Dispose of an Artwork: Give or Sell?

Possible Options and Related Tax Considerations1

 

Several reasons can justify that, at one time or another, you may want to dispose of some of your works or your entire collection. As you have probably read, you will have been told about the usual three "D" for Divorce, Death and Debt. To which one could add Depart2 (Retirement) and "Deaccessioning" or redevelopment of a collection.

The options are many and the impacts of any choices are not necessarily obvious to you and your heirs. In general, the collector at least wishes to recover its costs and, should he bequeath works to his heirs, not to hinder them financially by donation.

The key word: planning. Because many of the options presented here will require an organized and systematic approach that may take place over time, sometimes over several years. Clearly, you should have thought about it beforehand, be advise by competent professionals and have implemented your strategy with the support of specialists (eg tax advisors, chartered appraisers, etc.) over a relatively long period of time.

I confine myself here to provide a broad range of choices in Canada3.

 

Table of Contents

 

Disposition by gift4

Two (2) options:

Two (2) possible cases:

  1. Gift says "inter vivos"
    • What is it about? You assign one or more of your works to a person or company with a fiscal existence5 and that, during your lifetime.
    • Advantages/Disadvantages:
      1. Advantages: the donor is in control and can incorporate this donation into its annual tax strategy.
      2. Disadvantages:
        • You no more can dispose of your works;
        • The donor is subject to the gain/loss of capital resulting from the difference between the "Fair Market Value" (FMV) determined at the time of the donation and the "adjusted cost base" (ACB), that is to say, the total purchase cost (purchase plus costs);
        • No tax credit available.
    • Constraint: the fair market value (FMV) of works assigned must be determined by a qualified appraiser.
  2. Donation by succession
    • What is it about? You assign one or more of your works to a person or company with fiscal existence4 and that, following your death.
    • Advantages/Disadvantages:
      1. Advantages: you retain the enjoyment of the property until your death.
      2. Disadvantages:
        • At your death, your collection will need to be evaluated to determine its fair market value (FMV) and may generate a capital gain for your estate and/or heirs;
        • No tax credit available.
    • Constraint: the fair market value (FMV) of works assigned must be determined by a qualified appraiser.

Three (3) possible cases:

  1. Donation to a registered charity or other qualified donees
    • What is it about? You assign one or more of your works to a registered charity that does not acquire these works as part of his first mission (for example, museums would qualify organizations acquiring works in the context of their first mission). The organization in question has a maximum period of 5 years to dispose of it and recovers for its purposes the proceeds of the sale.
    • Advantages/Disadvantages:
      1. Advantages: You can obtain a tax credit based on the fair market value (FMV) of the gift. This tax credit applies to 75 %% of net income in the year of the gift. Specific to Quebec, the FMV is established here as equivalent to the lesser of the following amounts from the sale of the property:
        • The amount obtained from the sale of the work, or
        • The FMV of the work at the time of sale.
      2. Disadvantages:
        • You are subject to the capital gain;
        • In the case of Quebec, the receipt will only be issued following the sale of the property.
    • Constraints:
      1. If it exceeds $ 1 000,00, the fair market value (FMV) of the works assigned must be determined by a qualified appraiser.
      2. The donation must be accepted by the organization in question.
  2. If you are a resident of Quebec, donation to a Quebec museum
    • What is it about? If you are a resident of Quebec, some charities have been designated as eligible for donations corresponding to their specific mission. The Registered Museums are test cases for donations of works of art.
    • Advantages/Disadvantages:
      1. Advantage: the tax credit is based on fair market value (FMV), plus 25% at the time of the donation. This tax credit applies up to 75% of the net income of the gift for that year for Quebec tax purposes;
      2. Disadvantage: You are subject to the capital gain.
    • Constraints:
      1. The value of works sold must have been determined by a qualified appraiser;
      2. The donation must have been accepted by the organization in question.
  3. Recognized gift of national importance to an accredited or designated organization (museum, etc.), also known as "Gift of Certified Cultural Property"
    • What is it about? The Canadian government has created a special incentive to encourage Canadians to retain cultural property in Canada that is of "outstanding significance".
    • Advantages/Disadvantages:
      1. Advantages :
        • The tax credit is based on the fair market value (FMV) at the time of donation as established by the Canadian Cultural Property Export Review Board (CCPERB);
        • This tax credit has no limitation based on net income and the donor has 5 years to claim it;
        • No capital gains to be reported;
        • If the designated body is in Quebec, the fair market value (FMV) at the time of the donation will be increased by 25% for the purposes of Québec tax.
      2. Disadvantage: the process can be long and tedious.
    • Constraints:
      1. Only designed organizations may accept such gifts;
      2. The value of works sold (JVM) must have been determined by the Canadian Cultural Property Export Review Board (CCPERB) following external evaluations6. If the donation is made on behalf of a designed facility in Québec, an additional certificate from the Conseil du patrimoine culturel du Québec (formerly "Commission of Quebec Cultural Property") is required;
      3. The gift must have been accepted in advance by the donee and the Commission(s), if applicable.

