Corporate Art Collections
By Joel Secter
Have you ever walked into a corporate office or professional firm only to find yourself admiring the art? Though some businesses rent art to avoid the capital outlay required to purchase it,[1] many take advantage of the capital cost allowance (CCA) to build their own private collection. Hopefully, a better understanding of how to claim the CCA for original Canadian art will encourage our corporate readers to do the same.
By way of background, Canada’s Income Tax Act allows taxpayers to claim a deduction for certain capital assets held by the entity. The deduction is meant to represent the amount of depreciation and loss of value the asset suffered during the year. To do this, the Income Tax Regulations (ITR) put each object in a class of similar assets and assigns each class its own prescribed rate of deduction. To calculate the deduction for CCA, the book value of the item is multiplied by the prescribed rate (in the first year the prescribed percentage is divided in half as described below). This amount is then deducted from tax and from the book value (called undepreciated capital cost (UCC)). In the next year the prescribed rate is applied to the new UCC and so on. Because the UCC is lower each year the value of the deduction is lower each year, but never reaches zero.
The rules contained in paragraph 1102(1)(e) of the ITR provide that artwork acquired by a taxpayer, including but not limited to prints, etchings, drawings, paintings, or sculptures, may qualify as assets eligible for CCA at a rate of 20% if all of the following conditions are met:
· The artwork is acquired for the purpose of gaining or producing income,
· The artwork is not described in the taxpayer’s inventory,
· The cost of the artwork to the taxpayer is $200 or more, and
· The individual who created the artwork is a Canadian.
While the prescribed rate of deduction for artwork is 20%, the maximum amount of CCA that may be claimed for any asset in the year of acquisition is always halved. This is known as the half-year or 50% rule.
By way of example, if a taxpayer purchases an original work of art by a Canadian artist for $10,000, the taxpayer would be able to claim CCA of $1,000 in that tax year (applying the rate of 20% and the half-year rule). The UCC left for further depreciation would be $9,000. Thus, the taxpayer could claim CCA of $1,800 in the following tax year (leaving UCC of $7,200) and $1,440 in the tax year after that (leaving UCC of $5,760).
Given that art often increases in value, it bears mentioning that disposing of artworks may trigger recapture and capital gains. To the extent that the amount received upon disposition is greater than the UCC balance (but less than the capital cost), there will be recapture of the depreciation already allowed. The recaptured amount is treated as business income. To the extent that the proceeds of disposition exceed the capital cost, there will be capital gains.
Determining the CCA for a corporate art collection is made more complicated by the fact that the UCC balance is cumulative and calculated based on all the acquisitions and dispositions in the collection from the time the first artwork is acquired. Suffice it to say that the UCC will be equal to the amount, if any, by which the total of the increases to the UCC exceed the total of the decreases to the UCC.
The take-away is that the CCA can be used by businesses to adorn the places where they meet clients with original Canadian art. While the benefits could be offset by recapture and capital gains, this will only occur if the artwork increases in value. Not the worst problem to have when you are in business.