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, July 9, 2012

Are your Collectibles, Individual Pieces or an Unbreakable Set?

In March 2011, I wrote a blog post on the taxation of personal use property. In that post, I noted that upon the disposition of personal use property (“PUP”) there are no capital gains if the proceeds are less than $1,000. (See the above link for how PUP is taxed and the various subsets of PUP).

Financial blogger Michael James put forth an insightful question about the blog post when he asked “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?

My answer was as follows: “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 adjusted cost base ("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”, i.e.: is a single coin, stamp or card part of a set? You can answer yes or no in many cases.”

Former Interpretation Bulletin 332R which is not binding, but represents CRA’s past thoughts, says in paragraph 14 that 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 stamp collecting, 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."

So why am I bringing up this topic again? Because last year the Tax Court of Canada addressed the issue of what constitutes a set in an unusual and slightly amusing case, on whether an insect collection constituted a set. Yes, you read that correctly, an insect collection.

Danielle Plamondon donated a collection of insects worth $25,419 to Laval University. The CRA then re-assessed the taxpayer for a capital gain of $24,419 being the fair market value of the collection less the $1,000 floor on PUP.  Although the judge considered the issue of personal enjoyment of the PUP, the key to the case was whether the 2,158 insects constituted a set. The judge ruled that each insect was a distinct property and did not form an unbreakable set. Thus, the $1,000 floor ACB applied to each insect and there was no capital gain.

It should be noted that in the link above, there is a discussion about the words "set" and "collection" and that according to a tax commentary service, they are clearly not synonymous and, accordingly, a collection of paintings or of stamps would not normally constitute a set of paintings or of stamps.

So, if you have a hockey card set, it would appear most sets are linked. But what if you own a 1966 set with Bobby Orr's rookie card? That card is essentially the set, is that card a distinct property? What if you are a collector of duck decoys, are the decoys linked or separate and distinct properties? What about figurine and plate collections? If you collect stamps, based on the CRA comments noted in IT-332 and the case above, it would appear there would be circumstances in which a stamp collection would appear to be considered a breakable set. Clear as mud in many cases.

The Plamodon case has not necessarily clarified what PUP will be considered distinct property as opposed to an unbreakable set. However, if you are a collector, this unusual case may prompt you to consider how linked the items are in your sets and do they form an unbreakable set?

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.

4 comments:

  1. The ruling would seem to tip things in favour of non "set-ness". I think I'll avoid this issue by collecting experiences rather than things :-)

    ReplyDelete
    Replies
    1. Michael--very philosophical of you. You are more than just another pretty financial blogger :)

      Delete
  2. To Michael's first question, I would say the answer is YES. You can sell individual coins for less than $1K and avoid paying capital gains. No collector would consider a coin collection a whole anyway, as each piece was probably acquired separately (unless it was inherited or bought at an estate auction). This is exactly the kind of thing that Waddington's 'Transitions' experts specialize in handling. Just hang on, and I will have one of them weigh in here with their two cents.

    ReplyDelete
    Replies
    1. Thx Rob:

      However, I remember as a kid buying sets of a penny, nickel, dime, quarter and silver dollar for each year the Cdn Mint issued a new set of coins. It would appear to me that those sets could be unbreakable sets.

      Delete