My audit — covering the years 2011 to 2013 — was prompted by two things:
- Charitable Donations: A high amount in comparison to my income (no good deed goes unpunished).
- Income vs Deductions: The particular years being audited showed losses on the “business” portion of my tax returns — my business being “writing.”
After filing my 2013 income taxes I received a letter from Revenue Canada stating: Please fill out the enclosed Business Questionnaire and return.
The questions on the Business Questionnaire had little or nothing to do with the business of writing — for example — Provide your business registration certificate/provide information regarding a business licence from the city in which you reside, etc. There were other questions that I could answer, but my answers didn’t sound very “businessy.” Why did you start this business? Because I had a love of storytelling and a dream to be writer. What were your intentions when you started your business? To get published. To get my stories out to the world. And yes, fame and fortune!
When I got to the question Please provide a short description of any employment performed during the period under review I thought, okay, this answer can be more concrete.
I listed the four novels published just prior to these audited years to show that there was employment. To this I added dozens of author visits completed during the “being reviewed” years, a CCBC Book Tour in 2011, an Ontario Arts Council Grant, and finally a contract signed in 2013 for an upcoming three-book series.
I thought the powers that be would clearly see two things: the Business Questionnaire was inappropriate for writers and those in the arts, and the questions I could answer were proof that I was, indeed, in the business of writing. I sent up a silent prayer that they would drop the whole darn thing. Instead, they requested every business receipt I had for all three years.
No problem. My strong suit is organization. I carefully labelled my receipts for all writing related expenses (office supplies/postal/Union dues/literary organization dues/phone/internet/cable/car expenses, etc.). I slipped them into a Ziplock bag, labelled each bag with my name and case number, and sent them off.
Their response? Are you sitting down?
It is the Agency’s view, based on this review, that there does not appear to be any serious or reasonably continuous efforts being made to begin normal business operations (income-earning process). Therefore we have disallowed all your business losses.
I was told to return $8000 to Revenue Canada or accrue interest from the date of the letter.
I immediately contacted H&R Block (they had prepared my taxes) and asked for help.
H&R Block wrote an intelligent appeals letter making the case that I was, indeed, a professional writer. They listed my published books, my nominations and awards, and they pointed out that although 2011 and 2012 showed losses, 2013 actually showed a profit.
The appeals letter ended with a request to “Please reverse the decision regarding denial of Ms Falcone’s business deductions and refund her money.”
In July 2015, eleven months after my appeals letter was sent out, the phone rang. It was a Canada Revenue Agency (CRA) man calling from British Columbia. I crossed my fingers hoping to hear that logic had won out, and my money was being returned — with interest.
CRA MAN: Is writing a hobby for you?
ME (withdrawing knife from heart): NO!! I’ve been writing for decades. I’ve written for television. I’ve published seven books, I’ve received nine nominations and four wins and two honour nods. I’ve done hundreds of author visits and presented at literary festivals and conferences. MY WRITING IS NOT A HOBBY!
CRA MAN: Then why do your tax returns show losses?
ME: Okay. This is how the publishing business works. An author earns an advance in one year, bringing up their income for that particular year. This is followed by two years of editing and the whole process of publishing — with no income — followed by the book being finally released. Hopefully there are sales of said book and royalties start rolling in (I use the term loosely). Unfortunately, said author does not get to pocket any of these royalties until the publisher is paid back — in full — for the advance given three years before.
(I must admit, that as I listened to myself speak, this “writing” business sounded ridiculous.)
CRA MAN: How many hours a week do you write?
ME: I devote fifty to sixty to seventy hours per week writing when I’m working on a book, thirty to forty when I’m editing it, forty plus when I’m rewriting for a publishing house’s editor. I’ve given my life to writing! My entire life!
CRA Man listened politely, took notes, and then went on to the next question.
CHARITABLE RECEIPTS — THE NIGHTMARE CONTINUES
CRA MAN: How could you donate such high amounts to charities if you weren’t earning much money?
ME: I’m a great saver. I live simpler than a Buddhist monk. I have a part-time teaching job.
