FACT: We all pay tax. You, as a resident of Canada (or where ever you hail from), owe the government a certain percentage of your income. They use it to build roads, and heal the sick. That percentage is based on how much money you’re making (for more info on that check out: MARGINAL TAX RATES.) But basically: the more money you make, the more you’re going to end up paying in taxes.
What’s a deduction and how do they work?
Deductions are certain purchases that we make that we are allowed to DEDUCT off of our final taxable income. That makes it a smaller number and you pay less tax.
Sounds good right?
For example. I make a total of 32,000 sweet dollars in 2014. But through the magic of deductions, I can decrease that amount. Every deduction I make makes my total taxable income less. 1000 dollars in lessons, and presto, my taxable income is down to 31,000.
32,000 (Total Income) – 1,000 (Valid Deduction) = 31,000 (Remaining Taxable Income)
What can I deduct?
As a member of the ranks of the self-employed there are so many things that qualify as deductions. Any cost that you have which results from your business.
- Training costs: Lessons, coachings, classes
- Studio and Instrument costs
- Travel Costs
- Business meals (which you deduct at 50%)
- Advertising costs
- Accounting fees
- Rent (If you have a home office, or studio in your home, you can write off a portion of the rent)
- Telephone (a percentage can be written off, how much you use it for a business line)
- Internet (same deal as phone)
- Union dues
- Agent Commissions
- Supplies and equipment
That’s just a starter list. There are many more things that apply to the business of being an artist that can be deducted from your taxable income. It’s best you talk to an accountant that is well versed in the area of artist taxes. They’ll be able to give you a more complete list that applies to your situation.
It’s really tough when you start talking about deductions, you’re going to hear some pretty crazy things that people deduct out there. A good way of thinking about it is: if someone from the CRA called you and challenged you on it, could you make a good argument for why that specific purchase is essential to your business. If you can’t… maybe don’t claim it.
It’s really useful to know what’s deductible and what isn’t because HINT: Money spent on deductible expenses is money that pays off twice. Once in the thing you bought, and again at tax time, by reducing the amount you have to pay.
How do I claim a deduction?
You cannot claim something as a deduction, unless you have the records to back it up. That means RECEIPTS.
But Chris… one time I heard that you could use __________.
Nope. False. I have it right from the mouth of the beast (the friendly people at CRA) that you need the receipt to have it count as a deduction.
So make sure you ask for a receipt, and make sure you don’t lose it.
After you’ve got the receipt it’s a matter for your accountant. They may ask you to count up your deductions and categorize them for you. But accountant’s are just like you…. unique snowflakes. They’re also your best friend come tax time, so I encourage you to ask them all the questions.
NOTE: There is a big difference between a tax deduction and a tax credit. Where a tax deduction comes off of your total income, as explained above, a tax credit is actually credited directly to your tax owing.
If you want to learn more about tax credits (and you should… cause they’re awesome), check it out HERE.