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:
- 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
- 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:
- prints, etchings, drawings, paintings, sculptures, or other similar works of art;
- jewellery;
- rare folios, rare manuscripts, or rare books;
- stamps; and
- 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.
