Tax Implications of Grants
This material is provided for your information only. Should you have any questions, please contact your local tax services office of Canada Revenue Agency (CRA) or seek professional advice. The following information is extracted from Interpretation Bulletin IT257R from Canada Revenue Agency concerning the tax treatment of grants from the Canada Council. Grants from the Ontario Arts Council are treated in a similar manner for income tax purposes.
1. Depending on the nature of the assistance, the status of the recipient, and the arrangements or circumstances under which the assistance is provided, the amount received may be included in the recipient's income as:
(a) income from business (see 2 below);
(b) income from an office or employment (see 3 below);
(c) a scholarship, fellowship, bursary, prize or research grants, including a grant for the production of an artistic work (see 4 and 5 below).
Income from Business
2. When a taxpayer receives the assistance in the course of operating a business or practising a profession, the amount is included in the calculation of income or loss under section 9. An example of such assistance is project grants (other than education grants) to self-employed artists. The current versions of IT-504, Visual Artists and Writers, and IT-525, Performing Artists, discuss factors that identify a self-employed artist earning business income. When a grant for the production of a literary, dramatic, musical or artistic work does not constitute business income, it may qualify for the special treatment outlined in paragraphs 4 and 5 below.
Income from Employment
3. When a taxpayer receives an amount by virtue of or in connection with an office or employment, it is considered employment income under subsection 5(1). It is immaterial that the funds from which the remuneration is paid were obtained under Council assistance or from some other source. In a case when, for instance, an artist is selected by the Council for training or development through an arrangement under which the artist is placed under an employer for a small salary or no salary while the Council subsidizes the artist's employment income, the assistance from the Council to the artist, whether paid directly or through the employer, is considered to be received by virtue of the employment, and is therefore taxable in the artist's hands as income from employment. (Please refer to the current version of IT-525, for guidance in determining whether or not an artist is an employee or self-employed.) Paragraph 8(1)(p), applicable to the 1988 and subsequent taxation years, and paragraph 8(1)(q), applicable to amounts paid after 1990, allow a limited deduction of expenses paid for the purpose of earning employment income from certain musical and other artistic activities.
Art Production Grants
4. When an artist receives a project grant that is neither business nor employment income, the grant is included in the artist's income under paragraph 56(1)(n), but special rules apply. Specifically, an exception to the flat $500 exemption applies if an artist receives an amount that is included in income under paragraph 56(1)(n) and that amount is to be used by the artist in the production of a literary, dramatic, musical or artistic work. In such cases, when calculating income from an art production grant under paragraph 56(1)(n), the taxpayer may deduct whichever of the following amounts is greater:
(a) $500 and
(b) the total amount of reasonable expenses incurred to fulfil the conditions of receiving the art production grant, but not exceeding the total amount of the grant included in income for the year under paragraph 56(1)(n).
The amount in (b) above does not include:
(c) personal or living expenses of the taxpayer (other than expenses for travel, meals and lodging incurred in the course of fulfilling the conditions of the grant and while absent from the taxpayer's usual place of residence for the period to which the grant relates). The taxpayer may not claim the travelling expenses of his or her spouse and children or other third parties,
(d) expenses for which the taxpayer has been reimbursed, and
(e) expenses that are otherwise deductible in computing the taxpayer's income.
In this context, the term "expenses" includes not only current expenses, but also expenses of a capital nature.
5. Subparagraph 56(1)(n)(iii) provides that eligible expenses must be incurred in the same year in which the art production grant is received in order to be deductible from the grant. In some cases, expenses related to the production of the artistic work may be incurred in the year immediately before or immediately after the year in which the grant is received. While those expenses are not deductible in the year in which they are incurred, they will be allowed as deductions in the year in which the grant is received. However, expenses incurred in the year immediately before the grant is received are only deductible from the grant if they are incurred after the artist has received notification that the grant will be paid. Expenses incurred more than one year before, or more than one year after, the year in which the grant is received are not deductible from that grant. For example, if notification of a grant is received in September of one year, but the grant is not received until February of the following year, production expenses incurred during the last three months of the first year will be allowed as deductions from the grant in the second year when it is received and included in income.
Links to Canada Revenue Agency (CRA) Interpretation Bulletins