When you receive an artist’s grant in Canada from the Canada Arts Council or provincial granting body, the standard advice you’ll get is to report it on line 13000 as ‘Other Income.’ But for working artists, this is not the only, nor the best, option.
Recognizing A Grant From A Slip
The grants we’re discussing here are ones that are shown on a T4A slip in box 105. This is also where scholarships, fellowships and bursaries are reported, so if you were also in school in the year make sure the slip you’re referring to is the one that is for the artist’s grant.
Reporting A Grant On Line 13000
If you refer to most guides on income reporting, including the ones from Canada Revenue Agency (CRA), you’ll see that the standard way of reporting any taxable amounts from box 105 of a T4A is on line 13000 (known as line 130 for tax years 2018 and earlier). In the case of an artist’s or research grant, the recipient is entitled to deduct $500 from the total amount and report the remainder on line 13000.
Example:
Rosalie receives a Canada Council grant intended to cover the costs of an outdoor installation she is creating. The grant is reported on a T4A from the Canada Council showing $5,000 in box 105.
Following the advice she finds on CRA’s website she reports $4,500 on line 13000 ($5,000 minus the allowable deduction of $500).
In this situation, she will be taxed on $4,500 of income.
A Better Place To Report Artist’s Grants
For a working artist, producing and selling art is considered a business for tax purposes. Form T2125 Statement of Business or Professional Income is the schedule filed as part of the income tax return showing revenue and expenses relating to a business, including the business of art.
If a taxpayer regularly earns revenue through their art, they are allowed to choose to report artist’s grants as part of their art revenue, rather than on line 13000. In fact it is more accurate to do so, because line 13000 Other Income is usually for types of income that are atypical. Artist’s grants, by contrast, are a typical form of income for artists in Canada.
The reason this distinction matters is that, unlike line 13000 income, any profit from your business is pensionable, which is to say it affects your Canada Pension Plan (CPP) contributions. And that in turn matters because pensionable earnings increase the amount of pension you’ll receive from the government when you retire. This is the first advantage of reporting artist’s grants on T2125 instead of line 13000: it has the potential to increase your pension.
The other advantage of reporting a grant on T2125 is the result of how typical artist’s grants work in Canada. The vast majority of arts grants in Canada are project grants, rather than subsistence grants. In other words, the amounts they are designed to cover are the actual expenses of the project. They’re not intended to be used for the artist’s personal needs such as food and shelter; rather they’re supposed to be used up in the production of the art project. When all the expenses of the project are deducted from the grant, there should be little or nothing left.
Form T2125 isn’t just used to report business revenue; it’s also used to deduct expenses relating to that revenue so that only the net profit (what’s left after expenses) actually gets taxed. And this is the other advantage of reporting on T2125 instead of line 13000: on T2125 you will almost always get to deduct much more, and therefore pay much less (or no) tax on a grant.
Example:
Rosalie instead decides to report the grant on T2125. Her budget for the project ends up being very accurate, and she finds that the expenses relating to the project supported by the grant came to $4,950.
She therefore reports $5,000 of revenue on T2125, then deducts $4,950 of expenses against it, leaving a net profit of $50.
Instead of paying tax on $4,500, she pays tax on $50.
Situations where reporting on T2125 isn’t allowed
The advantages of reporting an artist’s grant on T2125 should be clear by now, but be aware that not everyone is allowed to report it this way.
Only a person with a track record as a working artist — which from CRA’s point of view means regularly filing a T2125 showing revenue from art — is supposed to include grants like this on T2125. If the recipient of the grant is someone who doesn’t typically work as an artist, then a grant like this is one of those atypical forms of income mentioned earlier — meaning it more properly belongs on line 13000.
Complications with CRA Matching
If you do decide to report your artist’s grant on T2125, there is one other pitfall you need to know about. You may get a letter from CRA Matching.
The fact that grants can be reported on line 13000, and that most amounts shown in box 105 of a T4A are in fact reported there in practice, means that sometimes an inexperienced CRA agent may believe that the grant they see on their slip has been missed entirely. They don’t always know there is another option — or they may not be completely sure that the income is included in the revenue reported on T2125.
This is a problem that can be solved by responding promptly to any communications from CRA Matching regarding grant income and explaining the situation.
If we at Personal Tax Advisors prepared the return in question, get in touch and we will handle this communication for you at no charge.
Or learn more about how CRA Matching works and what to do if they contact or reassess you due to a grant here.
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