Gwenyth Stadig, Associate and Upama Poudyal, Articling Student  – Gowling WLG (Canada) LLP

An increasing number of Canadian taxpayers are interested in giving pieces of art to charities or other qualified donees as part of their estate plans. Some of these Canadian taxpayers are choosing to make decisions to give such art during their lifetimes, while others are setting down a plan for their gifts of art to occur at death. This article forms part one of a two part series detailing the benefits and requirements for donating art for Canadian taxpayers to consider as part of their estate planning needs.

Benefits of Gifts of Art

Two sections of the Income Tax Act (“ITA”) govern gifts of art. Subsection 118.1(1) of the ITA governs gifts for individuals, while subsection 110.1(1) governs gifts for corporations. If the ITA requirements are met, then Canadian taxpayers that are corporate donors may deduct the amount of the gift of art directly from their taxable income whereas Canadian taxpayers that are individual donors receive a non-refundable tax credit. Any unused part of the donation tax credit can be carried forward for up to five years from the date of the gift.

Process of Donation

Gifts of art can be a useful tax reduction tool when made by inter vivos or testamentary disposition, but each method has its own considerations to keep in mind.

The Canada Revenue Agency (“CRA”) requires gifts of art to be given as a gift at law. This means that the donors must voluntarily transfer the property comprising the gift itself to the qualified donee. Further, the donors, typically, cannot retain any residual rights regarding the use of the gift (although conditions on the gift may be permitted) and the donors cannot, typically, receive any consideration for the gift. Practically speaking for gifts of art this means that if a donor chooses to proceed with an inter vivos gift of art (i.e., to the qualified donee which the qualified donee accepts and the donor receives an official donation receipt for), then the donor will not be able to personally enjoy that artwork once the gift is perfected and the gift is transferred to the qualified donee. Of course, if the artwork is given to a qualified donee that is a museum or an art gallery which exhibits its art to the public, then the donor – as a member of the public – can also enjoy the artwork it gifted to the qualified donee in that context.

Where a party is considering a gift of art, the donor and the qualified donees should consider the utility of entering into a gift agreement which details the agreed upon terms as between the parties and specifically addresses permitted future use of the donated property as well as other concerns such as naming rights and display considerations.

In order for donors to receive the tax benefits from donations of art, there are three main requirements which must be met. The art must (1) be given to a qualified donee; (2) be valued by a qualified valuator to obtain a fair market value valuation; and (3) be voluntarily transferred from the donor to the qualified donee.

Qualified donee is defined term found in subsection 149.1(1) of the ITA. This term broadly includes registered Canadian charities, Canadian amateur athletic associations, municipalities, and registered journalism organizations to name a few. Many museums and art galleries are qualified donees and specifically registered Canadian charities.  It is important for any potential donors to do their due diligence to ensure that a potential recipient of a gift of art is in fact a qualified donee. CRA maintains a list of registered qualified donees in Canada that can be accessed and searched here.

The final two requirements will be discussed in a future article.