Tips for Artists
by Robert McMurray

Donations of Artwork — Pros and Cons Clarified

An artist whe donates his/her artwork to a registered charitable organization has some
interesting options under the income Lax rules and regulations and these are very often
misunderstood. The first important step is thal the artist must be satisfied that the charity
warrants this support because, assuming the artwork is saleable, i is just the same as
giving cash. In some cases it may be easier to make a smaller cash donation, sell the
artwork and retain the proceeds,

If the charity warrants support there may be an income tax advantage available to the
artist upon donating the artwork. For tax purposes there are two transactions that occur
at the time of making the donation, Firstly, there is a deemed sale of the work and
secondly there is a donation made to the charity. Both transactions must be reported as
the same amount.

However, artists have an option that is not available to normal taxpayers in that they can
set that amount anywhere between zero and fair market value. The greatest benefit of this
option is. derived if the artist is in the lowest of fourtax brackets and the benefit decreases
asthe bracket increases. The following example shows the benefit to a single artist living
in BC with a part-time job earning 328,000 and a break even on an income in the year
2002 and who donates an artwork with a gallery pnce or fair market value of $2,000:

|. Without donation Taxable Income § 25,000)
Income tax 4.204

2. With donation Taxable income § 30,000
Income Tax 3.794

3. Reduction in Tax 5 410

The reason that there is a net tax reduction is that the additional income of $2,08%) is taxed
at the low rate of 21% increasing tax by $420 whereas the donation credit on $2,000 is
calculated at the high rate of 41.5% decreasing tax by $830. The result is a net tax
decrease of $410 which makes the exercise well worth the effort,

Please note that the additional income of $2,000 will increase RRSP contributeon room,
It will also require the payment of $188 into the Canada Pension Plan for future benefits.
This payment will be deducted from the tax reduction leaving a net improvement of $222
for the taxpayer.

Robert H. McMurray, P.C_A.. A.F.C.A. Chartered Accountant working with artists and
INCOME Taxes.

Robert H. McMurray, PCA (Fellow, Chartered Accountant), AFCA
(signature member of the Federation of Canadian Artsrs| is the sentor
partner in the firm of MeMurnry, Roberts, Heming & Wybom in Surrey. BC
and a pointerfartist. He is te imediar Past President of the Federation of
Canadian Artists, Ant anid artists ore focus interests for him aru! he hos
approximately 80 artists as clients, These include painters, sculptors,

writer musicians, etc. (predaninantly painters, both well established and
emerging). He can be reached at 604.576.0121, fax 604.376.2890 and email
wmermunnay rele, ers,

Recent Income Tax Developments
of Interest to Artists

Two recent tax cases in the Supreme Court
of Canada are of significant interest to
artists claiming tax bosses

Since the Muldowan case in 1978 an indi-
vidual, such a an artist, undertaking a
commercial activity had to pass a test set
by the Canada Customs and Revenue
Agency (CCRA), formerly Revenue
Canada Taxation, in order to apply their
losses against other earned income, The
test is referred to as the “Reasonable Ex-
pectation Profit” or REOP test and has
been used to deny loss deductions to any
business undertaking that does not show a
profit over a reasonable penod of time.

In both cases the Supreme Court found
that the REOP test could no longer be
used. In its place are the requirements that
the business activity must be in the pursuit
of profit and the income source must be a
business. The activities of most artists
trying to cam income from their art should
easily satisfy both requirements.

There have been a number of REOP cases
in lower courts in the Last year that have all
been decided for the taxpayer but the Su-
preme Court bas the last word. Further, it
does not appear that CCRA can easily
change the rules t counter this develop-
ment,

Thus, beginning and emerging artists will
find life a little casier in not having to meet
the numerous requirements of the REOP
test in order to apply their business losses
against other earned income.

Reference: Stewart v. Canada, 2()2
$C 46 and Wallis vy. Canada, 20027, 5CC
47

Robert H. McMurray, F.C.A,, AFCA,
Chartered Accountant