My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, March 28, 2011

Personal Use Property - Taxable even if the Picasso Walks Out the Door

I will start today’s blog with a question. What do stamps, duck decoys, hockey cards, dolls, coins, comics, art, books, toys and lamps have in common?

If you answered that the collection of these items are hobbies, you are partially correct. What you may not know is, that these hobbies also generate some of the most valuable collectibles in the world.

When a collector dies and leaves these types of collectibles to the next generation, the collectibles can cause rifts amongst family members. The rifts may occur in regard to which child is entitled to ownership of which collectible and whether the income tax liability related to these collectibles should be reported by the family members.

Let’s examine these issues one at a time. Many of these collectibles somehow miss being included in wills. I think the reason for this is two-fold. The first reason is that some parents truly do not recognize the value of some of these collectibles, and the second more likely reason is, that they do realize the value and they don't want these assets to come to the attention of the tax authorities by including them in their will (a third potential reason is that your parents frequented disco's in the 70's and they took Gloria Gaynor singing "Walk out the Door" literally- but I digress and I am showing my age).

Two issues arise when collectibles are ignored in wills:
  1. The parents take a huge leap of faith that their children will sort out the ownership of these assets in a detached and non-emotional manner, which is very unlikely, especially if the collectibles have wide ranging values; and
  2. The collectibles in many cases will trigger an income tax liability if the deceased was the last surviving spouse or the collectibles were not left to a surviving spouse. 
Collectibles are considered personal-use property. Personal-use property is divided into two sub-categories, one being listed personal property (“LPP”), the category most of the above collectibles fall into, and the other category being regular personal-use property (“PUP”).

PUP refers to items that are owned primarily for the personal use or enjoyment by your family and yourself. It includes all personal and household items, such as furniture, automobiles, boats, a cottage, and other similar properties. These type properties, other than the cottage or certain types of antiques and collectibles (e.g. classic automobiles), typically decline in value. You cannot claim a capital loss on PUP.

For PUP,  where the proceeds received when you sell the item are less than $1,000 (or if the market value of the item is less than $1,000 if your parent passes away) there is no capital gain or loss. Where the proceeds of disposition are greater than $1,000 (or the market value at the date a parent passes away is greater than $1,000) there maybe a capital gain. Where the proceeds are greater than $1,000 (or the market value greater than $1,000 when a parent passes away), the adjusted cost base (“ACB”) will be deemed to be the greater of $1,000 or the actual ACB (i.e. generally the amount originally paid) in determining any capital gain that must be reported. Thus, the Canada Revenue Agency essentially provides you with a minimum ACB of $1,000.

LPP typically increases in value over time. LPP includes all or any part of any interest in or any right to the following properties:

  1. prints, etchings, drawings, paintings, sculptures, or other similar works of art; 
  2. jewellery; 
  3. rare folios, rare manuscripts, or rare books; 
  4. stamps; and 
  5. coins. 
Capital gains on LPP are calculated in the same manner as capital gains on PUP. Capital losses on LPP where the ACB exceeds the $1,000 minimum noted above, may be applied against future LPP capital gains, although as noted above, these type items tend to increase in value.

The taxation of collectibles becomes especially interesting upon the death of the last spouse to die. There is a deemed disposition of the asset at death. For example, if your parents were lucky or smart enough to have purchased art from a member of the Group of Seven many years ago for say $2,000 and the art is now worth $50,000, there would be a capital gain of $48,000 upon the death of the last spouse (assuming the art had been transferred to that spouse upon the death of the first spouse). That deemed capital gain has to be reported on the terminal income tax return of the last surviving spouse. The income tax on that gain could be as high as $11,000.

The above noted tax liability is why some families decide to let the collectibles “Walk out the Door.” However, by allowing the collectibles to walk, family members who are executors can potentially be held liable for any income tax not reported by the estate and thus, should tread carefully in distributing assets such as collectibles. (As an aside, starting next week, I will begin a three part series on executors).

If you are an avid collector, it may make sense to have the collectibles initially purchased in a child’s name. You should speak to a tax professional before considering such, as you need to be careful in navigating the income attribution tax rules.

Where the above alternative is not practical or desirable, you should ensure that you have set aside funds or even taken out life insurance in order to cover the income tax liability stemming from these collectibles that may arise upon your death.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

48 comments:

  1. I have a question about the tax treatment of collectibles. Suppose that a coin collection is worth more than $1000, but each coin is worth less than $1000. Can the coins be sold off one at a time (or in groups of total value less than $1000) to avoid capital gains entirely?

    ReplyDelete
  2. Michael, great question. You have hit on a bit of a grey area.

    Where an individual item would normally be disposed of as part of a set such as a coin, stamp or baseball card set, the whole set is considered to be a single item of PUP. The disposition of a single item of a set may result in a capital gain even where the proceeds of disposition do not exceed $1,000 because the $1,000 floor ACB would have to be prorated among the items that make up the set.

    The term set is not defined, leaving this a bit of a “grey area”, ie: is a single coin, stamp or card part of a set? You can answer yes or no in many cases.

    Former Interpretation Bulletin 332R http://www.cra-arc.gc.ca/formspubs/prioryear/it332r/it332r-e.html) which is not binding, but represents CRA’s thoughts in the past says in paragraph 14 “The term "set" is not defined in the Act and therefore carries its ordinary meaning in the context in which it is used. The Department considers that a set for these purposes is a number of properties belonging together and relating to each other. For example, in the case of the hobby of philately, the Department considers that a set is a number of stamps which were produced and issued by one country simultaneously or over a short period of time. The fact that the value of a number of properties, if sold together, exceeds the aggregate of their values, if sold individually, may indicate the existence of a set. However, this is not in itself a decisive factor.”

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  3. Great blog! What about the setup in a company? Would it be possible for someone to buy collectibles in a company with "before" tax dollars?
    Thanks,

    ReplyDelete
  4. Hi Yan

    There is actually an anti avoidance rule in the Income Tax Act for personal use property of a corporation that igores decreases in the value of the property.

    The real issue is whether the corporation is purchasing a collectible for corporate purposes ie: to be used or displayed for corporate purposes and for future appreciation or is the shareholder using corporate pre-tax dollars for their own benefit--ie. they take the collectible home to display etc. If that is the case, then the shareholder may have a taxable benefit. Care would have to be exercised and you should discuss the specific purchase with your corporate accountant.

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  5. If I buy a classic vehicle in Canada and sell it a few years later at considerable profit, is it taxable in any way such as capital gains ?

    ReplyDelete
    Replies
    1. Hey Cool

      Yes, it would be a capital gain, assuming you are not doing it so many times that it could be considered business income.

      Delete
  6. If you built a house and never lived it in and claimed capital losses on it..would it still be under personal use property..It was never lived in...sold 5yrs down the road..
    Your thoughts...
    Mary

    ReplyDelete
    Replies
    1. Anon, there are various factors to consider including your initial intention, your profession amongst others. However, in general, without knowing your personal circumstances, the loss would be claimed as a regular capital loss on schedule 3

      Delete
  7. It's no wonder LPP tends to walk away when the tax rules are unbalanced and unfair - can only claim LLP losses against LLP gains not any other capital gain, time limits that make it unlikely losses can be used when deemed disposition occurs upon death (how do you carry forward losses then?). I'd guess death triggers the bulk of LLP gains. The rules make sure gains are taxed but losses are not considered. Cheating is boosted when people think the rules are unfair. At the very least, at death LLP losses should be eligible to offset any other CG in a final return.

    ReplyDelete
    Replies
    1. Hi CI:

      If I am being fair, in most cases LPP results in Capital gains and there is the $1,000 floor. Also upon death, all unused capital losses can be applied against regular income on the terminal return, so I dont agree with you in this situation. The property walks, because people feel art etc is personal in nature and the government has no right to any gains.

      Delete
  8. If you gift LPP to your children while you are alive, and the FMV of LPP is significantly more that $1,000 - is it a deemed disposition just like in death at FMV and taxable as such?

    ReplyDelete
  9. Does the "Under $1000 LPP rule" apply to corporations? Example, corporation buys stamp at $700, sells it later for $900 and has no capital gains tax? Thank you.

    ReplyDelete
    Replies
    1. Hi Anon

      It-332 which has been deleted by the CRA used to deal with LPP says

      "Property owned by a corporation may be personal-use property. This would be the case where it is used primarily for the personal use or enjoyment of one or more individuals who are related to the corporation by virtue of subsection 251(2)."

      BBC says- if property is for the use and enjoyment of an individual, there could be personal benefit issues of holding it in a corp, however, for stamps, it would probably not be an issue.

      Delete
  10. Hi,

    Just wondering if you can help with the following(below). Because these are a collection can I consider them Listed Personal Property or are they still considered Personal Use Property?

    At death, her father left her with his large collection of miniature vehicles. While he had acquired these vehicles for a total cost of $4500, at the time of his death, they were valued at $12000, Ms Forest sells the collection to a collector for $23000

    Thanks

    ReplyDelete
    Replies
    1. Hi Tyler:

      I do not provide personal tax advice on this blog, especially when the answer is not clear cut such as in this case. Sorry

      Delete
    2. It's not technically personal tax advice, Its part of a problem in school and I am having trouble distinguishing the limitations to listed personal profit and whether something such as the collection stated above would be considered LPP.

      I understand if you can not answer, but would be extremely grateful if you did.

      Thanks

      Delete
    3. Hey Tyler, now that I know it is a question for school, for sure I cannot help :) However, check out this blog I wrote, I would consider this argument (sorry the search button on blogger is not working) http://www.thebluntbeancounter.com/2012/07/are-your-collectibles-individual-pieces.html

      Delete
  11. Hi,
    My husband owns a town house that his parents live in. This property is only under his name. We also own a primary residence where we live (under both our names). My inlaws moved in as soon as the house was built (he bought it new). At the begining we were actually paying $300 out of our pockets towards the carrying costs. My father in law gives my husband a cheque of $1300 every month to help towards the costs of the house. Does he have to claim that he receives rent from his dad? We never signed a rental agreement since it's his parents... If we were to sell the property in the future, what will the tax implications be?

    ReplyDelete
    Replies
    1. Hi Anon

      You father in law is paying rent, thus,technically it needs to be reported less the expenses. Many families wrongly ignore this issue, but that does not make it right.

      I will not answer the second question, since I think you should get advice on this, but in some manner, one of the properties will be taxable since they are both in you and your husbands names.

      Delete
  12. Hi Mark,

    My Dad was given two paintings by someone he helped at the end of WWII. Dad was not an artist or an art collector and he did not did not buy or sell these paintings or any others. They were a gift that he kept for his own personal use and enjoyment not as an investment.

    My Dad has passed away and the paintings are not mentioned in his will but he had told my mother and other family members that he wanted me to have paintings. So my mother has given the paintings to me.

    The executor of my Dads estate has an accountant who is also handling my mothers income taxes this year. They have asked me to get the paintings appraised so my mom can pay the capital gains tax.

    The paintings have never been appraised were never bought or sold are not part of a collection and were not owned by a collector or as an investment.

    Are the paintings considered LPP?
    Do I have to get them appraised?
    Will my mother have to pay capital gains tax?
    Any advice?

    Thanks!

    ReplyDelete
    Replies
    1. Hi Henry

      As I noted in the blog above, things like art or either missed in the will by accident or on purpose. I dont know what your dad's intention was, whether he did not think about or did think about it and hoped you would just take the art and not let anyone know. Either way, the estate's accountant is techncially correct, the art was an asset of your fathers and under the Income Tax Act should be reported. Thus, technically you require an appraisal and an estimate by the appraiser of the value when your dad received the gift.

      Delete
  13. Hello Mark, Our mother passed away a year ago and we discovered in her papers that she had bought a Plot of 6 graves in a cemetery. She and Dad are both buried there and we the children (5) would like to keep the other 4 for 'future' need. The estate accountant is telling us that they must be sold. IS there a way for us to keep it as a Family Plot?

    ReplyDelete
    Replies
    1. Hi Anon:

      I am not aware of the specific circumstances as to why this advice is being given, it may have to do with the financial upkeep or the accountant feels this is an asset that needs to be valued and deemed sold for tax purposes (deemed sold is not the same as requiring a sale). However, for tax purposes and I think legal (although you would have to ask your estate lawyer) I dont think there is any requirement to sell the plots. You need to ask your accountant why he/she is suggesting this, he/she may have a good reason that I am not aware of - but in general, I am not aware of any obligation to sell the plots.

      Delete
  14. My father was an artist and has passed away. He left a working artists studio stuffed with his life's work. He is a prominant local artist who did sell work and did this as his sole occupation. He left everything to my mother and we are currently sorting and preserving the artwork that is on good watercolor or pastel paper. Much of it was newsprint and sketches etc that he stipulated be torn and burned. He wanted my mother to be able to sell his artwork as his contribution to her remaining lifetime as there was of course no pensions for him being self employed. I have looked into insurance for the studio and artwork there. I was told that the artwork has no value until sold therefore it only has a value of the paper cost matting and framing if it is framed. so supplies only. Does my mother have to claim the amount she gets from the sale of prints or originals and paintings that are her inheritance from my Dad?
    Also if she passes away I am the sole benificiary to the masses of paintings etc that are in his studio How will this effect her estate to me?

    ReplyDelete
    Replies
    1. Hi Anon

      I don't provide specific tax planning advice on this blog. This is very complex issue and you and your mom need to engage an accountant to ensure you minimize the taxes. That being said, in general if your dad left everything to your mom, it would flow tax free at his cost (which is probably minimal). When she sells the paintings she will have to report the proceeds (income or capital??). The problem will most likely, subject to the facts be when she passes away. Any art remaining would be deemed sold at its fair market on your moms final tax return which could be problematic Again, this is complex and you should get some accounting advice and I have never looked into whether there is an exemption for Cdn art upon death.

      Delete
  15. Can you comment on whether Canadian Silver coins that have been collected from circulation over the years (and therefore well worn), would count as Capital Goods because it is the silver content that drives their value or Listed Personal Property because they are a coin collection?

    ReplyDelete
    Replies
    1. Hi Anon

      Good question, unfortunately I dont know the answer off the top of my head and would have to research such and I dont have the time, sorry.

      Delete
  16. I have been collecting exclusively Canadian Stamps for over 40 years...both old/used and mint stamps. I recall, about 10-15 years ago that Revenue Canada issued several bulletins strongly advising 'collectors' of personal property to make a cost declaration and file a form (can't recall the exact from #) with them within a certain specific time. At that time, I then had my entire stamp collection appraised @$30,000.00 Cdn. Subsequently, I continued to further collect mint Canadian Stamps from the Canadian Philatelic services, and ceased altogether collecting as I'm retired and it was getting very costly to continue.
    If I chose to sell my entire collection....which likely maybe very difficult as there is very little market for stamp collections these days....the youth really don't collect stamps anymore etc....anyway, if I sell and I have to take less than $30,000.00 Cdn, can I claim a Capital Loss on Disposition ?
    Also, I assume that when I filed my ACB several years ago @ $30,000.00 that any appreciation OVER $30,000.00 would be subject to capital gains taxation ?
    Thanks for you help....
    Andy

    ReplyDelete
    Replies
    1. Hi Andy

      Appreciation over your $30k cost base would be capital gains, probably on listed personal property. If the property is considered LPP, you can only use the losses against other LPP gains.

      If you have not already read this blog, u should read it
      http://www.thebluntbeancounter.com/2012/07/are-your-collectibles-individual-pieces.html

      Delete
  17. Hi,
    Replying to a previous comment you mentioned that coins shall be considered in sets for the purpose of LPP, and not individually. My question is what if the coins are purchased from foreign income as a non-resident and sold while living in Canada as resident. How LPP will apply in this case? What if the coins were received as gift while being non resident Canadian?

    ReplyDelete
    Replies
    1. Hi Anon

      Property owned prior to entering Canada is valued at its fair market value upon entering Canada. Any gains would be measured from those values.

      Delete
  18. Hi,

    I have a very large art and music collection and spend a significant amount of money on storage costs, insurance and other fees. Are these fees tax deductible now or could they be applied to reduce taxes when the collections are sold?

    ReplyDelete
    Replies
    1. Hi Anon

      I think you are out of luck on both counts.

      Delete
  19. I have been collecting sports cards for the last 5 years. I have spent $2500 and my collection is now
    worth $5000. Does this mean I have $2500 in capital gains?
    Also, do I have to declare my proceeds as income even though the proceeds are in my paypal account and technically hasn't been transferred into my bank account?

    ReplyDelete
    Replies
    1. Hi Anon

      Yes you have a $2500 capital gain and must declare the gain once the proceeds are received, no matter if they are in your Paypal account.

      Delete
    2. Thank you, what if I sell my cards 1 year at a time and come in under the max threshold of $1000/year? Any tax implications there?

      Delete
    3. Hi Anon

      I provided you some guidance in the first question. I will not answer your second as i do not provide specific planning on this blog.

      Delete
  20. I just found this article through a Google search - it seems relevant to my current situation. I'd appreciate any comments you have on this.

    My grandparents gifted me a collection of mineral and rock samples that they collected over the years. The collection is pretty big and many of the samples are quite valuable. I've been selling off individual pieces online, as I certainly don't need to keep boxes of the stuff for my own collection. I'm wondering what the tax implications of my online sales are. These samples were collected by my grandparents - they weren't purchased, so assigning an original purchase value of them is quite difficult, if impossible.

    Do I need to pay capital gains tax on my sales?

    ReplyDelete
  21. Hi Anon

    If someone gifts items (rocks and minerals in your example) that had no cost, they have a capital gain upon gifting equal to the fair market value. Thus, in theory your grandparents had a capital gain (subject to the personal use rules above) at the time of gift. You in theory have a cost equal to the fair value at the time of gift and any sale from that value results in a capital gain subject to the rules above. Your situation is complicated assuming your grandparents did not report any gain and you should speak to an accountant to sort this out.

    ReplyDelete
  22. If the collectible is sold by an auction house in the US, but the owner of the collectible is a Canadian taxpayer, are there any US tax liabilities?

    ReplyDelete
    Replies
    1. Hi Unknown

      Unfortunately, I have never had to look at that issue, so I dont know the answer off the top of my head. You should check with the auction house if they can provide any info or direction and ask them whether there will be any U.S. witholding tax on the sales proceeds. Sorry.

      Delete
  23. On the CRA website it states If both the Adjusted Cost Base and the proceeds of disposition on LPP are $1,000 or less you don't have to report the sale on your income tax return. I want to sell 3 trading cards online, I paid less than $1000 for each of them...suppose I get $3000 in total proceeds, is my ACB $3000? Thus no gain on disposition?

    ReplyDelete
    Replies
    1. I don't provide specific tax advice on this blog. See the answer to the first comment on individual coin vs sets to assist you

      Delete
  24. Three years ago I was given a 30 year old custom made Rifle from my father. He has since passed away and I have been thinking of selling it. It is worth more then the $1000 with the last appraisal being done when the Rifle was made. Will I have to pay Capital Gains on the value from 30 years ago to today or from 2014 value when I received it.

    ReplyDelete
    Replies
    1. Hi Anon

      Technically your father had a disposition when he gave it to you, he may have reported this on his return or not. If not, a bit of an issue. Your cost is the 2014 value.

      Delete