Whether you are a full-time or part-time musician, there are some financial issues you should be aware of and know how to deal with. For the purposes of this article:
- I will be discussing these issues within a Canadian context; and
- I will be assuming that you’re a self-employed musician (as opposed to being an employee).
We’ll be dealing with three broad issues: taxes, record-keeping and financing.
SECTION 1: TAXES
If you expect to earn income from your musical activities as a self-employed musician, you shall be required to:
- Collect sales taxes on sales of your music, merchandise, performance fees, etc.
- You’ll also need to pay income taxes on your “net income”, which is defined as what you earn from your music minus the expenses you had to incur to earn that income, i.e., the profit you make from your music-related activities.
We’ll discuss each of these in turn.
Section 1A: Sales Taxes
Generally speaking, you need to charge sales tax on the sales of your goods (e.g., CDs and t-shirts) and services (e.g., performance fees). Depending on which province you reside, you’ll need to charge one of the following:
- A combination of the federal Goods and Services Tax (GST) and Provincial Sales Tax (PST)
- GST only
HST combines PST with GST to create one tax. If you operate in an HST-participating province, you will collect sales tax at the following rates:
- New Brunswick: 15%
- Newfoundland and Labrador: 15%
- Nova Scotia: 15%
- Ontario: 13%
- Prince Edward Island: 15%
If you operate in the following provinces, you need to collect 5% GST as well as provincial sales tax, with provincial sales tax rates as follows:
- British Columbia: 7% provincial sales tax (PST) on retail price only
- Manitoba: 8% retail sales tax (RST) on retail price only
- Quebec: 9.975% Quebec sales tax (QST) on retail price only
- Saskatchewan: 6% provincial sales tax (PST) on retail price only
- If you operate in the province of Alberta or in one of the three territories (Northwest Territories, Nunavut or the Yukon), you do not need to collect sales tax on goods and services beyond the 5% GST.
Exemptions from Sales Taxes
There are a number of exemptions from the requirement to charge sales taxes:
- Federally, if your business meets the Canada Revenue Agency (CRA) definition of a small supplier (total annual taxable revenue before expenses is less than $30,000), you do not have to collect and remit GST/HST. At the provincial level, the rules for small supplier exemptions vary from province to province:
Quebec has a small supplier exemption for the Quebec Sales Tax similar to the federal version (if annual revenue is less than $30,000 you do not have to register to collect QST).
Saskatchewan does not have a small supplier exemption – you must register for, charge and remit provincial sales tax on all non-exempt goods and services.
Manitoba businesses with annual taxable sales over $10,000 must register for, charge and remit the retail sales tax (RST) on all non-exempt goods and services. British Columbia has a Small Seller exemption.
- Music lessons are not subject to GST/HST. So if you live in (for example) Ontario and you give music lessons, you don’t have to charge the 13% HST tax to your students.
- Let’s say (for example) you sell your music online to fans outside of Canada. If you sell goods or services to customers outside of Canada, you are not required to collect GST/HST or PST, provided they take delivery of the goods or services outside of Canada. The good or service must be wholly used outside of Canada.
If you’re not exempt from collecting sales taxes as described above, you are required to register for a GST/HST account with the Canada Revenue Agency by calling 1-800-959-5525. They will assign you a GST/HST account over the phone and will follow up with some paperwork they’ll send to you by mail.
Input Tax Credits
If you paid GST or HST on expenses to generate your music-related revenue, you can claim the GST/HST you’ve paid on these expenses (called “Input Tax Credits”) against the GST/HST you collected from your customers.
For example, let’s say you’re a musician in Toronto, Ontario (with a 13% HST rate) and you rent a hall to hold a concert where you and your band will be performing.
- Renting the hall costs you $2,000.00 plus HST (i.e., $2,260.00 = $2,000.00 + $260.00).
- You sell $5,000.00 in concert tickets plus HST (i.e., $5,650.00 = $5,000.00 + $650.00).
You would need to remit to the Canada Revenue Agency the $650.00 of HST you charged your fans when you sold your tickets, less the $260.00 you paid in HST when you rented the hall. So the net remittance you’d need to make to CRA would be $390.00 for that one event.
When to remit sales taxes to the government
Once you are registered for GST/HST, the Canada Revenue Agency (CRA) will assign you a reporting period. You are required to file a GST/HST return for each reporting period. On your GST/HST return, you will be required to enter the amount of GST/HST you collected during the reporting period, along with the amount of Input Tax Credits you are claiming.
The reporting period you are assigned is based on the annual revenue you generate from your sales of taxable goods and services. If you generate less than $1,500,000.00 per year, you are only required to file a GST/HST return once per year for the period starting on January 1st and ending on December 31st. The GST/HST return is due by January 31st of the following year along with payment of the net GST/HST you collected (i.e., GST/HST collected minus Input Tax Credits you paid on your expenses – see section on Input Tax Credits above).
