2017-0706471E5 business expenses

Principal Issues: Whether certain expenses incurred to attend residencies, to produce art to earn business income are deductible for income tax purposes?

Position: It depends on the facts.

Reasons: A taxpayer carrying on business may deduct, from income, expenses incurred to earn income from their business, but not personal or living expenses.

Author: Krantz, Lita
Section: 9, 12(1)(x), 12(2.2), 18(1)(h), 56(1)(n) and (o), 67

XXXXXXXXXX                                                                                     2017-070647
                                                                                                             L. Krantz
June 1, 2018

Dear XXXXXXXXXX:

Re: Artist’s business expenses

We are writing in response to your email dated May 16, 2017 concerning whether you can deduct certain expenses for income tax purposes to spend time at a studio facility to work on a prescribed art project. You referred to this time, with respect to artists, as a residency.

You explained that most residencies are not affiliated with a school or with training, and are not conventions. The goals of a residency are specific to the artist, and can be for the purpose of creating art to sell, for an exhibition, or for research and idea development. In addition, you explained that the residency is an opportunity to work with other artists to develop both the artist’s professional network and art.

Residency 1

You have stated that you are a self-employed artist who lived in Canada. You received a project grant from the XXXXXXXXXX (“Foundation”) to attend a residency in another country for three months. The purpose of the grant was to assist you to create art. The art you created was shipped to, and sold in, Canada. You enquired whether you can claim travel expenses, such as accommodation and food, for the three-month period that you were away from home. This period was dedicated to art production in order to earn income from the art.

Residency 2

You explained that your second residency began in September 2016 and was expected to end at the end of 2017. You moved from one part of a province to another part of the province to attend the residency. You did not receive a grant to attend this residency. Your time at this residency was dedicated to art production, to earn income from the art. You want to know, as a self-employed business person, whether you can claim food and accommodation costs since you moved to another part of the province. The reason for your move was to attend this residency to produce art, which is your source of income.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Residency 1

Depending on the nature of the project grant and the arrangements or circumstances under which you received it, the project grant may be considered:

(a)   income from business;
(b)   income from an office or employment; or
(c)   a scholarship, fellowship, bursary, prize or research grant.

Based on the information you have provided, that you are a self-employed artist and attended the residencies to produce art to sell, we agree that the project grant to attend Residency 1 appears to be income from a business. For additional information on grants received under (b) or (c) above, we refer you to Interpretation Bulletin, IT-257R, Canada Council Grants and Income Tax Folio S1-F2-C3, Scholarships, Research Grants and other Education Assistance.

A taxpayer carrying on a business may be entitled to receive some form of financial assistance from a government source, such as a project grant from the Foundation. Generally, when such assistance is received in the course of earning income from a business to cover the cost of business property or business outlays or expenses, the amount would normally be included in computing the taxpayer’s business income in the year the assistance is received.

A taxpayer carrying on a business may generally deduct, from income, expenses incurred to earn income from the business. The deduction of any outlay or expense that was made or incurred for the purpose of gaining or producing income from a business is subject to the general rule in section 67 of the Act. In other words, such outlays or expenses must be reasonable in the circumstances. It is a question of fact whether a particular artist may deduct particular travel expenses incurred from business income. More information on travel expenses that may be deducted can be found in Guide T4002, Business and Professional Income (Guide), and Interpretation Bulletin, IT-504R2, Visual Artists and Writers. Travel expenses include public transportation fares, hotel accommodation, and meals. In most cases, a 50% limit applies to the cost of meals, beverages, and entertainment.

However, paragraph 18(1)(h) of the Act denies the deduction of personal or living expenses incurred by a taxpayer, other than travel expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business. It is the view of the CRA that a taxpayer on a relatively short-term stay, in a regular hotel room, would normally be considered to have incurred travel expenses while away from home. However, the rental of an apartment on a monthly basis would tend to indicate that a person was temporarily residing at the location. If a taxpayer is temporarily residing in a place, amounts paid for meals and lodging in that place are considered to be personal and living expenses rather than travel expenses. As such, they are not considered allowable travel expenses and cannot be deducted because of paragraph 18(1)(h).

Residency 2

Although it is a question of fact, in our opinion you were not travelling when you attended the second residency since you moved to the location of that residency. Therefore in our view, the food and accommodation costs are personal living expenses as described under paragraph 18(1)(h) of the Act, which are not deductible in calculating business income.

We trust our comments will be of assistance.

Yours truly,

Lita Krantz, CPA, CA
Manager - Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2018

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2018