Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
How does the election in ss. 118.1(7) work?
Position:
Election can be made where there is a donation by an artist of a piece of art from the artists own inventory, where the fair market value of the property exceeds its cost. The donation must be made to a qualified donee.
Reasons:
The wording of the provision Act
XXXXXXXXXX 2000-001177
A. Campbell
March 22, 2000
Dear Sir:
Re: Donation of Art Work
This is in your reply to your letter of November 30, 1999, to the Client Services Directorate. We have asked to reply to you on their behalf.
Your letter asked about the income reporting and donation credit available to you in respect of a donation of artwork. We have assumed from your letter that the piece of artwork was created by you and is inventory to you in your business. We can provide you with the following general comments which we hope will be of assistance to you.
When an individual creates a piece of art, the cost of materials and supplies, labour (other than that of the artist), and a reasonable allocation of overhead cost are considered to be the cost amount to the artist of the work of art. (Further details on the valuation of inventory can be found in the current version of IT-473, Inventory Valuation). When the individual then donates the piece of art, the difference between the fair market value of the piece of art and the cost amount, is considered to be taxable income to the individual. Generally, the amount for which the donation receipt is issued, which should be the fair market value of the donated art, will be the amount for which the individual may claim a donation tax credit. The donation tax credit available to an individual to reduce his or her federal taxes, is set at 17% of the first $200 worth of donations in the year and 29% on the amount of donations in excess of $200.
An individual can make an election under subsection 118.1(7) of the Income Tax Act where the individual donates a piece of art from their inventory to a qualified donee and the fair market value of the piece of art exceeds the cost to the artist of creating the piece of art. A qualified donee is a registered charity and certain other organizations which are permitted under the Income Tax Act to issue charitable donation receipts. In making the election, the taxpayer may designate in his or her income tax return, an amount that is not less than the cost and not more than the fair market value in respect of the piece of art. The amount so designated will then be considered to be the proceeds of disposition of the piece of art for purposes of determining the amount of the income inclusion from the sale of the piece of art from inventory. The amount designated by the individual will also be the amount of the donation for purposes of computing the charitable donation tax credit to which the individual is entitled for the year, in respect of this donation.
If an individual has made an election under subsection 10(6) of the Income Tax Act, to have his or her inventory deemed to have a value of nil, then the cost of the piece of art donated would have a cost amount of nil. In this instance, it is our view that in selecting a designated amount under subsection 118.1(7) as discussed above, the individual would select an amount not less than zero and not more than the fair market value of the piece of art gifted.
As discussed above, the designation of an amount under subsection 118.1(7) is an election that a taxpayer may make in filing his or her return for the year. There is no special form that needs to be completed to make the election effective. To make the election the taxpayer should include a note in their tax return for the year of the gift, indicating the cost amount of the piece of art, the fair market value of the piece of art (i.e. the amount for which the donation receipt was issued), and a statement that the taxpayer wishes to elect under subsection 118.1(7) of the Income Tax Act, to have the amount specified, be the proceeds of disposition used in computing the income from the disposition from the piece of art, and to also be the amount of the donation in respect of which a tax credit is being claimed.
We trust that our comments will be satisfactory for your purposes.
Yours truly,
F. Lee Workman
Manager
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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