Income Tax Tip for Canadian Writers
[Note: this post is modified from a piece I wrote for the March/April 2012 Outdoor Writers of Canada newsletter, Inside Outdoors.]
It’s that time of year again when we all must sit down and face the reality of just how much we did or did not earn last year in preparation of our annual income tax returns. Part of that preparation is making sure we report our writing business income and deductions correctly to pay as little tax as legally possible. However, many writers are not aware of how they should be reporting certain income to get the greatest benefit in both the short and long term. I am no accountant or tax lawyer but I have been in this business for over 30 years and have had a long relationship with the Canada Revenue Agency (CRA).
Book publishers and Access Copyright (AC) report to the CRA income earned by writers and photographers, etc. as royalties on T5 slips. The instructions on the form tell you to report the revenue on line 121 of your return as investment income or line 104 as other income. However, your AC and publisher revenue is NOT investment income. It is income you have earned as a result of publishing your writing or photography and rightly should be reported on line 135 of your tax return as earned business income as explained on the CRA web page.
Why is this important?
- As earned writing income you can legitimately subtract your writing expenses from it. If you are like most writers and barely break-even or only make a little profit, every piece of earned income is important, especially to the CRA in case you ever have to prove that you have a reasonable expectation of making a profit (i.e., pay taxes) from your writing. It’s always a good idea to show a profit from time to time in case that expectation is questioned.
- You get credit for earning the income on such things as how much you can contribute to a Registered Retirement Savings Plan (RRSP), and how much you will eventually receive from the Canada Pension Plan (CPP) and Old Age Security (OAS). This may not seem important if you are young but believe me it is as you approach retirement age. Your CPP (when the time comes) is calculated based on the amount of income you have earned over the years. The key word here is “earned”. Revenue from investments (dividends/interest) does not qualify as income for calculating what you receive from CPP or OAS or invest in an RRSP. Every piece of earned income you claim over the years will affect how much you receive from your RRSPs, CPP or OAS in your “golden years”.
So, claim your AC royalty as earned income in your writing (communication) business. But why does AC, and book publishers report revenue paid to writers on T5 slips? That’s a good question, and I have never heard a good explanation except that it is not salaried earnings (reported on T4 slips) and the CRA wanted them to report the earnings on something…? Writers have struggled with the CRA on this issue for decades. Several years ago, the combined efforts of The Writers’ Union of Canada (book authors) and the Professional Writers Association of Canada (periodical writers) convinced the CRA to issue a policy statement that those taxpayers who claim writing and artistic business income can claim royalty earnings from their publications as earned business income (it was always the case, but until then not formalized). That statement is reflected in the CRA web page explaining what you must do to report this income.
That’s great but often the minions at the CRA (or its computers) haven’t heard of this policy, and will flag your return because the CRA has received a T5 slip they believe you have not claimed as income. So, here is what you must do:
- if you submit a paper return, include the T5 slip as required and write on it that this income is reported as part of your writing business (line 135) and not as investment income. Enclose a covering letter explaining where the income is reported. [Note: as of 2013 (with the 2012 tax return), the CRA is discouraging paper (hardcopy) returns. However, if you dig down deep enough in your tax software, you will find a way to postal-mail a 'condensed' paper version acceptable to the CRA.]
- if you file electronically (where receipts etc. are not included), you need to also post a physical letter to the CRA (with all the details of who you are, SIN etc.) explaining why you did not report the T5 as investment income.
All that done, you may still get a reassessment back in a few months, showing the CRA has recalculated your tax to include the T5 as investment income (the reassessment is issued by a computer), thus double crediting that particular income. Don’t get angry (although easy to do). Just pick up the phone and call them (using the toll-free number found near the end of the reassessment) and explain that you are a writer and that the income on these particular T5 slips is income you have earned from your writing and was reported as part of your business income on line 135 of the T1 form. The first time this happened to me is when I learned that I should send a covering letter on each return explaining the situation. It’s a pain in the rear-end, but I do it (I have a form letter on my computer where I just change the dates). Also, I used to file electronically, but this hiccup with the T5 and a couple of investment issues where cover letters are required has convinced me that I should be sending in the physical return with all the attachments. If you use a tax accountant to prepare your return, alert him or her of this situation and why it is important to you. Print the CRA web page I’ve linked above.
Now, I know it is real easy to give in to the CRA and just report this income as investment, but DON’T. You will lose out in the long run. Take the extra steps. You won’t regret it.
PostScript: As I reported in a subsequent post to this blog, in March of 2014 I once again received a reassessment of my tax return (for 2012) that said I had not included income from my Access Copyright T5 slip. Following the above procedure, I phoned the CRA and was told they no longer make changes to files over the phone and I must write them a letter explaining the problem. This I did but I did not stop there. I wrote another letter to the Minister of National Revenue explaining my frustration with this procedure. The last time I did this (in 2012) I did get a phone call back from the CRA telling me that they were aware of the problem and that they were working on it. Well, apparently not. This does feel like harassment. If you feel the same, I strongly suggest you write a letter too! You might cc your local MP, Access Copyright and any other organization you feel should be addressing this issue. I cannot believe there is not a software fix for this. DM