According to a recent report tracking the luxury goods market, many high-value collectible asset classes – including wine – have appreciated by more than 100 per cent in the past decade.Thomas Demarczyk/iStockPhoto / Getty Images
While financial advisors are experts at helping investors manage their wealth, the value of collectibles - such as fine art, wine, whisky, watches and even baseball cards - is often overlooked.
“Normally, as advisors, we don’t talk about [collectibles] as investments,” says Tom McCullough, chairman and chief executive of Northwood Family Office in Toronto.
That said, it’s not an unusual topic of discussion at his practice, which largely serves high-net-worth investors. These individuals are most likely to have the free cash flow to pursue hobbies that can involve investments of hundreds of thousands, if not millions, of dollars, he says.
Indeed, collectibles can be a great investment. According to a recent report tracking the luxury goods market from London, England-based consultancy firm Knight Frank, many high-value collectible asset classes have appreciated by more than 100 per cent in the past decade. That includes rare whiskies, which increased by 40 per cent year-over-year in 2018 and by 582 per cent in the past decade.
Also experiencing big price jumps in the past 10 years were classic cars (258 per cent), rare coins (193 per cent), stamps (189 per cent), art (158 per cent), wine (147 per cent), coloured diamonds (122 per cent) and jewellery (112 per cent).
Despite the potential returns on investment, collectibles present challenges for advisors who are adept at providing guidance on stocks, bonds, investment funds and other liquid investments.
Mr. McCullough says collectibles are likely a rare topic of discussion for the majority of advisors. Most are unlikely to have many clients who have wine cellars filled with bottles worth hundreds of dollars; Patek Philippe watches, which can cost more than $100,000 a piece; or a Group of Seven painting that might sell for millions of dollars at an auction.
Then again, some do. Mr. McCullough estimates that about a quarter of his firm’s clients are collectors of luxury items – “and probably none of them think about these [collectibles] as investments, per se.”
Despite being exceptions to the norm, advisors should still ask clients whether they own assets of value, collectibles included, outside of the more typical sources of wealth. Beyond that, they’re best advised to seek assistance in providing advice on collectibles, Mr. McCullough says.
“A collectible’s value is just so variable that it really requires a very specific area of expertise beyond what most advisors can offer,” he says.
Those who can assist include professionals specializing in collectibles’ valuation, brokering purchases and sales, taxation, estate planning and insurance. Taxation can be especially complicated.
Debbie Pearl-Weinberg, executive director, tax and estate planning, at CIBC Financial Planning and Advice says tax implications may affect more clients than advisors realize because of the low threshold the Canada Revenue Agency (CRA) sets to determine capital gains on collectibles.
That’s because the CRA considers many collectibles as “personal use property,” she says. That means these items are used for enjoyment. When the owner disposes of an item – be it upon death, sale or by gift – it is subject to capital gains taxation rules if that collectible is worth more than $1,000. However, valuations are nuanced.
“If the cost is less than $1,000 at the time the item is sold, it will be bumped up to $1,000,” she says about calculating the adjusted cost base (ACB).
As such, a hockey card purchased decades ago for cents on the dollar would have its ACB increased to $1,000. Consequently, if sold for $1,200, the seller would be expected to declare a $200 capital gain. In contrast, claiming capital losses for tax purposes only applies to what the CRA refers to as “listed personal property,” which often includes traditional collectibles such as rare books, paintings, coins, stamps and watches.
What’s more, realized losses on the sale of items worth more than $1,000 can only be used to offset taxes on realized capital gains on other listed personal property.
Special rules also apply to sets of collectibles, stipulating the $1,000 ACB rule can only be used once if, for example, an owner sells one item in a set.
Ms. Pearl-Weinberg says this is to prevent individuals from selling pieces separately over time, taking advantage of the exemption, as each piece may be valued at less than $1,000. This is in contrast to selling the set as a whole, which would have a much higher value.
All told, she says taxation rules can be convoluted because collectibles’ valuation at the time of acquisition may be uncertain. What’s more, many sellers are generally unaware of the tax rules.
“For example, the numismatic [collectible coins] side of things is very, very murky,” says Maxim Smirnov, owner of Toronto-based Muzeum, which trades in rare, old coins and fine jewellery.
Many of his clients are individuals who have received items passed down through the family over the years, Mr. Smirnov says.
“If I’m a dealer and making a living buying and selling these items, I have to pay taxes like everybody else – that’s clear as day,” he says.
But, for example, the average Canadian who may find a rare penny worth thousands of dollars in a jar of spare change is much less likely to report a capital gain upon its sale, he adds.
Furthermore, it would be difficult to determine the gain in value, given most sellers may not recall when they obtained the item, let alone its worth upon taking possession.
Of course, advisors can help clients understand tax implications by bringing up collectibles in their discussions.
“Where we can also help with collectibles is with how will they be insured, whether they will be donated or given to the next generation when they die,” Mr. McCullough says. In some instances these discussions lead to the need for appraisals, requiring experts in the field.
Among them is Stephen Ranger, a specialist in valuating high-end art, wine and jewellery in Toronto.
He argues that rare coins found in a jar and other serendipitous discoveries are “needle in a haystack” scenarios, unlikely to apply to most Canadians’ wealth picture.
Typically, serious collectors are much more well-versed than their advisors in their area of interest because it’s a passion for them. Thus, they’re likely to understand the markets for high-value items such as art are “notoriously illiquid [and] long-term holds,” says Mr. Ranger, vice-president and partner at Waddington’s, which provides auction and appraisal services.
Still, he notes, it’s not unheard of for families to sell long-held paintings or other valuable heirlooms for thousands of dollars for a variety of reasons, including raising capital for more immediate needs.
“And those people likely are not paying capital gains.”
Again, this is an opportunity for advisors. They can get clients up to speed on the taxation rules so they are less likely to run afoul of the CRA inadvertently and potentially end up paying thousands of dollars in back taxes, interest charges and penalties.