Art: An exciting investment

21 February 2019 by National Bank
Investing in art

The art market is a prosperous one: Its average annual return is comparable to the main stock indexes, and you don’t have to be a millionaire to spend your assets on artwork. How can you ensure the profitability of this kind of investment? Here are some tips.

Does investing in art really pay off?

Art is an interesting alternative to traditional financial investments. First, when acquiring an admissible piece from a Canadian artist, under certain conditions, the taxpayer—whether an individual, corporation, stock company or trust—can amortize 20% of its federal cost and 33.3% of its provincial cost annually. However, in the first year of the purchase, the half-rate rule applies. Therefore, the amortization corresponds to 10% for the federal and 16.67% for the provincial costs.

Under certain conditions, someone who is self-employed can also deduct this expense from their income and recover the taxes if they are registered in the GST and QST.

“By choosing a piece that may interest museums, it is possible you could eventually donate it,” explains Pascal Desjardins, commissioner and co-founder of La petite commission. “At the time of the exchange, 125% of the artwork’s current value is eligible for a non-refundable tax credit. Therefore, if you purchase a $5,000 piece and 15 years later it is worth $30,000, you would be entitled to a tax credit valued at $37,500.” The donation amount of the artwork is increased by 25% if the donation is made to a museum.

However, Jo-Ann Kane, curator of major collections for corporations including National Bank, explains that, “To avoid speculation, the Government of Canada tightened restrictions on acquiring work for the sole purpose of donating it directly. If the government suspects that an acquisition was made only for speculative purposes, the donation could be restricted.”

An individual can also donate a work of art to a charity recognized by the Taxation Act. The donation would be treated the same as if the person had donated money, and the donor would benefit from a tax credit.

If the acquired work is later sold and its market value has increased since its purchase, 50% of its capital gain would be taxable. If applicable, the buyer would also have to add the recovery of the amortization claimed to their income. 

How to make the right choices

To evaluate if an artist is thriving, you have to consider their influence, considering among other things their public and media recognition. “An artist comes with a certain level of recognition from their peers and from a wider circle,” explains Pascal Desjardins. “The more references an artist has, the lower the risk of investing in their work.”

You should also examine the artist’s biography and professional background. Has their work been part of private or corporate collections? Has any of the work been acquired by museums? Has the artist had any solo exhibitions, and with whom have they exhibited?

A renowned artist will have exhibited in well-known places, such as an artists’ centre or a famous museum, either locally or abroad. Have you got your eye on a piece by an artist who has exhibited in New York? “There are many galleries in that city, and some of them are far from being reputable,” warns Jo-Ann Kane, who is also a member of the board of directors for the Conseil des arts et des lettres du Québec. “For many people, exhibiting work abroad seems like a good gauge of quality. Quite the contrary—you need to verify the gallery or museum’s importance before acquiring work.”

Aesthetic qualities are also taken into consideration when determining if a piece will gain value. “You want to make sure you have their best work, acquired from the artist’s best period,” explains the expert. “A good understanding of their career is essential.” Collecting based on a name is not a guaranteed good investment.

Get to know the art world

You need to do your homework if you hope to make the right purchase. “The first thing you should do is look at artwork and go see what museums are exhibiting. You should have a good understanding of art history and the artist’s career. That is how you begin to build a collection,” explains Ms. Kane. Museums, galleries, and books and magazines about modern art will help you follow artists’ growth.

It is also a good idea to work with experts. Pascal Desjardins advises, “Speak with gallery owners—they are the ones who are most passionate. Go see them, listen to them talk about work they love. Then decide if it makes sense for you.” Ms. Kane adds, “Gallery owners can offer good advice, but you have to remember that it’s in their interest to sell. When speaking with an advisor, do your research to find out who they are working with and what collections they have built.”

When starting your own collection, you could get your hands on a promising emerging artist’s work for a few hundred dollars. “If you’re interested in collecting, you may already be keeping an eye out for artwork,” says Desjardins. “It’s also nice to invest in an artist whose work is well-liked, but who has not yet received great recognition. This takes a certain flair, an eye that becomes keener over time.”

A long-term vision

For a project to be profitable, it must be considered a long-term investment. You should also consider the physical conditions for the exhibition, preservation and storage of the artwork so you can, quite literally, protect your investment.

“Once a piece of artwork is damaged, it loses at least 30% of its value,” explains Jo-Ann Kane. “Even more if it is badly damaged or restored. It should be framed well and handled by specialists.” Artwork should not be displayed near a strong source of light. “You must never hang work on paper near a window. Even when the work is protected, the UV in the paper will continue to damage the material,” says Kane.

Today, artwork is a coveted asset. However, several conditions must be respected for the investment to be profitable. You have to dedicate your time, be patient and use the right resources. Are you ready to pursue this passion?

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