2002 Ruling 2001-0100573 - GIFT OF CULTURAL PROPERTY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Whether or not certain properties which are to be donated to a designated institution as cultural property will qualify as a gift.

2. Will the fact that a sale of similar properties to the same designated institution which will occur at the same time as and is conditional on the donation of the other properties defeat the fact that a gift has been made?

Position:

1. Yes
2. No

Reasons:

1. The transfer of the properties meet the requirements of a gift for purposes of the Income Tax Act

2. The sale is to take place at fair market value.

XXXXXXXXXX 						2001-010057

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX ("Co A") - Business Number XXXXXXXXXX
XXXXXXXXXX ("B") - Social Insurance Number XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX wherein you revised your initial letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence and during the various telephone conversations in connection with your request between XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayers involved none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate

Unless otherwise stated, all references to statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. XXXXXXXXXX.

2. A died in XXXXXXXXXX. The Canada Customs and Revenue Agency (the "CCRA") has issued a Clearance Certificate for A's final individual income tax return and for the Estate of A.

3. Prior to XXXXXXXXXX A operated as a proprietor. A retained copyrights to all "XXXXXXXXXX" (herein referred to as "properties") A created until that time. A also owned properties given to him as presents from other individuals. On A's death these copyrights and properties then owned by A formed part of A's estate and under the terms of A's will were transferred to B. B also owns other properties. Some of these other properties were created by A and given to B as presents and some of these properties were properties given to B as presents from other individuals. B does not own copyrights on the properties received from other individuals. You advise that the estimated fair market value of all the properties owned by B is approximately $XXXXXXXXXX (excluding the copyrights). You advise that all these properties represent capital property to B.

4. In XXXXXXXXXX A and B incorporated Co A as equal shareholders. All new properties created by A after that date belonged to Co A and A and B worked for Co A as employees. As such, the copyrights to any properties created by A after the incorporation of Co A continue to belong to Co A.

5. Co A is a "Canadian-controlled private corporation" as defined in subsection 125(7). All of the shares of Co A are owned by B.

6. You advise that Co A has non-capital losses carried forward aggregating approximately $XXXXXXXXXX.

7. Other than the properties created by A and the copyrights pertaining to these properties Co A has no significant assets. You advise that the majority of the properties owned by Co A is inventory to the company but that a portion of the properties is capital property to the company. The capital property includes properties that are held for the purpose of XXXXXXXXXX Many of these properties were acquired by Co A in the open market.

8. You advise that the estimated fair market value of the properties (excluding the copyrights) held by Co A is $XXXXXXXXXX of which you consider $XXXXXXXXXX to be inventory to Co A and $XXXXXXXXXX to be capital property to Co A.

9. You advise that the value of the copyrights pertaining to the properties owned by Co A is very difficult to determine XXXXXXXXXX.

10. You advise that the XXXXXXXXXX ("Foundation") is a "charitable organization" as that term is defined in subsection 149.1(1) and a "registered charity" as that term is defined in subsection 248(1). You advise that the Foundation which has a board of XXXXXXXXXX directors made up of XXXXXXXXXX deals at arm's length with B and Co A. The Foundation has obtained a designation from the Canadian Heritage Department under subsection 32(2) of the Cultural Property Export and Import Act.

Proposed transactions

11. Co A wishes to donate to the Foundation certain of its properties, referred to in paragraph 8 above, which it holds as inventory with a fair market value of $XXXXXXXXXX and properties which it holds on capital account with a fair market value of $XXXXXXXXXX.

12. B wishes to donate to the Foundation certain of the properties, referred to in paragraph 3 above, having a fair market value of $XXXXXXXXXX.

13. Co A and B will enter into a gift agreement (the "Gift Agreement") with the Foundation.

14. The properties referred to in paragraphs 11 and 12 above are referred to in the Gift Agreement as the "Gifted Properties" and are listed in XXXXXXXXXX the Gift Agreement having a total fair market value of $XXXXXXXXXX. Provided various conditions precedent, as outlined in XXXXXXXXXX the Gift Agreement, are met including that the Foundation is successful in having the Gifted Properties designated as "certified cultural property" under paragraphs 29(3)(b) and (c) of the Cultural Property Export and Import Act Co A and B will, pursuant to the Gift Agreement, donate the Gifted Properties to the Foundation.