Section 1B: Income Taxes
If you rely on your artistic activities to earn income, you are considered an self-employed artist. In the eyes of the CRA, you can claim arts-related expenses if engaged in any of the following activities:
- Composing a literary, dramatic or musical piece
- Performing as a musician, singer, actor or dancer in a dramatic piece such as a play or movie or other musical work
- Performing an artistic activity as a member of a professional artist’s association that is certified by the Minister of Canadian Heritage
In other words, if you earn money for composing or performing music, you are eligible to claim expenses. As a self-employed musician, you are eligible to deduct a wide range of business expenses:
- Renting a rehearsal space
- Maintaining the part of your home you use for professional purposes (if applicable)
- Leasing or renting musical or recording equipment
- Insurance premiums paid on musical equipment and instruments
- Fees associated with instrument and equipment maintenance and repairs
- Interest paid on loans taken out to purchase professional equipment
- Professional development or industry-related periodicals
- Recording costs (i.e., tape, mixing, mastering, studio time, etc.)
- Professional membership and union dues (i.e., SOCAN, SPACQ)
- General office expenses (i.e., computer hardware and software, paper, pens, etc.)
- Manufacturing merchandise (t-shirts, physical records and CDs, etc.)
- Advertising and marketing expenses
- Amounts paid to hire an assistant or substitute performer
- Commissions paid to an agent or manager
- Travel expenses incurred for work-related purposes, both in and out of town
- Costs associated with publishing agreements, such as royalties
- Legal and accounting fees
- Capital Cost Allowance, which covers the depreciation of instruments, sheet music, scores, scripts, transcriptions, arrangements, recording equipment, and office equipment
- Phone expenses—including cell phone expenses and the cost of a phone number listed for professional purposes
- Travel expenses to get to a gig, such as gas and oil, licence and registration fees, insurance, interest on a vehicle loan, and vehicle maintenance and repairs.
Deducting losses from your music career against your other sources of income
Suppose you don’t earn enough money from your musical activities to cover your music-related expenses. In that case, you’re losing money from your musical endeavors – a very common situation with musicians! 😀
However, this loss can used to offset the income you earn from your other sources of income (like income from your day job – if you have one). Therefore, you can reduce your overall income tax payable.
SECTION 2: RECORD KEEPING
Poor record-keeping is the primary reason why so many individuals, including musicians, have problems managing their finances. Here are some important tips:
Open a separate bank account for your musical activities
Open a bank account that’s separate from your personal account. Use that account exclusively for your musical activities. Therefore, all music-related expenses should be paid from that account by direct debit if possible so you have a record of how much you paid and where you paid it. This makes it much easier for you to track your expenses. Similarly, all income from your music-related activities should go into that account.
It’s also a handy way of determining if you’re actually making any money from your music. Over the long term, if the balance in your account keeps going up, then you’re making money because your income exceeds your expenses. On the other hand, if your balance keeps going down, then you’re losing money because your expenses exceed your income.
Keep all your receipts
Get a receipt for everything you purchase, regardless of how you paid for it (i.e., cash, debit, credit card). There are times when you need to pay cash instead of debit so having a receipt is crucial for cash expenses – it will be evidence that you actually incurred a music-related expense . Keep all our receipts in a folder.
SECTION 3: FINANCING
In an ideal world, your music-related income would be sufficient to pay for your music-related expenses. However, the reality is that at least in the beginning, you’re not going to be generating much income from music, but you’re going to have to spend a lot of money to acquire your musical instruments and gear.
So that money will have to come from somewhere. Now, if you have a day job where you earn enough to pay for your living costs and have money left over to finance your musical activities, then great! However, if you don’t, you’re going to have to finance the difference. That’s where a credit card can come in handy.
Not all credit cards are created equal – some have different features than others. Since you’re probably going to be keeping a balance on your credit card, you should look for a credit card with a low (or no) annual fee and a low interest rate on purchases, cash advances and balance transfers. Using a very hand tool published by the Government of Canada called the Credit Card Comparison Tool, I was able to find the ideal credit card for my preferences (an American Express Essential credit card).
Some music instrument stores provide their own in-house financing. I would be wary of using this type of financing to purchase your gear since they often charge very high interest – about 25% per annum and up. You’d be far better off financially using a low interest credit card to buy your gear outright and pay back the credit card company at a lower interest rate.
CONCLUSION AND CAVEAT
The content pertaining to taxes in this article should of course not be interpreted as formal tax advice. You should seek professional advice if you have any questions about your own particular tax situation.
But I do hope that some of the preceding tips prove useful to you. If you have your own financial tips that you’d like to share with other readers of this article, please provide them in the comments below. 🙂