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Art-donation schemes or art flipping

November 2002

Donating art and other gifts in kind to registered charities or other specified institutions is a legitimate charitable activity that is encouraged by the Canadian tax system. However, taxpayers should be aware of the risks associated with certain art-donation schemes--often referred to as "art flipping"--which have the effect of cheating the government out of taxes that should be paid.

What is an art-donation or "art-flipping" scheme?

• Step 1: A promoter gives a person the opportunity to purchase one or more works of art or another item of speculative value at a relatively low price. The proposal is that the promoter will work with the person to make arrangements for donating the works of art or other items to a Canadian registered charity or other specified institution.
• Step 2: The person donates the art or other item and receives a tax receipt from the charity or other specified institution that is based on an appraisal arranged by the promoter. The appraised value of the art is substantially higher than the cost paid by the person.
• Step 3: When the person claims the receipt on his or her next tax return, it generates a tax saving that is higher than the amount paid for the art in the first place.
  
  Example: A person purchases three paintings at $200 each for a total of $600, on the assurance that the paintings' actual market value is substantially higher. As arranged by the promoter, the person donates all three paintings to a registered charity. The receiving charity accepts the paintings and issues tax receipts at $1,000 for each painting based on the appraisal arranged by the promoter.
  
  When the person claims the $3,000 on his or her next tax return, the tax saving generated will be approximately $1,500 (depending on the marginal tax rate) or about $900 more than the initial purchase cost of $600.

What are the potential penalties?

Penalties vary, depending on the role played in the art-donation scheme:

• Individuals: If the Canada Customs and Revenue Agency (CCRA) determines that an individual's donation is not a true gift or that the work of art's appraised value is inflated, the donation claimed will be disallowed or adjusted.
  
  Depending on the circumstances, the CCRA may also apply penalties.
  
  
• Third parties (promoters, appraisers, etc.): On June 29, 2000, the CCRA instituted new penalty provisions to deter third parties from making false statements or omissions.
  
  The third-party civil penalties are based on the amount of tax the third party caused others to evade (Information Circular 01-1, Third-Party Civil Penalties ).
  
  This can include the charity or institution itself, if it knew--or if it can reasonably be expected to have known--that the appraised values were incorrect.
  
  
• Charities or other specified institutions: In addition to third-party penalties, a charity or other institution may face loss of its registered status.

What should taxpayers do?

• Beware of advertisements that sell batches of art or shares in art or other speculative property that are valued at several times their cost and that promise substantial tax savings through charitable tax receipts. Be especially wary if you do not get to see the art, or if the charity has been pre-selected for you.
  
  
• Ask for certification to prove that the appraiser is a qualified and independent party who is not connected to the promoters or sellers of the art.
  
  Generally, membership in a professional association is a good indication of an appraiser's qualifications.
  
  
• Pay close attention to statements or professional opinions in advertisements or other documents that explain the income-tax consequences of the investment.
  
  Often, these opinions will describe problems that can be expected and will suggest that the investor get independent legal advice.
  
  
• Ask promoters and others to provide assurances of the transactions' legality in writing.
  
  
• Ask the promoter for a copy of any advance income tax rulings from the CCRA about investments and donations.
  
  Review the rulings carefully.
  
  
• Before signing any documents, consult a professional tax advisor to obtain competent and independent advice.

For more information…

Please contact a CCRA tax services office if you would like more information.

This document is also available for download in PDF format.

For media information

Date modified:

2002-11-15