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TAXFlash News from IncomeTaxCanada.net

Jim Maroney Jim Maroney

:: Onslaught of tax shelters and creative tax-saving schemes is no accident at this time of year

:: The end of the calendar year always brings an onslaught of tax shelters and other creative tax-saving schemes. The timing of this marketing blitzkrieg is no accident since many taxpayers turn their minds to tax reduction at this time of year.

Equally predictable is CCRA issuing a press release warning taxpayers about the perils of ill-conceived tax plans. Clearly CCRA would rather stop taxpayers from diving in head first than having to deal with the issue further on down the road.

In recent years, the focus of CCRA’s annual press release has been tax shelters and there may still be such a release forthcoming. This year, however, the first CCRA warning shot is targeted at art-donation schemes or “art flipping”.

While acknowledging the legitimacy of donating works of art to registered charities, the press release warns that “taxpayers should be aware of the risks associated with certain art-donation schemes--often referred to as "art flipping"--which have the effect of cheating the government out of taxes that should be paid”. Any rest assured, tax collectors don’t particularly like being cheated.

Art-donation schemes generally work as follows:

A promoter provides a taxpayer the chance to purchase a work of art at a relatively low price. Now if you’re like me, once I get beyond Rembrandt, I can’t distinguish the difference from valuable artwork and junk. The artistic side of my brain has atrophied through a complete lack of use since the day I was born. Art and the value of art is simply not my balliwick.

But have no fear, be it collector’s piece or trash, the promoter who sold the investor the stuff in the first place will also have made arrangements to donate the same piece of art to a Canadian registered charity. Indeed this part of the process is often so smooth that the investor will more than likely never set eyes on his or her newly purchased work of art. In my case, that’d be a good thing.

In between the original purchase of the artwork and its subsequent donation, an appraisal is completed that concludes, lo and behold, the “investment” is worth more, perhaps substantially more, than its original cost. Imagine that – turning a profit on a first foray into the subjective world of art investing – not bad for a neophyte investor!

CCRA provides advice on Artwork and Charity

Donating a treasured, probably unseen, piece of art to a registered charity generates an income tax receipt in the name of the investor. This act of philanthropy provides the investor with a tax saving that may very well be higher than the amount originally invested.

In its press release CCRA provides an example of an investor paying $600 for three paintings with an appraised value of $3,000. The tax saving generated by the resulting donation receipt is approximately $1,500 or $900 more than the cost of the original purchase.


Gee, spend $600 and net $900 with little or no effort - sounds like a no-brainer doesn’t it? Perhaps, until you take a look at the potential penalties.

If CCRA determines that the donation is either not a true gift or the value of the gift is inflated, the taxpayer’s donation will either be denied or adjusted to a lower amount. Now, where 2002 is concerned, this won’t happen until sometime after the taxpayer has filed a 2002 personal income tax return so interest will also be assessed on the tax improperly avoided.

Promoters, appraisers and others involved may be subject to the newly instituted third-party penalties designed to deter the making of false statements or omissions. Known colloquially as the “planner penalty”, when a false statement is made in the course of a planning activity or a valuation activity, the penalty amount is the greater of $1,000 and the total of the person's gross entitlements for the planning or valuation activity. That is, big schemes can result in big penalties for planners.

Of course, where the registered charity is concerned, the loss of registered status is what’s at risk – not a small price to pay.

If you’re still contemplating investing in one of these schemes, CCRA provides the following advice:

• Beware of advertisements that sell batches of art or shares in art. Be particularly wary if the art is pre-selected or you are denied the opportunity to see the art in question.

• Ask for certification to prove that the appraiser is a qualified and independent party who is not connected to the promoters or sellers of the art. At the very least, the appraiser should be a member in a professional association.

• Pay close attention to statements or professional opinions in advertisements or other documents that explain the income tax consequences of the investment. More to the point, read the limitations of the opinion and the problems and potential risks with the investment.

• Ask the promoters and others to provide assurances of the transactions’ legality in writing. And good luck on this point, by the way.

• Ask the promoter for a copy of any advance income tax rulings from CCRA about investments and donations. I might add that, considering the subject CCRA press release, there won’t be too many favourable advance tax rulings on art-donation schemes since it appears CCRA doesn’t like them very much.

• Before signing any documents, consult a professional tax advisor to obtain competent and independent advise.

Reading between the lines, I’d surmise that those who choose to invest in art-donation transactions can expect to land squarely in the crosshairs of CCRA’s audit department. If you enjoy the heat of the battle then good on you, otherwise steer clear.



Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca
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