15. XXXXXXXXXX the Gift Agreement contains, inter alia, the following conditions:

a) the Foundation must ensure that at all times the Gifted Properties are preserved in accordance with museum conservation standards,

b) the Foundation must, within XXXXXXXXXX years, house the Gifted Properties in a museum or gallery-type facility,

c) the Foundation must ensure that the Focus of the museum remains the properties of A,

d) the Foundation must insure the Gifted Properties,

e) the Foundation must never dispose of any part of the Gifted Properties except as provided in XXXXXXXXXX the Gift Agreement,

f) the Foundation must never pledge or otherwise encumber the Gifted Properties, and

g) the Foundation must never borrow funds or incur obligations in excess of its available cash.

16. XXXXXXXXXX the Gift Agreement provides, inter alia, that in the event of default of any terms of the Gift Agreement that the Gifted Properties will be transferred to another institution designated under paragraph 32(2) of the Cultural Property Export and Import Act. Pursuant to XXXXXXXXXX the Gift Agreement the Gifted Properties transferred to the Foundation by both Co A and B shall not revert back to either Co A or B by virtue of the operation of any of the provisions of the Gift Agreement.

17. XXXXXXXXXX the Gift Agreement provides, inter alia, that in order to ensure the transfer of the Gifted Properties to another designated institution referred to in paragraph 16 above in the event of a default by the Foundation of the terms of the Gift Agreement, a security interest will be registered against the Gifted Properties by Co A and B. However, under no circumstances shall title in the Gifted Properties revert to Co A or B by virtue of the exercise by Co A or B of their rights under XXXXXXXXXX.

18. The Canadian Cultural Property Export Review Board ("Cultural Review Board") has accepted the fair market value determined by the Professional Art Dealers Association of Canada for each of the Gifted Properties which in the aggregate is set out in paragraph 14 above. The Cultural Review Board will issue a certificate to Co A and B when the Cultural Review Board is provided with a copy of the deed of gift confirming that an irrevocable gift has been made and that the Foundation has obtained legal title to the Gifted Properties. The Cultural Review Board has agreed that the Gifted Properties meet the criteria of "outstanding significance and national importance" contained in section 11 of the Cultural Property Export and Import Act.

19. Pursuant to XXXXXXXXXX the Gift Agreement, Co A will sell to the Foundation certain properties which are referred to in the Gift Agreement as the "Sold Properties" and which are listed in Schedule B of the Gift Agreement. You advise that the purchase price of the Sold Properties will be equal to their fair market value which is estimated at $XXXXXXXXXX. The fair market value of the Sold Properties was determined by the Professional Art Dealers Association of Canada and was agreed to by the Cultural Review Board. This sale will occur at the time the Gifted Properties referred to in paragraph 14 above are transferred to the Foundation.

20. The Gift Agreement provides that the terms and conditions described in paragraphs 15, 16, and 17 above which apply with respect to the Gifted Properties will also apply in respect of the Sold Properties.

21. XXXXXXXXXX the Gift Agreement provides that Co A will have no obligation to refund any portion of the purchase price referred to in paragraph 19 above in the event the Foundation becomes obligated to transfer the Gifted Properties as described in paragraph 16 above.

22. Co A will report the proceeds from the transfer of the Sold Properties as income for income tax purposes.

23. Co A will amend its share capital to include a new class of preferred shares (the "Special Shares") with a par value of $XXXXXXXXXX per share and a redemption and retraction amount of $XXXXXXXXXX per share. The Special Shares will contain a built-in price adjustment clause which will alter the redemption and retraction amount of the Special Shares in the event that the CCRA determines that the value of the consideration for which the Special Shares were issued is different than the value determined by the parties at the time the Special Shares were issued.

24. Pursuant to a written agreement, B will sell to Co A the copyrights which B owns in the properties created by A together with the right to use A's name and likeness for consideration equal to their fair market value which you advise is estimated at $XXXXXXXXXX. You advise that the copyrights and the right to use A's name and likeness represent capital property to B. As consideration for such transfer, Co A will issue to B XXXXXXXXXX Special Shares with a redemption amount of $XXXXXXXXXX. B and Co A will jointly elect to have the provisions of subsection 85(1) apply to the transfer and the agreed amount will be $XXXXXXXXXX.

25. Concurrent with the execution of the Gift Agreement, Co A, B and the Foundation will enter into a licence agreement (the "Licence Agreement") pursuant to which Co A will licence to the Foundation the right to reproduce certain pieces of the Gifted Properties and the Sold Properties. The Licence Agreement will not take effect until B has transferred the copyrights to Co A as described in paragraph 24 above.

26. Under the terms of the Licence Agreement, the Foundation will agree to make on-going royalty payments to Co A based on the production and use of the copyrights which are the subject of the Licence Agreement. The full amount of any subsequent royalty payments received by Co A will be included in Co A's income for tax purposes.

Purpose of the proposed transactions

Co A and B wish to make a donation of the Gifted Properties to the Foundation with a view to preserving and protecting the Gifted Properties and the Sold Properties and ensuring that they be available for future generations by displaying them in a secure public place in perpetuity.

Rulings given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our Rulings are as follows:

We confirm that

A. To the extent that the Gifted Properties owned by Co A and donated to the Foundation as described in paragraph 14 above represent capital property to Co A and provided that the Cultural Review Board determines that these Gifted Properties meet all the criteria set out in paragraphs 29(3)(b) and (c) of the Cultural Property Export and Import Act they will constitute objects for purposes of subparagraph 39(1)(a)(i.1); and further provided an official receipt containing prescribed information and a certificate issued by the Cultural Review Board are filed with the Minister as required by subsection 110.1(2), the amount equal to the aggregate fair market value of these Gifted Properties will constitute a gift of objects for the purposes of paragraph 110.1 (1)(c). Subsection 118.1(10) will apply for purposes of paragraph 110.1(1)(c) to deem the fair market value of each object to be equal to the fair market value determined by the Cultural Review Board;

B. Provided that the Gifted Properties owned by B and donated to the Foundation as described in paragraph 14 above represent capital property to B and provided that the Cultural Review Board determines that these Gifted Properties meet all the criteria set out in paragraphs 29(3)(b) and (c) of the Cultural Property Export and Import Act they will constitute objects for purposes of subparagraph 39(1)(a)(i.1); and further provided an official receipt containing prescribed information and a certificate issued by the Cultural Review Board are filed with the Minister as required by subsection 118.1(2), the amount equal to the aggregate fair market value of these Gifted Properties will constitute a gift of objects for the purposes of the definition of "total cultural gifts" in subsection 118.1 (1). Subsection 118.1(10) will apply for purposes of the definition of "total cultural gifts" in subsection 118.1(1) to deem the fair market value of each object to be equal to the fair market value determined by the Cultural Review Board;

C. To the extent that the Gifted Properties owned by Co A and donated to the Foundation as described in paragraph 14 above represent inventory to Co A and provided that the Cultural Review Board determines that these Gifted Properties meet all the criteria set out in paragraphs 29(3)(b) and (c) of the Cultural Property Export and Import Act; and provided an official receipt containing prescribed information and a certificate issued by the Cultural Review Board are filed with the Minister as required by subsection 110.1(2), the amount equal to the aggregate fair market value of the Gifted Properties will constitute a gift of objects for the purposes of paragraph 110.1(1)(c). Subsection 118.1(10) will apply for purposes of paragraph 110.1(1)(c) to deem the fair market value of each object to be equal to the fair market value determined by the Cultural Review Board; and

D. Provided the copyrights and the right to use A's name and likeness referred to in paragraph 24 above, which are owned by B, are held by B as capital property the copyrights and the right to use A's name and likeness will each be "eligible property" as defined in subsection 85(1.1).

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 17, 2001 and are binding on the CCRA provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Section Manager
For Division Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch