By Julia Stanley, CA
The following article uses information provided by the Canada Revenue Agency (CRA) in the tax bulletin IT-504R2, paragraph 11. For guidance on a specific situation please review the tax bulletin or consult with your tax advisor.
As a visual artist, you may be asked to donate a work of art to a not-for-profit organization for various purposes, most commonly, a live or silent auction. This article is intended to inform you of some of the consequences of donating your personally created works of art as they relate to your personal tax return. If you did not create the work of art, or if the donation is not of something you would typically sell (i.e. a diary, letters, or log of your creative process) then this article does not apply to you. Additionally, if you are donating cultural gifts, this article should not be used as a guide as it does not cover this topic.
When you create a work of art with the intention of selling it but instead donate it to another person, the donation is considered to be a disposition of a property from your inventory and should be reported as income on your personal tax return based on the fair market value of the work of art. When the donation is given to a charitable organization, the fair market value of the work of art can be used to create a tax receipt, which can be claimed on your personal tax return. Only charitable organizations are authorized to create donation tax receipts. Should you choose to donate a work of art, make sure the organization is legally able to provide a donation tax receipt.
As a self-employed individual you will need to report the donation of your work of art in the Sale, Commissions, or Fees line in Part 1 of your Statement of Business Activities. The fair market value of items donated in the year will increase your total sales reported to the Canada Revenue Agency. The value most often used, is that of the amount stated on the charitable donation receipt. The amount could be anywhere between the cost to produce the work of art and the fair market value.
You will claim the donation receipt separately with all other receipts on the Donations section of your tax return. The donation receipt cannot be claimed as an expense in your Statement of Business Activities. Both the income and donation receipt must be reported on the tax return for the same year as the gift was made.
Depending on your tax bracket, you may not be able to take advantage of the donation receipts you receive, as you may not need to use all the potential tax credits created by the donation. In this situation, donations will carry forward and can be used in a future year. Donation tax credits are non-refundable, which means that they can reduce the tax you owe but you will not receive a refund once the tax is reduced to zero.
In summary, depending on the value of the works donated, you may end up paying more taxes than expected due to this lesser known income tax rule. Consider consulting your tax advisor before making substantial donations to ensure there are no surprises on your tax return at the end of the year.