The Art of Canadian Taxation.
September 1, 2020By Hugh Neilson
Jean-Baptiste Colbert said, "The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing." I suspect that this is the closest that most would equate tax and the arts.
But the arts provide the livelihood of artists, and income tax applies to that livelihood as it does to other forms of income. Unusual tax issues can arise within the arts, issues which the income tax system is forced to address. This article discusses a sampling of such issues.
The Kindness of Others
Many arts organizations are charitable organizations. Most Canadians are well aware that donations to registered Canadian charities generate a personal income tax credit.
Donations of "cultural property" to organizations such as museums can generate a further benefit - no portion of capital gains on such property is included in income for tax purposes. Prior to donation, the Canadian Cultural Property Export Review Board must certify and value the property. The receiving institution may be familiar with this process, or at least willing to learn in order to secure the donation.
What is "Art"?
The income tax system thrives on definitions. Art, by its nature, defies precise definition. As a result, different provisions may apply to different "arts". One special rule is provided for a business which is an "artistic endeavour". The legislation describes an artistic endeavour as "creating paintings, prints, prints, etchings, drawings, sculptures or similar works of art" but excludes a business which reproduces such works. The individual carrying on such a business may elect to value inventory of that business at nil.
Normally, inventory must be valued at the lower of its cost or fair market value at each business year-end. Imagine trying to determine the cost of canvasses, paint or supplies used in sculpture which form any given piece of artwork. Then, assess the value of any artist's work when it has not yet been sold. This election provides a much-needed simplifying assumption.
Given the cliche regarding the value of art during and after the artist's lifetime, determining that value immediately prior to death - to report a deemed disposal at fair market value - would create further interesting arguments at the Tax Court and unwelcome costs for those administering, or benefitting from, the artist's estate.
Working for the Man
Of course, not all artists are...
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