Principal Issues: How to report a grant received from the Canada Council for the Arts, for writing a book?
Position: The amount of the grant should be reported in the year of receipt pursuant to paragraph 12(1)(x) of the Act, subject to an election under subsection 12(2.2) of the Act.
Reasons: Consistent with the provisions of the legislation.
Bob Naufal, CMA
XXXXXXXXXX (613) 957-2744
2004-007666
July 20, 2004
Dear XXXXXXXXXX:
Re: Canada Council of the Arts grant
We are writing in response to your email of May 13, 2004, wherein you asked us if a grant you received from the Canada Council of the Arts is subject to income tax and Canada Pension Plan ("CPP") contributions. You describe, in the email, that you are a self-employed writer who received the grant to help pay for expenses you incurred in writing a book.
Our Comments
Written confirmation of the tax consequences that apply to a particular fact situation is given by this directorate only in the context of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide the following general comments.
Depending on the nature of the grant and the arrangements or circumstances under which you received it, the grant may be considered:
(a) income from business;
(b) income from an office or employment; or
(c) a scholarship, fellowship, bursary, prize or research grant
Since you have indicated that you are a self-employed writer, we have assumed that the grant constitutes income from a business. For additional information on grants received under (b) or (c) above, we refer you to Interpretation Bulletins, IT-257R, Canada Council Grants and IT-75R4, Scholarships, Fellowships, Bursaries, Prizes, Research Grants and Financial Assistance.
A taxpayer carrying on a business may be entitled to receive some form of financial assistance from a government source, such as a grant from the Council. Generally, when such assistance is received in the course of earning income from a business to cover the cost of business property or business outlays or expenses, the amount would normally (subject to the comments provided below) be included in computing the taxpayer's income in the year the assistance is received. A taxpayer carrying on a business may deduct, from income, expenses incurred to earn income from their business. For additional information on this matter, we refer you to Guide T4002, Business and Professional Income and Interpretation Bulletin, IT-504R2, Visual artists and writers.
A taxpayer may be able to elect to reduce the amount of a business outlay or expense (whether or not deductible) incurred in a particular year, the immediately following year or any preceding year, by all or part of any government assistance received in the particular year in respect of the outlay or expense. The amount elected by the taxpayer reduces the amount of the government assistance that would otherwise be required to be included in income.
The election must be filed no later than the day on which the income tax return for the year (i.e. the taxation year of the receipt of the assistance or the taxation year the expense is incurred) is due. The election is made by means of a signed letter accompanying the applicable income tax return, which states:
(a) the subsection under which the election is being made (subsection 12(2.2) of the Income Tax Act);
(b) the elected amount;
(c) the amount of assistance and the date it was received;
(d) the amount of the outlay or expense; and
(e) the date on which the outlay or expense was made or incurred.
For more information on this election, and the reporting of government assistance, please see Interpretation Bulletin IT-273R2 Government Assistance-General Comments.
Finally, self-employed taxpayers are required to pay both the employer and employee portions of the CPP premiums. In this regard, a self-employed taxpayer may deduct one-half of the taxpayer's CPP premiums payable on the taxpayer's self-employed earnings. For more information on this matter, we refer you to the General Income Tax and Benefit Guide.
All publications referred to in this letter are available on our Web Site at www.cra.gc.ca.
We cannot provide definitive comments without reviewing all of the facts including the terms of the grant and the nature of your writing business. If you need further assistance, please contact Business Enquiries at the XXXXXXXXXX Tax Services Office.
We trust our comments will be of some assistance.
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate