We have a client who wrote a book a number of years ago on the topic of “parks in protected areas”. lat year he received $152 in royalties. The last few years have been similar. Every year he submits travle and meals and entertainment expenses for, as he says “I continue to travel around the wold to examine parks, with the aim of collecting materials that can be used in future editions of the book”.
Is this one of those “who am I to say he has no expectation of income from this venture” and we should just claim it and leave it up to CRA to object?
I’ve had a few authors over the years…some of whom actually made REAL money…and more than once. Those I don’t mind reporting expenses because there actually IS a REOP and they’ve proven that.
This one? No…or at least only enough to reduce the net royalties to NIL.
How about reporting income as work in progress (inventory) to offset the expenses. When real income does come in and reduce the inventory to offset taxable income ?
Interesting idea. How are you going to support the value of WIP? He might “someday” have a book that makes a million dollars a year. Will he want to report that as income now?
“…a number of years ago… lat year he received $152 in royalties. The last few years have been similar. Every year he submits travle and meals and entertainment expenses for, as he says “I continue to travel around the wold…”
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Since for REOP, his expenses are $151 or less, what I REALLY want to learn from this person, is HOW can I “continue to travel around the world” on holiday every year after tax season, for LESS THAN $151 …
I’ve done this with painters, sculptors, and authors with a record of having made sales in the past (not hobbyist). Inventory is the lesser of cost or market and creating it allows to claim expenses unquestioned. The value of work in progress is limited to the actual cost without personal expenses. It reduces the bite when creations are sold. Should the inventory never sell, liquidation time or change of use, but I’ve not had to do this yet. The inventory could also be devalued over the years.as the artist slows down.
“Oh no, his expenses are considerably more that $151”
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How disappointing!
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Then it would appear that Stewart v Canada would say that he is undertaking a rather expensive “personal endeavour”…
If the $151 is for present royalties, it has nothing to do with the project he is working on. Research and travel expenses pertain only to work in progress. The only expenses he can claim against the $151 would be expenses made during the year for the book earning royalties. If no expenses such as promotion etc, $151. should not cause too much additional tax to pay.
Artist also have the option of declaring the value of their inventory as $0.00. This is advantageous for many artists, considering that at least 50% of most fine art (painting, etc.) is never sold. This means that ALL of their supplies (paint, canvas, etc.) purchased in a year can be written to CoGS every year.
It’s an interesting area of tax. I have an author who makes nothing for one or two years at a time, then completes a biography and makes $150-200K in the next year. During the intervening years there are (sometimes) considerable expenses on research, travel, communications, etc. Given that the author is incorporated, it’s somewhat easier and more appropriate to simply claim the losses, apply them against whatever income there is…and then tax the income as it occurs.
That option is rather limited for a self-employed individual, especially where there is outside personal income.
So, authors/artists’ WIP is not the same as for us accountants/lawyers/professionals?
For most of us professionals, our WIP is “hours worked, but not yet billed to the clients” and the value of that is the $ amount that will be billed to the client - there is no “cost” (unless you consider salaries to employees) and we now have to include the FMV of our WIP as taxable income every year, right?
Why would authors/artists be allowed to value their WIP at zero when professionals are no longer allowed to? Is this similar to the lawyer’s exception for contingent fees?
That exemption for artists has been available for decades. Most artists actually make less than minimum wage from their work, and it is considered one of, if not the highest, risk businesses to be in. Lawyers and accounts are pretty low risk businesses. Note: it is only for visual artists!
" 1.34 As a general rule, the cost of property unsold and material unused (in other words, inventory) at the fiscal year-end of a business is only deductible in computing the profit or loss of the business for a subsequent fiscal year when any such property is sold. However, for the purpose of computing income from an artistic endeavour for a tax year, subsection 10(6) allows an individual to make an election in the return of income for the year that would deem the value of the property in inventory for that year to be nil. The expression artistic endeavour of an individual is defined in subsection 10(8) to mean the business of creating paintings, prints, etchings, drawings, sculptures, or similar works of art, where such works of art are created by the individual.
1.35 It should be noted that by virtue of subsection 10(8), an individual cannot make a subsection 10(6) election in respect of:
any work of art which has not been created by that individual, or
a business of reproducing works of art.
The subsection 10(6) election is not available to an individual who is in the business of writing.
1.36 Where an individual has made a subsection 10(6) election for a tax year, it is effective for subsequent tax years as well, and can be revoked only with the concurrence of the CRA and on such terms and conditions as are specified by the CRA."
So was the exemption for accountants, lawyers, and other professionals. But, that exemption was revoked in 2017, remember? Sorry, I don’t know the section of the ITA in which it was specified, but it was big news when they announced it in 2015 or 2016. I was under the impression that they revoked that exemption (for professionals) because everyone else was always required to record/report their WIP or other inventory on the balance sheet. I’m just surprised to discover that other exemptions existed, and were not revoked at the same time.
