Often when we think about tax, all we think about is paying taxes. However, in certain circumstances, taxation can also mean tax incentives for taxpayers and corporations. Tax legislation can be advantageous for people who purchase Canadian artwork. Indeed, several tax incentives exist to encourage the acquisition of art, and to help showcase artwork and artists in various locations.1
1. Purchasing and Re-Selling Artwork
The Quebec and Canadian governments have implemented a capital cost allowance incentive for companies and individuals operating a business. This declining deduction is 33.33% of the cost of purchasing the artwork in Quebec and 20% at the federal level.
To benefit from this measure, two basic criteria must be met. First, the artwork must be purchased for the purpose of earning income. In other words, the artwork must be purchased by a person (company or individual operating a business) in a commercial context, i.e. to be exhibited in a place of business where it will be seen by clients. Second, the artwork must be created by a Canadian artist.
To illustrate the impact of these declining deductions, let’s look at the following example: a company or self-employed worker purchases artwork created by a Canadian artist to hang in an office where it will be seen by clients. The cost of the artwork is $5,000. The capital cost allowance of the artwork would be 20% per year for federal income tax and 33.33% for Quebec income tax.
In the case of artwork that is re-sold, if the work was completely depreciated at both government levels, the amount equal to the initial cost of the artwork would be used in the income calculation (tax recapture). The difference with the resale price would be considered a capital gain. For example, if the artwork purchased for $5,000 is resold several years later for $8,000, the depreciated $5,000 would be declared as a CCA recapture (100% included in the income calculation) and the difference of $3,000 as a capital gain (50% included in the income calculation).
If the artwork is rented, the rental expenses will also be deductible, similar to an acquisition, as long as the purpose of earning income was the main objective.
2. Measures Relating to Charitable Donations
For donations in kind offered to qualified donees, such as registered charities, the amount that appears on the donor’s receipt is the fair market value (FMV) of the donated property. An independent appraisal is required to determine the FMV. However, if the value of the property is equal to or less than $1,000, and the cost of such an appraisal represents an excessive expense for the organization receiving the property, the tax authorities will accept the donee’s qualified staff appraising the artwork.
2.1 Tax Credit and Deduction
An individual in Quebec who makes a donation is entitled to a 48.2% tax credit, considering the abatement, for property whose value exceeds $200. Companies are entitled to a deduction equal to the eligible donation amount in calculating taxable income. Generally, the donation amount that an individual or company is entitled to may not exceed 75% of net income. The excess can be carried forward over the following five years and in Quebec, corporations can elect to carry forward their donation balance over the following 20 years.
2.2 Gifts of Art
Not all artwork donated to qualified donees allows donors to systematically benefit from a tax credit or deduction. Under Quebec legislation, certain donors who do not purchase artwork as part of their primary purpose may not give donation receipts, as long as they have not disposed of the property that was given to them. Furthermore, the donation amount will be limited to the lesser of the resale price and the FMV at the time of resale. Additionally, the sale must take place before December 31 of the fifth year following the donation; otherwise no receipt may be given.
There is also a measure applicable in Quebec only when a work of art is donated to a Quebec museum whereby the donation amount is increased by 25% in the tax credit calculation for individuals and in the deduction calculation for corporations.
Therefore, using our previous example, if the same work is donated to a Quebec museum (registered in Quebec and Canada), instead of being sold, the depreciated $5,000 will also be considered as a CCA recapture (100% included in the income calculation) and the $3,000 difference as a capital gain (50% included in the income calculation). Also, the donor would be entitled to a tax receipt of $8,000 for federal purposes and $10,000 for Quebec purposes (25% more).
However, if the artwork is qualified as cultural property and is certified, the donation would not generate any capital gain for the donor.
Our objective here is to explain the main tax measures with respect to purchasing artwork. To maximize tax deductions or credits relating to the transmission of artwork, it is strongly recommended to speak with a tax expert.
One thing is for sure; the Quebec and Canadian governments have implemented tax measures to encourage access to culture, which is an undeniable economic driving force in our development. By encouraging local artists, we are helping to enhance Quebec creativity and innovativeness.
So let’s all support art, it’s in our best interest!
1 Note that this article describes certain tax issues relating to artwork and does not describe all of the tax measures or tax incentives in effect.