The Income Tax Act allows very few opportunities to purchase an appreciating asset while simultaneously receiving a deduction for that asset. The purchase of Canadian Artwork may be one such opportunity.
As we near year-end for many corporations, companies with profits are looking for ways to reduce their tax burden. This is especially so given the Accelerated Investment Incentive introduced in late 2018.
For qualifying artwork, companies can deduct for tax purposes an amount annually for depreciation. This amount is normally equal to a 20% declining deduction. To qualify, the artwork must meet the following criteria:
- The artwork cost $200 or more,
- is not held for resale, or otherwise included in inventory,
- is acquired for the purpose of gaining or producing income from an arm’s length individual, and
- was created by an individual who was at the time a Canadian.
As an example – in 2013 a Toronto based law firm acquires a piece of art from a local art gallery for $20,000 to display in their lobby. The artist who originally produced the work was a permanent resident of Québec at time of creation. Since the artwork was created by a Canadian artist, costs over $200, and is used as a beautifying fixture in their office, the $20,000 acquisition would be considered a Class 8 capital asset for tax purposes and would be eligible for deduction at a declining rate of 20% per year. Due to CRA’s half-year rule, the deduction in year 1 would be equal to $2,000, or half of the normal 20%.
With the new Accelerated Investment Incentive rules, the year 1 deduction in the above example would be increased to $6,000 if the artwork were purchased in 2019. This offers a way for companies to reinvest inside their business, reduce tax, and participate in any appreciation in the value of the artwork.
So, what happens in the event that the artwork does in fact appreciate and is subsequently re-sold? Investors should be mindful that any sale of a depreciated art asset will result in recapture, up to the amount originally paid for the artwork. This recapture will be included as business income, and any amounts received over and above the original cost would be considered a capital gain. Given the tax deferral in this scenario, purchasing Canadian artwork could be considered as a viable tax planning opportunity.
If you’re looking to scope out some Canadian artwork, we encourage you to check out a local gallery like the Herringer Kiss Gallery’s beautiful location in Sunalta, whose current exhibits run until December 21.
The above is for general information purposes only and should not be considered tax advice. The Income Tax Act has many nuances and exceptions; we strongly encourage you reach out to a Chartered Professional Accountant regarding the specifics of your purchase to determine if it will qualify for a deduction.