Did these explanations cut it with the CRA agent? Yeah, right.
CRA MAN: Please provide us with proof that every charitable receipt from 2011 to 2013 actually came out of your bank account.
ME (losing it): WHAT!!!??? YOU THINK I’M PRINTING UP RECEIPTS IN MY BASEMENT!!??
CRA MAN: Some people cheat on their charitable receipts. Just send the proof, please. Oh, and I’ll also be sending you a Business Questionnaire. Please fill it out and return everything to me by July 31.
Yes. I was being audited for a second time before the first audit was even settled. And I had a whole fifteen days to pull everything together.
Note: CRA Man did say, “We can provide a one-time extension of two weeks — if needed.”
When the Questionnaire arrived I was pleased to see that it wasn’t the same ridiculous one I filled out the first time. It covered topics like Give details of the training you’ve taken in the field of your business/What is your business plan/Provide documentation to support your course of action/How do you advertise your business, etc.
It wasn’t until I got to the last page of the Business Questionnaire that I went into cardiac arrest.
Please provide the following:
- documentation supporting the goods sold and services provided (gross incomes declared) in the course of your business activity;
- the receipts and documentation in support of each of the business expenses claimed, and how the expenses relate to earning income from your business;
- the T2125 forms, Statement of Business or Professional Activities for 2011 to 2013;
- the log books that indicate the starting point, ending point and the purpose of each business trip taken, total annual kilometers and total business-related annual kilometres driven for each vehicle used for business for 2011 to 2013. If you were meeting a client please provide their full name and contact details.
What the heck does “goods sold and services provided” even mean?
Documentation — on top of a receipt — to support business expense?
A travel log? I’ve never kept a travel log!
Oh, yeah — and I still had to prove that every charitable receipt I submitted for the three audited years actually came from my bank account!
I shouted a resounding “F**!!!#$%! IT ISN’T WORTH IT!” An ocean of tears followed. I suffered a bit of a breakdown at this point. (Seriously, not kidding.)
The wobblies settled down and I pulled myself together. I can do this. I will do this. Nobody is going to say I’m not a professional writer and get away with it.
I worked ten to twelve hour days trying to recall where I might have travelled for “business” from 2011 to 2013. Thank God for author visits in the middle of nowhere. Double thanks for multiples — for example, CANSCAIP meetings, visits to the library, travelling to Staples or Kinkos for office supplies and photocopying.
I went through the CANSCAIP directory finding authors I might have had lunch with — or authors whose book launches I attended. What year was their launch? Did it match the years I was being audited for? This required more researching online — checking author websites — checking book store links to their launches. Add in TD Book Awards at the Carlu, CCBC AGMs, Writers’ Union events, and on and on. Somehow, out of the recesses of my memory, I managed to account for approximately 11,000 km of business travel in 2011. Now onto 2012 and 2013.
DROP EVERYTHING AND RESEARCH
After finishing the travel logs I stopped the mad rush of documenting every bloody thing and started researching taxes, authors, artists, etc. There had to be some proof out there — SOMEWHERE — that writing is indeed a business. I poured over sites — checked every link — every article that linked to another article that linked to another.
Then, and don’t ask me how, I managed to find this quote:
An individual not classified as an employee (in connection with his or her writing activities) who begins to write full-time or part-time with the serious intent of being published for the purpose of making money has commenced a “business” for purposes of the Canadian Income Tax Act.
I promptly emailed this passage to my H & R appeals officer. He dug into the Canada Revenue Agency website and — are you still sitting down? — here’s what he discovered.
Bulletin IT – 504R2 “Visual Artists and Writers” (paragraph 7)
In the case of an artist or writer, it is possible that a taxpayer may not realize a profit during his or her lifetime but still have a reasonable expectation of profit. However, in order to have this “reasonable expectation of profit,” the artistic or literary endeavours of the artist or writer must be carried on in a manner such that, based on the criteria (their criteria were things like “amount of time devoted to literary endeavors/representation by a publisher or agent/type of expenditures claimed/membership in professional organizations”), they may be considered for income tax purposes to be carrying on a business rather than, for example, a hobby.
