Antiques & Collectibles Is your collection taxable?

It's that time of year again. The tax man cometh, but is he going to exact a toll on your art holdings or other collectibles? Not surprisingly, it depends on whether you're making money on your collection or losing it.

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The Canada Customs and Revenue Agency (CCRA) generally classifies collectibles or art items as "personal-use property," and that includes everything from baseball cards and antique furniture to wine.

There is, however, a special type of personal-use property called "listed personal property" (LPP). LPP is clearly defined as: prints, etchings, drawings, paintings, or other similar works of art; jewelry; rare folios, manuscripts, or books; stamps; and coins. Every collectible that isn't a LPP is personal-use property.

The tax man classifies LPP separately from personal-use property because these items generally appreciate in value over time. But as most collectors know, many of the items that would be considered personal-use property (antique furniture or a baseball card, for example) will appreciate in value as well.

That fact is lost on the tax man, however. In spite of this, most LPP regulations can be applied to both LPP and personal-use property - with a few exceptions that I will point out along the way.

Personal use and LPP items are not taxable in and of themselves, but you may have to pay capital gains tax when you sell them. Capital gains tax is charged on certain types of income that are not directly employment related. There are both good and bad things about this. You'll find out why shortly.

A capital gain is incurred when you sell an item for more than you paid for it. For example, if you buy a painting (a LPP) for $1,000 and sell it for $2,000, the $1,000 profit is considered capital gain.

That profit is good for your bank balance but bad for it as well, because you have to report three-quarters of your capital gain as income on your tax return. You will then be taxed according to your income level. If you are in a 26 per cent tax bracket, you will have to pay $195 in tax after selling the painting ($1,000 x .75 = $750, $750 x .26 = $195).

You can also lose money selling LPP. This is hard on your bank account, but good because the tax man lets you take advantage of the loss. How? By applying LPP losses to LPP gains. For example, if you buy a gold coin for $500 and sell it for $350, you incur a capital loss of $150.

You can then apply this $150 loss to any LPP gain. To continue with the painting example, you could reduce your gain from $1,000 to $850 by applying the loss, and only pay $165.75 in taxes instead of $195. This isn't the case with personal-use property, but more on that in a minute.

But the best part of all of this is that you can carry over your capital losses for LPP. The CCRA allows you to apply losses to the three years prior to the given tax year or the seven years following a loss.

You can only use the losses once, but you can use a couple of bad years of collecting to balance out a particularly good year and minimize the tax you pay. Obviously, this is a good thing.

Collectors should be aware that only personal-use property or LPP sold for more than $1,000 can incur a capital gain or loss. Anything that sold for less than $1,000 does not need to be reported on your income tax return. This is a good thing for people who buy and sell less expensive personal-use property or LPP.

But this only applies to single items sold for less than $1,000 - a bad thing. This means that you can't sell three coins or four baseball cards worth $400 each and not incur a gain because each sale was less than $1,000. Keep that in mind when you are selling a collection of similar items.

Those are the similarities between personal-use property and LPP. There are, however, two very important differences people need to be aware of, both of which are bad things.

First, you cannot apply a personal-use property loss to a personal-use property gain. If you lose $200 on the sale of a baseball card, you cannot apply that loss to a $500 gain on a piece of antique furniture. The CCRA calls this loss a personal expense. Second, collectors can only apply LPP losses to LPP gains; they can not be applied to any other type of capital gain. What this means is that you can't apply your losses from the sale the coin to your gain for the sale of the antique furniture.

One big exception to all of this is sales or donations of certified Canadian cultural property. You do not have to report a capital gain when you sell something like a Group of Seven painting to a museum. This, for those who don't know, is a good thing.

Most of you are probably wondering "But what about the deductions?" That's everyone's big question around tax time. What can I deduct? Unfortunately, collectors or art lovers can't deduct anything, because all of the items in question are personal-use property. This is a bad thing, but it is also a fact of life when dealing with Revenue Canada.

Collectors should be aware that capital gain regulations will change a little for the 2000 tax year, and gains will be taxed at a two-thirds rate. This, again, is a good thing. It isn't a huge break, but it is a break nonetheless, and when it comes to breaks from the taxman, take whatever you can get. And be grateful for it. There are far too many bad things to deal with when it comes to taxes not to appreciate the good ones.

Readers should bear one thing in mind: this column is only intended as a guideline. I'm not an accountant, and I don't want to hear about it if you get audited for not reporting the sale of your stamp collection.

By Stuart Kernaghan

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Is your collection taxable?

It's that time of year again. The tax man cometh, but is he going to exact a toll on your art holdings or other collectibles? Not surprisingly, it depends on whether you're making money on your collection or losing it.