Fine art is an asset class of growing importance among the affluent and is beginning to be a significant part of select estate plans.   A recent estimate pegged the international art market at US$57.5 billion in 2024 (a 12% decline from 2023)  and Canada has seen some record prices at auction.   Many collectors are contemplating donating their art at death, but the process has its challenges. Here are some tips and traps.

Two Donation Methods

A donation of art can take one of two pathways:  1) ordinary donation; 2) Cultural Property Donation.

Any registered charity willing to accept the art can receive an ordinary donation.  The standard donation rules apply: the charity issues a donation tax receipt for the appraised fair market value of the donated property.  This receipt would then produce a donation tax credit of up to 54%, depending on the province and amount.  In most cases, the capital gain is subject to the normal 50% inclusion rate at the time of disposition.

A cultural property donation is a rarer gift that is eligible for extra tax incentives, but the process is more rigorous and involves a second validation step.  A cultural property donation generates a receipt for the appraised fair market value of the object.  Under the Cultural Property Export and Import Act (“CPEIA”), donations of objects of “outstanding significance” are exempt from capital gain.  These donations have a claim limit of 100% of net income and five year carry-forward period.  This is a huge benefit during life, but less so at death due to higher contribution limits for estate donations.  A cultural property donation is the holy grail of Canadian donation tax incentives, but it is not easy to secure.

With both methods, the recipient organization arranges the valuation of the art.  Typically, the donor is expected to pay for it.  Payment be a problem for an estate if the will does not contemplate this expense.

Cultural Property Donations

The top-of-mind recipients of art donations are galleries and museums.  To receive cultural property status for an art donation it must be to a designated institution and certification by the Canadian Cultural Property Export and Review Board (CCPERB).   The list of designated institutions includes certain universities, libraries and archives. The cultural property designation process is a lengthy and may be arduous,.  Both the art and its value will be subject to scrutiny.

Don’t Make Assumptions

Whether the donation is ordinary or cultural property, donor should not assume that charities and cultural institutions will be necessarily be lining up to accept their art.  First off, the donor must find an institution interested in the object or collection on offer.  This requires research and discussions with intended beneficiaries.  As difficult as it is to acknowledge, donors should also not assume that a cultural property donation means public display.

For a gift by will, it is prudent to negotiate with the recipient institution during life, particularly if the donor intends to obtain a cultural property designation. Institutions have limited resources for display, storage, and restoration. Public galleries are cautious about what they accept. An institution may reject a surprise estate donation due to quality, fit with the collection, or lack of curatorial resources.  Sometimes galleries change their collecting priorities long after a will is drafted.  The gallery may decline a donation at death that was notionally accepted during life.

Galleries may be reluctant to undertake a post-mortem CCPERB application due to the time involved.  It is essential to remember, only CCPERB can validate value or provide a cultural property designation.

Donation of Collections

Aqueduct Foundation accepts gifts by will of fine art, especially collections.  The art goes in a donor advised fund.  While a public foundation is not eligible for designation under the CPEIA, Aqueduct provides tax certainty and the ability to find the ultimate “home” for the art after the death of the donor.  Tax certainty derives from the ability to provide a tax receipt for an in-kind donation within the 60-months for the appraised fair market value.  This is key collection management strategy for art that will not stay in the family.

After the death of the donor, the Foundation or a chosen advisor can make decisions about grants of individual artworks.  After due diligence and negotiation by the foundation, grants will be made to a qualified institution.  Depending on the preference of the donor, the art may even end up at registered charities that are not collecting institutions.

We have one art donor who has a “catch and release” philosophy.  He has an outstanding art collection and has spent many years assembling it, but doesn’t want it to languish in storage at a large public gallery.   Instead, he views his art as an asset, and he wants it to be sold at the best possible price by the foundation. The proceeds will fund other charitable purposes, which include art education.  Choice pieces will go to museums and public galleries, and the balance will be “released” to the market for other collectors to discover.