The tax treatment of art and other collectibles

Under the tax rules, where an item is used primarily for your personal use or enjoyment, it is called “personal use property.” Many collectibles will fall into this category. When you ultimately dispose of the item, or if it is still held at the time of your death, a capital gain or loss may arise.

When calculating this gain or loss, if the cost of the property was less than $1,000, then it is bumped up to $1,000. Similarly, if the amount you received for it at the time of disposal is less than $1,000, then your proceeds for tax purposes are also bumped up to $1,000. Effectively, this means that no capital gain will arise should you sell personal use property for less than $1,000. Capital losses on personal use property, however, are deemed to be nil, unless the item falls into the special category of “listed personal property,” which is discussed below.

The following items are considered to be “listed personal property”:

• Prints, etchings, drawings, paintings, sculptures or other similar works of art
• Rare folios, manuscripts or books
• Jewelry, coins and stamps

If you dispose of listed personal property at a loss, then the loss can be offset against other capital gains, but only against those gains arising on the disposition of other listed personal property. Any such losses can also be carried back for 3 years or forward for 7 years — but, even in those years, may only to be used to offset gains from the disposition of other listed personal property.

Special rules apply where the collectible you own is considered to be part of a set of items, and you only dispose of part of a set to one person. A group of items is treated as a set where the items would ordinarily be disposed of together, and are generally thought of as belonging together. Often their value as a set is greater than the total value of the individual pieces. For instance, a group of different stamps that were issued by one country at the same time or over a short period of time will generally be treated as a set. Where this occurs, the set is deemed to be one single personal use property, and the $1,000 minimum cost and proceeds will be shared by all of the properties in the set. This rule is in place to prevent someone from selling parts of a set in a series of transactions, and then using the $1,000 minimum cost for each transaction to reduce the overall gain for tax purposes.

Since your personal use property is not used to earn income from a business or property, capital cost allowance, (“CCA” or depreciation for tax purposes) cannot be claimed. There may, however, be situations where you purchase a collectible not merely for your personal use and enjoyment. For instance, art may be purchased for the purpose of being displayed in your place of work. In this case, the art would not generally be considered to be personal use property, and CCA may be claimed so long as it is otherwise permitted. In most cases, however, CCA may only be claimed on Canadian art. In addition, the cost of the art must be reasonable in relation to the value of the business itself. For instance, the CRA may not view a claim of CCA to be a reasonable expense on a painting with a value of $800,000, where the value of your business, without taking into account the artwork, is, say, $700,000.

You may choose to hold collectibles in a trust where your children are the beneficiaries. If you contribute a collectible item to a trust, you are generally deemed to have disposed of the item at its fair market value, and you may realize a capital gain or loss at that time. However, any capital gains arising should the trust later dispose of the property will not be attributed back to you, and can be distributed and taxed in your children’s hands. You may wish to use the trust structure so that the trustee can maintain control over the item and decide whether it should be held or sold. As with any trust, it is important to accurately document the trust terms, such as the powers of the trustee and when and how the trust property is to be distributed. You should obtain legal advice on how to establish and maintain the trust.

One issue to take into consideration is the “21 year rule.” To prevent indefinite postponement of tax on capital gains accruing on property (including collectibles) in a trust, the tax law creates a “deemed disposition” of trust assets every 21 years, which could result in taxes owing on the accrued capital gain1. The tax can be delayed by transferring trust assets to the beneficiaries, which can be done at the trust’s ACB of the property. This is often referred to as “rolling” the property out of the trust to the beneficiaries at the tax cost.

Depending on the age of the beneficiaries of the trust, you may not be comfortable with them receiving the trust property in 21 years. For instance, if a trust beneficiary is currently two years old, you must decide if you are willing for the property to be owned and under their control at age 23, or risk paying the capital gains tax in the trust on the 21^st anniversary, rather than distributing the property to the beneficiary to avoid the tax hit on the deemed disposition.