’s money: The government entrusts businesses with collecting GST/HST on its behalf and to withhold and remit certain taxes on payments to employees and non-residents. Some people will collect these funds and use them for their personal needs or to finance their operations. When the CRA asks for this money, these people are shocked and angry.
3) Hiding from your partner: Some people will not file tax returns and assume that nothing will happen. We live in the data age, so don't be surprised when the CRA arbitrarily assesses your tax – whether it’s HST or income – and hands you punitive interest and penalties.
4) Not keeping proper records: Your partner and you operate on a trust relationship. They expect you to maintain proper records and support your claims for income and expenses. They have the ability to come in and examine your records, and if they do and you can't support a claim, you’ll be assessed tax and potentially given a gross negligence penalty.
Many of the above situations will result in you owing money to the CRA. The CRA has a division that is strictly dedicated to collections. They will demand payment, and if you don't have the money to pay, they'll want you to borrow to pay it off. If you can't borrow to pay them (they will need proof), then they will put a payment plan together for you. If you don't provide support or communicate with the CRA, they'll put a hold on your bank account and garnish as much money as required to recover the money you owe.
If you don't have the money, the alternative is to hire an accountant to see if they can resolve the issue. If they can't, then a trustee in bankruptcy is your last resort.
The time and cost of resolving your issues with the CRA could set back your career and business by years. So respect and understand that your partner is there, waiting for their cut – and that they have the power to get it.