As duties go, filing your tax return probably ranks somewhere just north of getting a root canal on the list of things you most look forward to doing. Given the fact that many young people do not file their tax returns and seem to suffer no ill consequences as a result, ignoring this annual ritual is an altogether tempting option. Besides, you've always hated math, and pecking away at a calculator is just about the most un-rock'n'roll activity conceivable, not to mention one of the most frustrating, right?
Well, as someone who's spent the better part of his academic and professional life practicing accountancy, I'd like to set the record straight. Yes, doing your taxes can be boring. But so can washing your dishes or laundering your clothes and neither of those activities offers the same potential for sizeable cash refunds, nor such a thorough cleansing of your conscience.
If you do choose to file your taxes this year, the most important part of completing your return is to maintain good records. Again, keeping good records seems awfully nerdish, but if it scores you a few hundred dollars in refunds, it might help to keep your fledgling band in the black. Face it: if money problems can break up a marriage, they can easily disrupt even the most tight-knit bands.
A Fine Balance
If you're a working musician or even a fledgling musician you can claim deductions for most of your career-related purchases. Deductions are important because they reduce your taxable income; for every hundred dollars that you can reduce your income by, your tax bill will be lowered by approximately $20, depending on your income level.
Before the band members can claim any expenses, though, they will have to convince the government that their band is a potential money-maker. This means either a) you're presently selling CDs and getting paying gigs, or b) you have good prospects to be doing so at some point in the next few years. In short, the government wants to be sure that you'll eventually be able to make some money from your music career. If your tunes are strictly for you and your friends, you are not allowed to claim deductions for music expenses.
Powers of Deduction
If you figure you've got a legitimate chance at even a small-time career, you're probably eligible to deduct expenses. Remember, though, that you can only apply those deductions against the current or future income you earn from your band. So if you made $10,000 waiting on tables last year, and you made $1,000 selling your homemade CDs, the maximum amount of expenses you can claim is $1,000. (You cannot claim music expenses against non-music-related income.)
So what kind of expenses can you deduct? Well, the good news is that you can deduct just about any sort of expense as long as it's related to your music career.
Let's take the example of a band that records an album and hits the road. As for the recording process, band members can freely deduct their equipment purchases and rentals, as well as the cost of their rehearsal space and recording studio. The band can also deduct all costs of manufacturing, as well as all promotional expenses (e.g., stationary, postage, etc.).
Once the band hits the road, most of its expenses will also be deductible. That means hotels, long-distance charges, even the cost of purchasing a cellular phone. You can even deduct 50 percent of all your meal expenses. As for transportation, if you're renting a van for the trip, you can deduct those costs as well as all gas charges incurred during the trip. If you decide to purchase a van, the math gets a bit trickier; whether you acquire it through lease or purchase, you'll probably have to consult with a tax professional to figure out the tax consequences.
What's more, band members can also claim deductions for their research costs, whether they're buying CDs, magazines or concert tickets to check out other bands. There are no hard and fast rules for what's legally deductible, just exercise reasonable judgment and don't be afraid to be aggressive with your deductions but not so aggressive that you're being absurd. Remember: auditors tend to be a humourless bunch.
Sweet Relief
Finding as many reasonable deductions as you can is the key to scoring tax relief. Assuming that all band members contribute an equal share to the group's expenses (and that all revenues from the band are similarly split equally), the tax breaks should be split evenly across all members.
Remember: the more expenses you claim, the lower your taxable income; and the lower your taxable income, the greater the odds that the government will be cutting you a tidy cheque this spring. That sounds a bit like music to the ears, doesn't it?
Martin Turenne is a Chartered Accountant in Vancouver.
Frequently Asked Questions
Do I have to file a tax return?
If you made more than a few thousand dollars in 2004, you have to file a tax return. Even if you earned less than that, filing a return might make you eligible to receive GST credit payments from the government every three months. Can you afford to say no to free money?
Aw, come on. Do I really have to file a tax return?
If you don't file your tax return, you've no right whatsoever to complain about the way this country's run. None. Bitch all you want about tax-evading corporations and loophole-abusing fat cats, but if you're not reporting your income, you're just as bad as they are. Corny as it may seem, it's best to think about filing your taxes as a principled civic duty a way of throwing your support behind the social services that Canadians hold dear.
What are my options for completing my return?
The first of three options and in my opinion, the least attractive is to seek out the help of a paid professional. While these folks typically do a fine job for a reasonable price, paying a professional accountant to do your taxes is kind of like paying a dentist to brush and floss your teeth for you. If you've got your own calculator and a few spare hours, you can do your own taxes with little difficulty.
Your second option is good old-fashioned DIY tax filing. How punk is that? Nowadays, you can file your taxes online, on the telephone, or via snail mail.
For newbies to the process, I'd recommend filing with hard-copy forms because it will allow you to gain a better understanding of the information flow through the tax return.
If you have neither the money to pay a professional nor the patience to complete your own return, you may be eligible for assistance from the Community Volunteer Income Tax Program. If you have a low income and a straightforward tax profile, governmental volunteers are willing to assist you in completing your return. You can find out more information about this free service by calling 1-800-959-8281 or visiting Canada Revenue Agency's website (www.cra-arc.gc.ca/ tax/individuals/topics/income-tax/menu-e.html).
