A query arrived in the Writescape’s comments mailbox last week the gist of which was:
I self-published a book in 2015 and sell via Amazon.com. I received a form in the mail (1042-S Foreign Person’s U.S. Source Income Subject to Withholding). My Amazon book sales are pretty paltry (a whopping $277!). Must I report this on my Canadian tax return?
I answered in a private email, but thought that this question and others related to writing income may be on the minds of many Canadian writers preparing tax returns this time of the year, so below is the answer to this question and a few more tips about reporting writing income to get you started.
One of the many hats I wear, is that of a tax preparer at a local accounting office, which I have done for decades, so I do know a thing or two about filing Canadian taxes. And since 2009, Writescape has periodically offered a workshop on tax tips for writers and artists.
That said, a caveat: The tips offered here are general information only. Your tax situation could be influenced by other factors not dealt with here, so if you are at all in doubt, contact your accountant or follow the links to CRA’s website for more information.
What kinds of income are considered writing income?
- royalties/ advances for book sales 9print/e-book) from your publisher (T5)
- independent book sales, print and e-book, (possible foreign income slips )
- grants, bursaries and residencies (T5 or T4A)
- school visits and speaker honorariums (possibly a T4A)
- access copyright royalties (T5)
- public lending rights payments (PLR) (T4A)
- freelance earnings (possibly a T4A)
- workshops, coaching, retreat facilitation ( possibly a T4A)
- writing contest winnings
How much do I have to make before I have to report writing income?
Canadian taxation works on the honour system. Even if you do not receive a T slip from the entity that paid you, you are obliged to report all your income from all sources worldwide. That includes sales through Amazon, PayPal, eBay and other websites, books sold at craft fairs, honorariums for being a guest speaker, etc.
Where on my return do I report my writing income?
That depends on whether you are, by Canada Revenue Agency’s (CRA) definition, a “hobbyist” or a “writer” operating as a small business. In VERY general terms:
- a “hobbyist” reports T slip income on the lines instructed by the T slip. Generally, hobbyists do not deduct expenses, although deductions are allowed on some grants and scholarships.
- a “writer” operating as a small business (with an expectation of profit), reports all income including income on T5s and T4As as part of business income on form T2125. (Be aware you may have to inform CRA by letter that you are doing so, so that they do not think you forgot to report the T slip income.)
- any T4 income as a writer or editor is employment income and should not be reported as part of a writing business.
What do I do about income from outside Canada?
- Foreign T slips you may receive include a 1042-S for the US or a SA103S for the UK.
- Canadian residents must file worldwide income regardless of whether a return is required or not in the foreign country where the income was generated.
- Double taxation agreements exist between Canada and many countries, e.g. the US. This means that if you paid tax on certain income in the US, you will not be taxed again on that income in Canada. CRA may, however, charge a difference between rates.
- Foreign income must be reported in Canadian dollars. You can use the exchange rate for the date/s the income was received, or you can use the Bank of Canada average rate for the year.
Best for last
- Most contest winnings are considered “prescribed prizes” and are not reportable or taxable. Yeah!!
- Unlike employment income, writing business income and grants and bursaries can be reduced by expenses paid to generate that income. What expenses? That’s a whole other blog.
- CRA bulletin specifically for people filing as writers or artists
- CRA bulletin on grants, bursaries, scholarships
- T2125 Statement of Business or Professional Activities
- Allowable expense deductions for small business operators