Taxation: the Art of Giving

Taxation
     The Art of Giving

     Charities often encourage the gifting of works of arts. Beyond the satisfaction of giving something beautiful for the public to share, the taxpayer may also use the donation to reduce income taxes payable.  Similar to the donation of cash, a donation of a work of art to a registered charity will result in a donation receipt for the value of the art donated. For the portion of the donation in excess of $200, this results in a tax savings of approximately 50%, depending on the provincial tax rates of the individuals province of residence. However, the gift of the art also results in a disposition for income tax purposes. To the extent that there is an accrued gain on the art, there may be income tax payable. Since the art is considered listed personal property for income tax purposes, a loss may only be applied against the taxpayers gains from other listed personal properties.

In computing the gain or loss for listed personal properties, the Income Tax Act provides that there is a minimum adjusted cost base and minimum proceeds of disposition of $1,000. Therefore, the gift of a piece of art that originally cost $300 and is currently worth $900 will not result in any capital gain because both the proceeds and the adjusted cost base are deemed to be $1,000. The amount of the donation receipt would be the fair market value of $900. However, if the art were currently worth $1,200, the amount of the capital gain would be $200.

Cultural Property
     The Canadian government has special rules to encourage the retention of national treasures within Canada. If the art can be certified under the Cultural Property Export and Import Act (CPEIA) and is donated to institutions specified under the CPEIA, then no amount of the capital gain is subject to tax but a listed personal property loss can still be claimed. In addition, 100% of the donation may be claimed since the 75% limitation does not apply (usually the amount of charitable donations eligible for a tax credit is restricted to 75% of income).  Consider the example of an individual who owns a piece of art that originally cost $1,500 and has it certified under the CPEIA as having a value of $10,500. If the person decided to sell the art, there would be a capital gain of $9,000, a taxable capital gain of $6,750 and, if the individual is in the 50% tax bracket, an income tax liability of $3,375.
     If after the art is sold, the $10,500 cash is donated to the charity, the individuals income taxes will be reduced by approximately $5,250, for a net tax savings on the sale and gift of $1,875 ($5,250 $3,375). However, if the art is donated to the charity, then the capital gain is not subject to tax and the donation receipt would still be for $10,500. By donating the art to the charity, the individual has a net tax savings of $5,250.  To overcome some of the past abuses of these generous provisions for cultural property, the value of the property is now set by the Canadian Cultural Export Review Board at the time it is certified under the CPEIA. This valuation must be used for purposes of determining the amount of the donation for a two-year period following certification.

Be Wary
     Although it is possible to use the listed personal property rules to an individuals advantage, extreme care must be exercised. If an individual were able to purchase a piece of art today for $200 and establish that the value of the property is $1,000, then there would be no capital gain on the donation of the property and the individual would be entitled to a $1,000 donation receipt. The tax savings resulting from the donation would be approximately $500, which, after deducting the $200 cost of the art, would result in a net profit of $300. Sounds good?
     In fact, Revenue Canada has successfully attacked many such transactions on the basis the value of the art is not $1,000. It denied the deductions to the taxpayer and, in some cases, even revoked the charitable status of the charity for issuing donation receipts in excess of the value of the donation. Sometimes the taxpayer was also subject to penalties.  If you are considering gifts of artwork to a charity, discuss it with your chartered accountant or lawyer to ensure you achieve the desired tax advantages.