Disposition by sale

  • Sale to a prescribed authority or institution (Quebec only?)
    • What is it about? You sell one or more of your work to an administration or a prescribed institution, a certified archival center or a Quebec museum.
    • Advantages/Disadvantages:
      1. Advantages: No capital gains to be declared; loss of capital possible under certain conditions;
      2. Disadvantages: It is not easy to identify the institution concerned who has the budget to do so.
    • Constraints:
      1. You must obtain from the organization a document attesting that it is a significant cultural property.
  • Sale through an auction house
    • What is it about? You sell one or several of your works through an auction house.
    • Advantages/Disadvantages:
      1. Advantages: The auction house supports the entire sales process.
      2. Disadvantages:
        • You are subject to the capital gain/loss rules;
        • Expensive process for both the seller and the buyer;
        • You have limited control over the amount you will get.
    • Constraints:
      1. Not all auction houses are equal. You need to select the best intermediary based on the work you want to divest yourself off;
      2. Utilizes our simulators to properly assess the costs involved and the net amount that you can get from the sale.
  • Sale through an art gallery
    • What is it about? You sell one or several of your works through an art gallery.
    • Advantages/Disadvantages:
      1. Advantages:
        • The gallery supports the entire sales process;
        • You control, after agreement with the gallery owner, the price you will receive from the sale.
      2. Disadvantages:
        • You are subject to the capital gain/loss rules;
        • Expensive for both the seller and the buyer (commission around 40-50%).
    • Constraints:
      1. You must identify a gallery interested in the secondary market of this artist.
  • Direct sale, usually via a website

Two (2) possible cases:

  1. Sale through a generic website (eBay, Kijiji, etc.)
    • What is it about? You sell one or more of your works through an online selling site such as "classified ads"
    • Advantages/Disadvantages:
      • Advantages:
        • Inexpensive for the seller;
        • Seller retain total control on the asking price.
      • Disadvantages :
        • Limited description of the works sold;
        • You assume yourself the sale;
        • You find yourself lost among all kinds of products;
        • Limited attendance by collectors;
        • The seller and the buyer assume the risks inherent in the transaction;
        • You are subject to the capital gain/loss rules.
    • Constraints:
      • On some sites, unless your subscription is priced, your ad will quickly appear on the secondary pages.
  2. Sale through a specialized site (Associated Art Collectors, ArtAds.ca, ArtViatic, ArtBrokeerage, etc.)
    • What is it about? You sell one or more of your works through specialized visual art websites.
    • Advantages/Disadvantages:
      • Advantages :
        • Works are described thoroughly;
        • Sites are specifically aimed at collectors in visual arts and are frequented by them;
        • Inexpensive for both the seller and the buyer.
      • Disadvantages :
        • You generally assume the sale yourself, unless options to that effect are available;
        • You generally assume the management of the transaction and, unless specific provisions, the inherent risks;
        • You are subject to the capital gain/loss rules.
    • Constraints:
      • The website must have accepted your work.

1 Page created as of August 23, 2016.   Need to consult a professional for updated information.

2 With the large influx of "baby boomers" reaching retirement age, the phenomenon is currently expanding. see:

3 Note that depending on the country, the rules can vary greatly. Hence, the importance of obtaining the advice of specialists, among others, for the tax point of view.  Documents of interest on this matter:

4 Are not covered here donations to minors or trusts.

5 Individual or company required to produce a tax report.

6  In June 2018, Federal Court Justice Manson reduced the notion of "National Importance" to an object that has "a direct connection with Canada's unique cultural heritage". This decision, which could have a significant impact on the volume of donations to be submitted to the Commission, was de facto reversed by the Canadian government's March 2019 budget statement, which proposes to return to a broader vision of the notion of "National Importance".