The biggest issue that comes up, especially for executors, is showing proof of what the art was worth when it was purchased, says an advisor.Kirsty Wigglesworth/The Associated Press
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High-net-worth clients who possess valuable artwork are often ill-prepared on how to pass down their collection to the next generation, some industry observers say.
The first mistake is assuming their families want to keep the art for nostalgic reasons, notes Tina Tehranchian, senior wealth advisor at Assante Capital Management Ltd. in Richmond Hill, Ont. She says children may want to sell the art and use the proceeds toward a house downpayment, for instance. She encourages clients to host family meetings to discuss their intentions and desires.
“Sometimes, these conversations are very eye-opening because while parents want the art pieces in the family forever, the kids have absolutely no interest,” she says.
Malcolm Burrows, head of philanthropic advisory research at Scotia Wealth Management in Toronto, says that in some cases, the rising value of a particular artwork may make the next generation feel uncomfortable owning it.
“There may be an aesthetic quality that doesn’t fit in their house and lifestyle and that becomes a reason to sell,” he says. “They may even be worried about insurance costs for the art.”
So, then, the conversation shifts to whether the children should sell or donate the art upon the death of the parent, or if the parent should just sell or donate the art in their lifetime. Ms. Tehranchian is a fan of the latter choice.
“It will make life easier for your executor and heirs,” she says.
She also notes that the art owner will have a better understanding of the art’s history and the type of institution that will hopefully accept the donation.
“The biggest issue that comes up, especially for executors, is showing proof of what the art was worth when it was purchased,” Ms. Tehranchian says.
She says clients need to keep an inventory of art purchases that reflect the initial purchase and valuations since that time. Updated valuations also help when hoping to distribute assets equally in an estate situation.
“Collectibles, including artwork, went up during the pandemic because people started collecting things more,” Ms. Tehranchian says. “The value of things will change, and that includes art.”
Tax implications of handing down art
Mr. Burrows says clients need to identify whether the art has value or is simply deemed personal property. Similar to any investment, any art disposed of will result in a 50 per cent capital gain (or loss) for the proceeds minus the adjusted cost base. Art with proceeds of less than $1,000 won’t result in a capital gain.
Valuing art starts with the proof of purchase and is followed by a review from an accredited, independent appraiser.
“For art donations or gifts or sales to family members, you need one by a reputable evaluator because you don’t want to get into a situation in which the Canada Revenue Agency (CRA) challenges you on the donation’s value,” says Debbie Pearl-Weinberg, executive director of tax and estate planning at CIBC Private Wealth in Toronto.
Ms. Pearl-Weinberg cites the example of a $20,000 painting that’s sold to a family member or friend for a mere $100. That’s a red flag for CRA.
“If I have a piece of art and want to give it during my lifetime to a family member, I’m deemed for tax purposes to have disposed of it at fair market value,” she says.
However, art that’s deemed culturally significant and accepted by approved museums can result in significant tax savings. In that case, any capital gain would be eliminated and the owner would receive a tax receipt for the art’s appraised fair market value.
But actually having culturally significant art that’s accepted is not an easy feat. It’s a rigorous process the Canadian Culture Property Export Review Board set up. Mr. Burrows also notes that museums and art galleries have different policies and don’t necessarily accept an art donation as it may not fit within their collection.
“That’s often a key point that’s forgotten,” he says. “Don’t always assume there’s an institution that wants your art. It’s quite a regulated process.”
Mr. Burrows recalls a client who amassed a collection of mid-20th-century pieces and handpicked a gallery to house the art upon his death. But it turns out the client’s chosen gallery only desired contemporary and Indigenous art.
If a client can’t find an institution to accept the donation, the other option is selling the art via auction. But that process is still quite involved, he notes.
“The cost of selling and the physical handling of the art is quite expensive and auction houses can charge a lot of commission,” Mr. Burrows adds.
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