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Many parents encourage their kids to pursue their passion, especially if they show talent at a young age towards a particular endeavour, but other parents may go way beyond mere encouragement and dig deep into their own pockets to financially support a child as they launch their career.
This begs a question: Can a parent’s expenses to help their child’s career ever be tax deductible? A recent tax case dealt with precisely this issue.
The case involved a taxpayer who has a “musically talented daughter.” The taxpayer chose to use both his business management and contract negotiation skills to help manage his daughter’s artistic career. The two of them entered a “personal management contract” in which the father would initially incur various expenses in return for receiving a commission if his daughter ended up signing with a major record label.
In 2017, the taxpayer claimed $52,046 in “business expenses” relating to managing his daughter’s career. The Canada Revenue Agency, however, wasn’t convinced the taxpayer was truly in the business of artist management, so it disallowed his expense deductions. The taxpayer appealed the matter to the Tax Court, which released its decision earlier this month.
By way of background, the taxpayer began working in sales after high school and was employed for several years as an account manager at an international money transfer company. That job led to a senior opportunity with a cheque-cashing firm that, at the time, had three retail locations. He became a shareholder and director of the business, and helped it grow until it was sold to a publicly traded U.S. company. He has been with that company for 22 years, and is currently the vice-president of real estate, a role that requires him to negotiate contracts and leases, as well as do all the company’s site selection. He described himself in court as “an entrepreneur at heart.”
The taxpayer’s daughter is a singer/songwriter. When she was first starting out, one of the judges at a talent show let her know that he would like to work with her. The taxpayer negotiated a contract with this judge, which led to his daughter recording an unreleased album that was produced by this individual at an Ontario studio.
To facilitate the tax and business side of things, the taxpayer hired an accountant who was also a musician and had contacts in the music industry to assist and advise him. With the accountant’s help, the taxpayer prepared a personal management contract that said (among other things) that he would receive a five- or 10-per-cent commission if his daughter achieved a major milestone, such as signing with a major record label, while under his management. The agreement said that if none of the milestones were met within five years, she could terminate the contract.
In 2017, father and daughter began to work on establishing a network of industry contacts. That year, he was introduced to a Nashville producer, who introduced them to other music people in that city. The taxpayer testified that in late 2017, he and his daughter decided to stay in Nashville to work with the producer on a new album.
Most of 2017 was spent recording music demos, negotiating the terms and conditions for producing the album, travelling to Nashville, shooting the album cover and doing social media to increase his daughter’s profile. He described the process as “labour-intensive” and “almost cost-prohibitive” at the beginning because it took nearly two years to produce and master the album.
They brought the album back to Canada and shopped it around to “mixed reviews.” In 2019, they met a producer who owned a Toronto record label and signed an agreement that gave the company ownership rights over his daughter’s music, including the exclusive right to distribute master recordings and to issue remixes of songs to revive interest in them. His daughter did receive some royalties for one song that was played on the radio in 2016.
The issue before the court was whether the taxpayer had a “source of income,” namely, a true commercial business. As in prior cases, the judge turned to a seminal Supreme Court of Canada decision that found the starting point was to ascertain whether a taxpayer’s activity was undertaken in “pursuit of profit” or was personal. Where there is a personal element, the activity must have a sufficient degree of “commerciality” to be considered a source of income.
In determining whether a taxpayer is carrying on an activity in a sufficiently commercial manner, the list of factors to be considered include: profit and loss experienced in past years; the taxpayer’s training; the taxpayer’s intended course of action; and the capability of the activity to show a profit.
The judge reviewed the facts of the case, noting there was obviously a personal element involved because the artist being managed was the taxpayer’s daughter. Therefore, the key question was whether the activity was carried on in a sufficiently commercial manner so as to be a source of income.
The judge ruled it was, noting the taxpayer’s prior entrepreneurial success in growing a business as well as his deep experience negotiating contracts. It seemed logical, therefore, that the taxpayer would enter a contractual arrangement with his daughter to use his skill set to help advance her career. The taxpayer also demonstrated his professional intent by engaging an accountant with an understanding of the music industry.
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“Putting aside the unpredictability of the music industry in terms of whether an artist achieves success, the radio play of (her) songs, royalties received, and the ongoing interest of music producers to work with her demonstrate that the activity is capable of showing a profit,” the judge said. “The (taxpayer) carried on his activity of artist management in a sufficiently commercial manner so as to be a source of business income.”
As a result, the taxpayer’s business expenses for 2017 were deemed to be properly tax deductible.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. [email protected].
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