Jamie Golombek: Can a mother or father’s bills to assist their baby’s profession ever be tax deductible? On this Tax Court docket case, the reply was sure

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Many mother and father encourage their youngsters to pursue their ardour, particularly in the event that they present expertise at a younger age in the direction of a selected endeavour, however different mother and father might go manner past mere encouragement and dig deep into their very own pockets to financially assist a baby as they launch their profession.
This begs a query: Can a mother or father’s bills to assist their baby’s profession ever be tax deductible? A current tax case handled exactly this concern.
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The case concerned a taxpayer who has a “musically proficient daughter.” The taxpayer selected to make use of each his enterprise administration and contract negotiation expertise to assist handle his daughter’s creative profession. The 2 of them entered a “private administration contract” through which the daddy would initially incur varied bills in return for receiving a fee if his daughter ended up signing with a significant report label.
In 2017, the taxpayer claimed $52,046 in “enterprise bills” regarding managing his daughter’s profession. The Canada Revenue Agency, nevertheless, wasn’t satisfied the taxpayer was actually within the enterprise of artist administration, so it disallowed his expense deductions. The taxpayer appealed the matter to the Tax Court docket, which launched its choice earlier this month.
By means of background, the taxpayer started working in gross sales after highschool and was employed for a number of years as an account supervisor at a global cash switch firm. That job led to a senior alternative with a cheque-cashing agency that, on the time, had three retail places. He turned a shareholder and director of the enterprise, and helped it develop till it was bought to a publicly traded U.S. firm. He has been with that firm for 22 years, and is at the moment the vice-president of actual property, a job that requires him to barter contracts and leases, in addition to do all the corporate’s web site choice. He described himself in court docket as “an entrepreneur at coronary heart.”
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The taxpayer’s daughter is a singer/songwriter. When she was first beginning out, one of many judges at a expertise present let her know that he wish to work along with her. The taxpayer negotiated a contract with this decide, which led to his daughter recording an unreleased album that was produced by this particular person at an Ontario studio.
To facilitate the tax and enterprise facet of issues, the taxpayer employed an accountant who was additionally a musician and had contacts within the music business to help and advise him. With the accountant’s assist, the taxpayer ready a private administration contract that stated (amongst different issues) that he would obtain a five- or 10-per-cent fee if his daughter achieved a significant milestone, akin to signing with a significant report label, whereas beneath his administration. The settlement stated that if not one of the milestones have been met inside 5 years, she may terminate the contract.
In 2017, father and daughter started to work on establishing a community of business contacts. That yr, he was launched to a Nashville producer, who launched them to different music individuals in that metropolis. The taxpayer testified that in late 2017, he and his daughter determined to remain in Nashville to work with the producer on a brand new album.
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Most of 2017 was spent recording music demos, negotiating the phrases and circumstances for producing the album, travelling to Nashville, taking pictures the album cowl and doing social media to extend his daughter’s profile. He described the method as “labour-intensive” and “nearly cost-prohibitive” in the beginning as a result of it took practically two years to supply and grasp the album.
They introduced the album again to Canada and shopped it round to “combined opinions.” In 2019, they met a producer who owned a Toronto report label and signed an settlement that gave the corporate possession rights over his daughter’s music, together with the unique proper to distribute grasp recordings and to concern remixes of songs to revive curiosity in them. His daughter did obtain some royalties for one track that was performed on the radio in 2016.
The problem earlier than the court docket was whether or not the taxpayer had a “supply of earnings,” particularly, a real business enterprise. As in prior cases, the decide turned to a seminal Supreme Court docket of Canada choice that discovered the start line was to determine whether or not a taxpayer’s exercise was undertaken in “pursuit of revenue” or was private. The place there’s a private ingredient, the exercise should have a ample diploma of “commerciality” to be thought-about a supply of earnings.
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In figuring out whether or not a taxpayer is carrying on an exercise in a sufficiently business method, the checklist of things to be thought-about embrace: revenue and loss skilled in previous years; the taxpayer’s coaching; the taxpayer’s meant plan of action; and the potential of the exercise to point out a revenue.
The decide reviewed the details of the case, noting there was clearly a private ingredient concerned as a result of the artist being managed was the taxpayer’s daughter. Due to this fact, the important thing query was whether or not the exercise was carried on in a sufficiently business method in order to be a supply of earnings.
The decide dominated it was, noting the taxpayer’s prior entrepreneurial success in rising a enterprise in addition to his deep expertise negotiating contracts. It appeared logical, due to this fact, that the taxpayer would enter a contractual association along with his daughter to make use of his talent set to assist advance her profession. The taxpayer additionally demonstrated his skilled intent by participating an accountant with an understanding of the music business.
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“Placing apart the unpredictability of the music business by way of whether or not an artist achieves success, the radio play of (her) songs, royalties acquired, and the continued curiosity of music producers to work along with her reveal that the exercise is able to displaying a revenue,” the decide stated. “The (taxpayer) carried on his exercise of artist administration in a sufficiently business method in order to be a supply of enterprise earnings.”
In consequence, the taxpayer’s enterprise bills for 2017 have been deemed to be correctly tax deductible.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.
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