Of interest to entrepreneurs who regularly purchase artwork to display in
their office is a tax case decided last month that dealt with whether the cost
of artwork purchased for "business purposes" can be written off against business
income.
Ms. Nahla Boury, an engineer, provides consulting services to Alberta's oil
and gas sector through NRC Consulting Ltd., her wholly owned company. In 2001,
the year under audit by the Canada Revenue Agency, Ms. Boury operated the
business from an office in her home, which she used for administrative work and
non-client meetings. Most of her client work was done either at clients' offices
or "in the field," typically within a 300-kilometre radius of Calgary.
That year, NRC bought a $4,000 painting and claimed it as a business expense
because it was displayed in Ms. Boury's home office. The CRA, whose auditor
testified she did not see any artwork when she visited the office for her audit
in 2002, denied the deduction on the basis the painting had no business purpose.
Ms. Boury admitted she saw no clients at her home office and that it was used
only for "landmen, typists, [people doing] filing and other consultants."
The judge concluded "even if there was a painting in the home office in 2001,
I can see no link between its presence and the generation of NRC income. In my
view, it was there for Ms. Boury's personal use and accordingly, the minister
was correct to have disallowed a business expense deduction for its purchase."
The judge also upheld a taxable shareholder benefit assessed by the CRA for
the personal use of a corporate asset, reasoning "since the artwork was
purchased by NRC and had no business purpose, it follows the corporation
conferred a benefit on Ms. Boury in respect of the painting." She was forced to
include the fair market value of the painting in her 2001 personal income as a
taxable shareholder benefit.
Had Ms. Boury actually seen clients in her home office she likely could have
convinced the court the painting was bought for her clients' enjoyment. Even if
that was the case, however, the corporation would still not have been entitled
to a full deduction.
Under the rules governing artwork, as long as the art costs at least $200, it
can be capitalized and depreciated at a rate of 20% a year for tax purposes,
provided it was acquired for the purpose of earning income and the artist was
Canadian at the time the work was done.
According to the CRA, art done by a non-Canadian is excluded from the capital
cost allowance system because art objects typically do not depreciate; rather
the opposite is true, which is why art is often purchased as an investment.