What are the Tax Incentives for Certified Cultural Property?

The Income Tax Act provides for exemptions from the payment of capital gains tax for certified cultural property sold or donated by individuals to designated institutions or public authorities in Canada. Gifts of certified cultural property to designated institutions and public authorities are also eligible for a tax credit for up to 100% of net income.

1997 Budget: Charitable Donations vs. Donations of Certified Cultural Property

There are two significant differences between the measures proposed in the 1997 Budget with regard to gifts of cultural property to a charity and the existing tax treatment of donations of certified cultural property to designated institutions:

1. The budget proposal does not exempt the capital gain on a donation of cultural property from income tax for which a charitable tax receipt has been issued. It simply provides that the resulting donation tax credit may be used to offset the capital gain in the year of the donation.

   This can be contrasted with the treatment of certified cultural property under which any capital gain resulting from a donation is exempt from tax. As a result, where a donor makes a gift of certified cultural property, the donation tax credit resulting from any capital gain is fully available to reduce tax on other income. For gifts of uncertified cultural property to a charity, the donation tax credit resulting from the capital gain is used to offset taxes resulting from the inclusion of the capital gain in the donor's income.

2. A second significant difference between the two regimes is the extent to which the donation tax credit resulting from a gift may be used to reduce a donor's income from other sources. In the case of a donation of certified cultural property, a donor may offset the tax on 100% of net income, and thereby reduce his or her income tax liability to zero. This treatment is available in the year of the donation and in the following five years. In the case of a gift of property, a donor is only allowed to offset tax based on 75% of net income.

Examples which illustrate the difference in tax treatment between gifts made under the proposed budget measures, and donations of certified cultural property can be obtained on request from the Secretariat to the Canadian Cultural Export Review Board. They show that, because of the differences between these two regimes, a donor may be better off choosing certified cultural property treatment when the value of the gift is over $1,000¹. As well, because capital gains are still included in income subject to tax, but can be offset by donation tax credits, overstatements of the value of a donation are of little net benefit to a donor, as they reduce the tax credit that is available to offset tax on other income.

The above comments on the tax consequences of donations are illustrative and for information only and should not be construed as legal or accounting advice. You should contract the services of competent professionals if you require legal or other expert advice.

For further information, please contact revboard_sec@pch.gc.ca.

(1) There is no capital gain or loss on personal use property which costs $1,000 or less if the proceeds of disposition are $1,000 or less (Gifts and Income Tax, P113(E)Rev. 95, Revenue Canada).