Art is meant to be experienced. Irrespective of whether those experiences take place in public or in private, art in any of its forms has the power to create lasting impressions.

The tax treatment of art as it changes hands can also leave an impression, being subject to capital gains and potentially involving large tax liabilities. However, donating art can give one access to credits that could significantly decrease their taxes owing.

There are two pathways one can take when donating art: donation to a public organization or donation to a museum.

Donating to Public Organizations

Donations to public organizations are still subject to a capital gains tax, if the piece is determined to hold a fair market value of more than $1,000, and the CRA will require that any art donated with the aim of receiving a tax credit be appraised. However, donation also gives the donor access to a tax credit that can be used to offset up to 75% percent of income in a year, a significant amount considering the high value ascribed to some pieces of art.

Not every public organization is deemed equal, and credits are only available upon donation to what the CRA considered to be "qualified donees". These include registered charities, Canadian amateur athletic associations, national arts services organizations, listed municipalities in Canada, and the Government of Canada, among others.

It is important to not attempt to take advantage of these donation credits, and the CRA has shown that they are willing to review and fight back against donation claims that they deem to be unreasonable. One example is the "Art-Flip" scheme.

In these cases, promoters were specifically looking for participants who would lower their tax liabilities by making donations of large art collections to schools. Prints were purchased by art dealers and sold in bundles to participants at inflated prices. Prints that were purchased for a range of $5 to $75 were sold to participants at $300 each, while appraisers hired by the promoters then valued the individual pieces between $1000 and $2000 each. Most of the participants never even saw the art they had purchased and were donating.

One participant, Frank Klotz, spent $75,000 on 250 prints that were valued by the appraisers as holding a total market value of $264,900. Klotz claimed $258,400 to offset his income, an amount that was disputed by the CRA. The CRA said, if anything, Klotz should have been limited to being able to claim the $75,000 he spent on the prints. Klotz attempted to justify his claims in court and, following a loss at the Supreme Court of Canada, new rules regarding the donation of art were introduced.

Now, if a donor intends to make a claim higher than the purchase cost, they must retain the collection for at least three years.

The above case demonstrates the importance of being aware of the provisions governing donations. Attempts at reducing taxes paid on income should not risk running afoul of the CRA.

Donating to Museums

The other option for donation would be to donate art to a museum or art gallery. While this process is more labour intensive, a successful donor could be able to offset the taxes on up to 100% of their income.

These donations would also not be subject to capital gains, as culturally significant donations are exempt.

To make a donation to a museum, one must first find an interested museum from a list of federally designated cultural institutions. Once a museum has accepted the donation, ownership must be transferred to the museum to qualify for the tax credit. Donations that come with too many strings and vestiges of past ownership will often be denied. Once the required professional and independent appraisal has taken place, the museum will complete an application to have the piece reviewed by the Canadian Cultural Property Export Review Board.

The Board must certify the piece as being culturally important. It must be associated with Canadian history or national heritage or be useful in the study of arts and sciences. This certification process can take up to four months, and upon successful certification, the Board will issue a tax receipt for what they deem to be the fair market value of the piece. This receipt is valid for wo years.

Conclusion

While it does require some effort and expenditures, donating art for a donation credit is a very effective method of offsetting tax on income. These credits come along with an added bonus, seeing the art transferred into hands that can hopefully preserve it and make it available to a larger audience, ensuring that many will benefit for generations to come.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.