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Marshall Webb is pictured in his apartment in Vancouver, British Columbia on August 14, 2018.BEN NELMS/The Globe and Mail

Cash-strapped galleries across Canada are facing new limits on their best tool for encouraging wealthy philanthropists to give them art: the tax receipt.

Public art-collecting institutions typically have small or non-existent budgets to buy new work, and often rely on generous donors to add to their collections. In exchange, the museums and galleries can apply to a federal government board to give the donors a tax credit for the full value of the art – which, in some cases, can be worth millions of dollars.

But a recent Federal Court ruling about a different part of the Canadian Cultural Property Export Review Board’s work has had a sudden and unexpected impact on the way the tax credits are given out.

The details are complex and bureaucratic, but those in the art world say it boils down to this: There will be fewer paintings donated to Canadian museums and galleries.

Marshall Webb, a Vancouver collector known internationally, said his family recently agreed to give five works of art to a gallery. When the works were assessed by the review board this summer under the new rules, only two pieces – both Canadian – were approved for a tax receipt; the other three pieces, which were European, were denied.

Mr. Webb said the previous system benefited institutions, which received the art, and collectors, who were able to leave a legacy.

“That’s fine and dandy if people want to sell it abroad at auction,” he said, referring to a consequence of the new rules. "But I’d much rather have it stay in the country.”

"[We] give works of art to galleries in Canada for future generations,” he added.

The tax break works like this: If a donor agrees to give a piece to a public gallery or museum, that institution can then apply to the Canadian Cultural Property Export Review Board for a special certification. The board reviews appraisals of how much the work is worth and assesses whether it is of “outstanding significance” and “national importance.”

The change that museums are now dealing with came about because of a recent court ruling that criticized how the board handled its other main duty: deciding whether to grant export permits to artwork that its owners want to take outside of the country.

The June court ruling, which concerned a refused export permit for a French Impressionist painting, narrowed the test for national importance.

The test is used for both exports and for tax credits because, the review board says, the tax break provides art owners a financial benefit that might balance a loss they could experience by being limited on how they sell art on the international market.

Hilliard Goldfarb, a senior curator at the Montreal Museum of Fine Arts, said the new rules have had an immediate impact on his institution.

"We are very dependent on donations,” he said.

For instance, in the 2016-17 year, the Montreal museum acquired 380 works of art valued at $10.6-million – of which $9.9-million worth was donated.

"At this very moment, we have had several major works that have been suspended from donation,” Mr. Goldfarb said. “Works by major European masters. And I know this is true at other nationally recognized museums and a library.”

In June, Federal Court Judge Michael Manson ruled the Canadian Cultural Property Export Review Board was unreasonable in deciding not to grant a permit for the 1892 Gustave Caillebotte painting Iris bleus, jardin du Petit Gennevilliers, which was sold by a private Canadian collector to a British gallery.

Justice Manson said that in order to be denied an export permit on the grounds the art is significant or important to Canada, a work must have a demonstrable link to Canadian heritage.

He said the board did not prove that link in the case of the Caillebotte canvas, which was created in France by a French artist of a French subject and which has never been exhibited in Canada.

In 40 years since the export-control regime was created, it was the first time the courts have ever weighed in on one of its export decisions.

Sharilyn Ingram, the chair of the Canadian Cultural Property Export Review Board, says she and her colleagues – a mix of academics, art dealers and museum professionals – didn’t see the decision coming.

"Generally speaking, members of the board were surprised by the ruling,” she said.

She said the board has had no choice but to apply the judge’s decision to all aspects of how it conducts business – deciding on both exports and on tax credits. Even if most of the people who interact with the board don’t see the connection between the two.

"I would not expect that was something that collecting institutions would have foreseen,” Ms. Ingram said.

Although fine art makes up the majority of the cases the review board hears, the cultural property regime also covers the certification and export of other items, such as historical artifacts, military objects and music instruments.

The government is currently appealing the Federal Court decision. In the meantime, the review board is giving galleries the choice to either apply under the new rules or have their cases put on hold until the appeal is decided.

Bob Rennie, a prominent B.C. art collector and real estate businessman, said art donation may be an “elite sport,” but if philanthropy dries up in the art world, the alternative is that works will stay in private hands and never get out into the public sphere.

“It gets criticized: ‘Why do people get tax advantages?’” Mr. Rennie said. “But it’s a lot better to see the art go to a museum rather than the children sell it to get boats and planes."

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