Expert: Peter Messaline - 5/27/2009

Question
Mr. Messaline, thank you in advance for your advice. I know it comes from a background of sound experience.
Would your publication "Tax Kit 2000" be useful for the finances of self produced shows? We are three partners in a Canadian production company, subsidizing our shows with our day job income if the shows do not cover their own costs; costs such as hall rental and printing.  Shouldn't we be doing taxes like a small business? We also act in our own shows, and we use other actors to whom we give small honorariums. We are aiming at being a completely professional company, someday, but we are not making an overall profit just yet. Some shows make a small profit, but some create a loss. We are learning as we go.  
Could we use the tax kit to help us set up our books? How would Canada Revenue view us?
Your assistance is very much appreciated.

Answer
I am flattered by your interest.

The Tax Kit is now expanded into a CD! Try it here: http://www.tinyurl.com/DemoMenu

In our tax publications, we try to give you the wheels underneath the rules, so that you can understand why a thing is so, rather than simply trying to remember pages of bullet points.

I think you would have been wise to declare your production company years ago: if you had suddenly produced a "Drowsy Chaperone", your increased income out of nowhere would have encouraged the audit machine to start.

As it is, you could, from your description, describe this as a hobby so far, for enjoyment rather than intended to make a profit. Since you haven't been claiming your costs, I think that would fly.

Now that you are becoming professional, Canada Revenue Agency would regard you as a small business. You need to make no special efforts to claim business status -- you simply start using the T2125 you can download from the CRA site. You should make one of you responsible for nagging the others and keeping the paperwork. (Rotate it between you year by year!)

You should each keep a record of your expenses and income, and combine them regularly, so that at the end of the year you have paperwork showing the partnership income, the money spent out by the partnership (if you have a production account), and the money spent by each of you individually on the partnership. Then your tax returns will each show a copy of the partnership income and expenses, and each of you will take a third of the partnership's profits or losses and add your individual expenses to that figure.

CRA requires that you keep records. A partnership diary would be ace, individual work diaries would do, and they'd be useful in your personal career costs. Keep copies of your promos and reviews (that could be useful to prove that you are professional, even if unsuccessful so far).
Get your performers to sign for their fees, keep other receipts, or at least a diary record of the expense, if it's small. Keep a copy of the sheet you give the hall renter when you pay. Get some sort of paperwork on the income, even if it's just a note of how many tickets sold, how many comped, and the gross income. Write it out at the time, or you'll be constructing it out of memory, which CRA hates.

Excel and other spreadsheets could be used, if you are proficient, but it's enough to have a simple paper list of the totals of expenses in reasonable categories. Keep all your receipts. These are the primary evidence -- anything else is just a convenient way to present that data. Sort the receipts out regularly - into an accordion file, perhaps

Once you have set this up, you'll know where you are losing money and how much, and it's likely you'll have a loss to reduce the taxes on your joe-job income.

If you're still lost and scared, use the demo to contact me and we'll set up a meeting.