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Donating art to charity: What are the tax incentives?

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Some works of art may hold personal or emotional value for the owner but some artwork has cultural significance to Canadians. For this reason, the Canadian government has established the Canadian Cultural Property Export Review Board (the “Board”) to certify artwork or other items of cultural value to Canadians.

When you sell a work of art you have to pay capital gains taxes on proceeds of sale minus your cost. When you gift it, from a tax perspective a deemed disposition or sale at market value occurs. The proceeds of disposition or fair market value of the object minus your cost would be considered capital gains and 50% of that gain would be included in your income in the year when the gift is made and you would have to pay tax on it based on your highest marginal tax rate.

If you own a work of art or item that is certified by the Board and you donate it to a designated institution, there would be no tax payable on the disposition.

Institutions are categorized as Category A or B institutions. Category A designated institutions are institutions that meet all relevant criteria with regards to legal, curatorial and environmental requirements.

Category B is granted to institutions that are involved in the acquisition of an object or collection, which do not meet all the criteria for designation but have demonstrated their capability to effectively preserve and care for the specific property for which certification is desired.

If you own an asset which is certified by the Canadian Cultural Property Export Review Board as “certified cultural property”, and you donate it to a designated institution, you will not have to pay any tax on the gift. In addition, you will be entitled to a tax receipt for the full value of the gift as determined by the Board.

For example, let’s say Lucy owns a Lawren Harris painting that she purchased in 1960 for $100,000. Knowing that this painting has significant cultural value, she asks the Canadian Cultural Property Export Review Board to assess it. The Board conducts an assessment and determines that the painting has indeed significant cultural value and has a fair market value of $1,100,000.

Lucy decides to donate the painting to her favourite charity that happens to be a hospital and notifies the charity of her intention. The charity is thrilled but they let Lucy know that they do not have “designated institution” status. Lucy considers the tax consequence of her donation to a designated institution versus one without that status, taking into account that the capital gains would be taxed at 24.76% or 50% of her highest combined (federal and provincial) marginal tax rate of 49.53% in her home province of Ontario:

             Charity A                Charity B (designated institution)     
Proceeds of Disposition      $1,100,000 $1,100,000
Cost Base $100,000 $100,000
Capital Gain $1,000,000 $1,000,000
Taxes Owing $247,650 $0
Tax Credit $544,830 $544,830
Net Taxes $0 $0
Leftover Credit $297,180 $544,830
 

Once Lucy realizes that if she makes a gift to a charity that is not a “designated institution”, she would have to pay $247,650 tax on her gift, she contacts another charity which is an art museum and qualifies as a designated institution. By making a donation to a designated institution, she would have no net taxes to pay and would also end up with a leftover tax credit of $544,830.

Clearly, Lucy has an incentive to make the gift to a designated institution. This was designed to motivate Canadians to make gifts of cultural property to institutions that would ensure the preservation and proper care of significant Canadian art and cultural objects. The same rules apply to bequests and gifts made by will.

In recent years Canada Revenue Agency (CRA) has been clamping down on all sorts of donation schemes, including tax shelter gifting arrangements involving donation of art. These tax shelters typically provide a tax receipt for an amount larger than the cash investment of the donor/investor and use various approaches such as buy-low, donate-high arrangements, gifting trust schemes and leveraged cash donations. Until recently, certified cultural property was exempt from the rule that donated property acquired as part of a tax shelter gifting arrangement has a value no greater than the price paid for it by the donor. This exemption was removed as a result of Budget 2014. Therefore, any donation of certified cultural property that is made on or after February 2014, where the property was acquired as part of a tax shelter gifting arrangement will no longer be exempt and will be subject to this rule.

You should seek the advice of qualified tax and financial planning professionals before you make a gift of cultural property or include it in your will and estate planning to ensure that you maximize your tax benefits.

Tina Tehranchian, MA, CFP, CLU, CHFC, is a branch manager and senior financial planner at Assante Capital Management Ltd. in Richmond Hill, Ontario and can be reached at 905-707-5220 or through her web site at www.tinatehranchian.com.

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