Donate art to reap tax rewards

Deciding to donate some or all of your art collection is a big decision — both sentimental and financial. But making that decision is only the first step in a complicated process.

The first thing to consider is how your collection fits with your legacy.

While you may plan on leaving art to your children, keep in mind that art is treated as capital property. Any change of hands could trigger huge tax bills. You may instead want to give your collection to a museum. If so, it’s best to plan the donation now.

How you acquired the art affects the taxes. If you’re the spouse or child of the artist, an art dealer, or the artist yourself, Canada Revenue Agency (CRA) will treat you differently than a general collector. For instance, when an artist decides to donate a piece, it’s considered inventory, and he can choose to deduct the expenses he incurred to make the art rather than its market value.

The two most common donation scenarios are: collectors giving art to institutions (like a museum), or gifting works to charities.

From attic to museum

Regardless of your circumstances, the most tax-effective strategy is to give an item of cultural importance to a gallery.

Art is usually subject to capital gains when it changes hands, but culturally significant donations are exempt. You can also claim a charitable tax credit equal to the fair market value of the work, and use it to offset up to 100% of your net income. By contrast, other charitable donation credits are capped at 75% of net income.

These advantages come with strict rules. The Canadian Cultural Property Export Review Board must certify the piece as culturally important. To pass, the object must have a close association with Canadian history, be potentially useful in the study of arts and sciences, or contribute to national heritage.

Before the review board can assess the piece, you must find an interested gallery that’s on the list of nearly 300 federally designated cultural institutions.

Once the museum accepts, you must sign over ownership to qualify for a tax. To qualify for a particular tax year, the donation must be made by Dec. 31, says the Art Dealers Association of Canada.

From this point, the institution handles the donation, says Secter. It works with you to get the piece valued. CRA requires a professional and independent appraisal for any piece worth more than $1,000. If it could be worth more than $20,000, two appraisers should weigh in, says Jim Stokoe, senior principal at KPMG in Edmonton.

While the institution arranges the appraisal, the donor is usually expected to pay, says Toronto-based professional appraiser Sharon Berlin. You need to provide as much documentation as possible, including original tax or purchase receipts, prior appraisals and other paperwork. “It saves time and effort on the part of the appraiser,” she says.

Others note it also saves you money. Appraisals for the cultural review board are more detailed and can be more costly.

The institution then assembles the rest of the cultural board application, including an explanation of why the art is of national importance.

It should take four months for the board to make a decision. If the application is approved, it issues an income tax certificate for what it deems fair market value. It’s good for two years. If there’s disagreement about the board’s assessment, it can be appealed in tax court.

Donating to public organizations

You may have a beneficiary other than a museum in mind. You can give to registered charities, all levels of government, and even amateur athletic associations.

These donations are subject to capital gains tax if the piece in question is worth more than $1,000, says Secter. In that case, CRA also requires an appraisal.

After accepting the piece, the organization issues a receipt. It can be for as much as the piece’s fair market value, or for as low as the adjusted cost base of the art, says Secter. “If I’m giving a work of art to an eligible recipient and I don’t want the capital gains, I can elect to have it valued at a lower amount,” he explains.

When determining capital gains, deduct any expenses incurred to donate, such as appraisal fees, from the adjusted cost base, says Secter.

The credit can be used to offset up to 75% of your income, and any unused amounts can be used to offset taxes in the next five years.

When the time is right

“You want to match the timing of a significant donation with a significant amount of income,” Stokoe says.

When to make a donation depends on your circumstances, he says. “Often, the big liability is on death. If that’s the case, you may want to make the donation through your will.”

Currently, the credit for a donation made in a bequest can be carried back one year, but changes in the 2014 budget will give future donors more flexibility.

But giving sooner can be useful, too. For example, if your annual income is similar to the value of a donation, the resulting credit could be used immediately or within the carry-forward time limit.

Whether a donation will be made while alive or through the estate, Sector says to plan now to ensure tax benefits are used efficiently.

“Collectors can make the decisions themselves during their lifetimes,” he says. “Even if it is to see that things happen after they’re gone, they have control now.”