My appeals officer sent off a fax to the CRA man highlighting this irrefutable information taken directly from their own website.
We both breathed a huge sigh of relief believing that a decision to end the audit would be forthcoming.
Finally, the call came.
CRA MAN: We accept that writing is a business.
SWEET VICTORY! HAPPY DANCE! ALLELUJA!
CRA MAN: Continue with the documentation.
Climb out of dark hole. Take medication for impending aneurism.
When my bank statements from two separate banks arrived (President’s Choice sent eighty-three separate business envelopes — each one containing one month’s worth of banking), it turned out that they, like Canada Trust, don’t list the name of who or what organization a cheque is made out to — only the date, the cheque number, and the amount.
More ten- to twelve-hour days ensued as I poured over the dozens and dozens of bank statements, cross-referencing everything I could by locating the date the transaction occurred (which is stated on each charitable receipt) and cross-referencing it with a bank statement. I miraculously managed to locate some old transaction records and scoured them for every charity name.
I contacted organizations when I couldn’t locate a donation amount and discovered that I had donated by cash or by credit card.
To say I didn’t leave the house for weeks is not an understatement. I barely ate and got seriously dehydrated. Nights proved to be sleepless because my brain kept trying to process facts and figures and information.
Somehow, someway, I compiled all the information requested by CRA. I sent all my business receipts/the Business Questionnaire/the T2125 Forms/the Travel Logs, and proof that every single charitable receipt came from my hard earned money.
CRA Man reviewed everything and determined that:
- Meals with authors — not allowed.
- All coffee shop receipts where I met with author friends — not allowed.
- Mileage to meet with authors anywhere/anytime — not allowed.
- Entertainment (movies, theatre tickets) — not allowed.
- Purchase of books — not allowed.
- Internet — not allowed.
- Parking receipts — not allowed.
- Office expense receipts and postal receipts — cut in half.
My brain short circuited.
Pulling myself together I called my CRA Man and proceeded to calmly and reasonably explain that there is great value to an author in reading other authors’ books, or in attending plays or seeing movies. We are, after all, in the “entertainment” business and can learn much from each other. I explained that authors meet to network and critique each other’s work, and that we often meet at a restaurant or coffee shop. I explained that I don’t download movies or play games on the Internet, but truly use it, for the most part, to research and to write. I explained that I wrote, on every parking receipt, who I was meeting with or the reason I was parked (attending OLA/CANSCAIP meetings, meeting with a publisher or editor, etc.). After debating for a full hour, he agreed to allow parking receipts and my Internet.
CRA Man then said that this was the end of the negotiations and he would be sending me a “final offer.”
The following day the “final offer” was sent along with a “Waiver of my right to objection or appeal.”
After more than a year, and with me burned out to the core, I signed the darn thing. The alternative was Tax Court — with a wait time of approximately seven months.
I fought the good fight, and won half the battle — CRA refunded two-thirds of what I had returned to them a year ago. The cost in stress — incalculable. The audit had proven to be an emotionally, physically, and mentally exhausting undertaking. Exhausting is too weak a word — too soft — too “this-does-not-begin-to-express-how-deeply-distressing-the-situation-has-proven-to-be.”
The unreasonable demands and illogical determinations of Canada Revenue personnel brought me to my knees on more than one occasion. I don’t want anyone else to suffer through this. I can’t stop the CRA from auditing you, but my hope is that no other author will have to go through this experience unprepared. Knowledge truly is power. So —
- Keep all business related receipts (and label as many as you can).
- Keep travel logs.
- Keep bank transaction records to prove charitable donations.
And most importantly: File away a copy of the Canada Revenue Agency Interpretation Bulletin IT-504R2 “Visual Artists and Writers” so that if any CRA auditor dares to ask you the question, “Is writing a hobby for you?” you can smack them up the side of the head with it.
L. M. Falcone is an award-winning author who also worked as a writer for Nickelodeon TV. Her books include the middle-grade chillers Walking with the Dead, The Midnight Curse, The Devil, and The Banshee and Me, as well as a current kid-detective series The Ghost and Max Monroe.