How long should I maintain my records?
Generally speaking, income tax filers must keep all their records invoices, receipts, T4 slips, etc. for six years. If the government ever chooses to audit you, having this information on hand will be crucial to defending your case.
Well, as someone who's spent the better part of his academic and professional life practicing accountancy, I'd like to set the record straight. Yes, doing your taxes can be boring. But so can washing your dishes or laundering your clothes and neither of those activities offers the same potential for sizeable cash refunds, nor such a thorough cleansing of your conscience.
If you do choose to file your taxes this year, the most important part of completing your return is to maintain good records. Again, keeping good records seems awfully nerdish, but if it scores you a few hundred dollars in refunds, it might help to keep your fledgling band in the black. Face it: if money problems can break up a marriage, they can easily disrupt even the most tight-knit bands.
A Fine Balance
If you're a working musician or even a fledgling musician you can claim deductions for most of your career-related purchases. Deductions are important because they reduce your taxable income; for every hundred dollars that you can reduce your income by, your tax bill will be lowered by approximately $20, depending on your income level.
Before the band members can claim any expenses, though, they will have to convince the government that their band is a potential money-maker. This means either a) you're presently selling CDs and getting paying gigs, or b) you have good prospects to be doing so at some point in the next few years. In short, the government wants to be sure that you'll eventually be able to make some money from your music career. If your tunes are strictly for you and your friends, you are not allowed to claim deductions for music expenses.
Powers of Deduction
If you figure you've got a legitimate chance at even a small-time career, you're probably eligible to deduct expenses. Remember, though, that you can only apply those deductions against the current or future income you earn from your band. So if you made $10,000 waiting on tables last year, and you made $1,000 selling your homemade CDs, the maximum amount of expenses you can claim is $1,000. (You cannot claim music expenses against non-music-related income.)
So what kind of expenses can you deduct? Well, the good news is that you can deduct just about any sort of expense as long as it's related to your music career.
Let's take the example of a band that records an album and hits the road. As for the recording process, band members can freely deduct their equipment purchases and rentals, as well as the cost of their rehearsal space and recording studio. The band can also deduct all costs of manufacturing, as well as all promotional expenses (e.g., stationary, postage, etc.).
Once the band hits the road, most of its expenses will also be deductible. That means hotels, long-distance charges, even the cost of purchasing a cellular phone. You can even deduct 50 percent of all your meal expenses. As for transportation, if you're renting a van for the trip, you can deduct those costs as well as all gas charges incurred during the trip. If you decide to purchase a van, the math gets a bit trickier; whether you acquire it through lease or purchase, you'll probably have to consult with a tax professional to figure out the tax consequences.
What's more, band members can also claim deductions for their research costs, whether they're buying CDs, magazines or concert tickets to check out other bands. There are no hard and fast rules for what's legally deductible, just exercise reasonable judgment and don't be afraid to be aggressive with your deductions but not so aggressive that you're being absurd. Remember: auditors tend to be a humourless bunch.
Sweet Relief
Finding as many reasonable deductions as you can is the key to scoring tax relief. Assuming that all band members contribute an equal share to the group's expenses (and that all revenues from the band are similarly split equally), the tax breaks should be split evenly across all members.
Remember: the more expenses you claim, the lower your taxable income; and the lower your taxable income, the greater the odds that the government will be cutting you a tidy cheque this spring. That sounds a bit like music to the ears, doesn't it?
Martin Turenne is a Chartered Accountant in Vancouver.
Frequently Asked Questions
Do I have to file a tax return?
If you made more than a few thousand dollars in 2004, you have to file a tax return. Even if you earned less than that, filing a return might make you eligible to receive GST credit payments from the government every three months. Can you afford to say no to free money?
Aw, come on. Do I really have to file a tax return?
If you don't file your tax return, you've no right whatsoever to complain about the way this country's run. None. Bitch all you want about tax-evading corporations and loophole-abusing fat cats, but if you're not reporting your income, you're just as bad as they are. Corny as it may seem, it's best to think about filing your taxes as a principled civic duty a way of throwing your support behind the social services that Canadians hold dear.
What are my options for completing my return?
The first of three options and in my opinion, the least attractive is to seek out the help of a paid professional. While these folks typically do a fine job for a reasonable price, paying a professional accountant to do your taxes is kind of like paying a dentist to brush and floss your teeth for you. If you've got your own calculator and a few spare hours, you can do your own taxes with little difficulty.
Your second option is good old-fashioned DIY tax filing. How punk is that? Nowadays, you can file your taxes online, on the telephone, or via snail mail.
For newbies to the process, I'd recommend filing with hard-copy forms because it will allow you to gain a better understanding of the information flow through the tax return.
If you have neither the money to pay a professional nor the patience to complete your own return, you may be eligible for assistance from the Community Volunteer Income Tax Program. If you have a low income and a straightforward tax profile, governmental volunteers are willing to assist you in completing your return. You can find out more information about this free service by calling 1-800-959-8281 or visiting Canada Revenue Agency's website (www.cra-arc.gc.ca/ tax/individuals/topics/income-tax/menu-e.html).
How long should I maintain my records?
Generally speaking, income tax filers must keep all their records invoices, receipts, T4 slips, etc. for six years. If the government ever chooses to audit you, having this information on hand will be crucial to defending your case.