Taxes for collectors

Perhaps your client likes to collect coins, stamps, antiques, rare books or other memorabilia. If that’s the case, consider these tax requirements and tips.

1) Report the sale of personal-use property

Did you know that you are required to report capital gains on the sale of property used in daily life? This includes cars, furniture or electronics.

To report it, complete Part 7 of Schedule 3: Capital Gains (or Losses).

To calculate your adjusted cost base (ACB):

a) If the item cost $1,000 or less, write $1,000

b) If the item cost more than $1,000, state the actual cost.

To calculate proceeds of disposition:

a) If you sold the item for $1,000 or less, write $1,000.

b) If the item was sold for more than $1,000, state the actual proceeds.

Calculating the adjusted cost base

CRA deems listed personal property to have a minimum adjusted cost base of $1,000. It also deems the proceeds of disposition to be $1,000 in cases where it’s actually lower.

That means anything you bought and sold for $1,000 or less is tax-free, says accountant Clayton Achen. If your bought something for $1,000 or less, and sold for more than $1,000, you would pay tax on the amount above $1,000.

Note that you should report only a net gain on Line 158 of Schedule 3, and you cannot claim a loss on Line 158.

For purchases where you lost the original receipt, ask an appraiser to determine what the item was worth in the year it was bought, and to prepare an official report. CRA has its own appraiser and may contest your appraiser, warns Achen.

2) Report the sale of listed personal property

Collectors are only able to claim capital losses on listed personal property (LPP), such as art and stamp collections. Those losses can only offset capital gains on other LPP.

To do this, complete Part 8 of Schedule 3 by describing the item sold, the year of acquisition, expenses from the disposition, and the gain.

Consider this tip: Like other personal-use property, Canada Revenue Agency (CRA) deems the adjusted cost base and proceeds of disposition of inexpensive goods to be $1,000.

Sets of collectibles

If a collectible is part of a set, such as a series of commemorative coins, CRA may consider such collections a single property. In this case, the deemed $1,000 for ACB and proceeds applies to the entire collection.

This rule prevents you from selling sets piece-by-piece to qualify for a $1,000 ACB on each item, thereby lowering your total taxable gains, says Achen. But the rule only applies when parts of sets are sold to the same person or related persons.

If your pieces are sold to unrelated parties, then the $1,000 ACB per piece still applies.

3) Use prior-year losses to offset current-year LPP gains

Your losses on LPP can be carried forward up to seven years. When completing Part 8, subtract any unapplied historical losses from your total gain for this year. If there’s still a net gain after applying losses, you can report this on Line 159.

But be warned: Do not report LPP losses on Line 253 of your return.

Also, you can use other, non-restricted capital losses to offset LPP gains, says Achen: “This can include carry-forward capital losses or current year capital losses.”

4) Use current-year losses to offset prior-year LPP gains

Losses on LPP can also be carried back up to three years, so keep a record of your LPP losses by year. Complete Section 4 of Form T1A: Request for Loss Carry Back to assign current-year losses to past gains, and attach it to your return.

However, be warned: Don’t file an amended return for the year the losses are being carried back to.

5) Total all gains and losses

Calculate your capital gains or losses from all sources, such as investment portfolios and real estate, and report the total from Line 199 of Schedule 3 on Line 127 of your return.

Personal-use property vs. listed personal property

CRA says personal-use property is household and personal items like cars, clothes, furniture and cottages, which are primarily for personal use and enjoyment. Listed personal property (LPP) is a special category of personal-use property. With LPP, owners are allowed to claim a capital loss when they sell it. These losses can be carried forward up to seven years, or back for up to three years.

Personal-use property includes: cars, furniture, boats, computers and cottages.

Listed personal property includes: rare books or manuscripts, coins, stamps, jewelry and art.

When applying losses from LPPs, your client can’t deduct:

• losses from the disposition of LPP from non-LPP gains.
• more LPP losses in a year than that year’s LPP gain.

Sources: KPMG; CRA

CRA has an example of a personal-use property loss. And for more on gains and losses, refer to CRA’s Capital Gains Guide T4037.

The story of two amateur entomologists’ bug collection led to a precedent-setting Tax Court decision on what makes a collection a set. Read Advisor’s Edge Report, “A tangled web of taxes,” to learn more.