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.
Principal Issues: 1) When does a recipient recognize in income a grant
received from the Canada Council; 2) How to report income grants received by an artist in collaborations with other artists?
Position: 1) Income is reported in the year received pursuant to
paragraph 12(1)(x), subject to an election under subsection 12(2.2) of the Act. 2) Generally, the grant will be recognized in income in the year received, subject to an election under subsection 12(2.2) and dependant on the underlying legal relationship between the collaborators.
Reasons: In each case, consistent with the wording of the
legislation. In the case of artist collaborations, the determination can only be made following a review of all the facts and underlying circumstances.
Bob Naufal, CMA
XXXXXXXXXX (613) 957-2744
2003-004484
April 8, 2004
Dear XXXXXXXXXX:
Re: Canada Council Grants
We are writing in response to your letter dated March 17, 2003 wherein you asked for our comments with respect to grant payments (the "Grants") made by the Canada Council for the Arts (the "Council").
Our comments herein are based on our general understanding of the process followed by an artist to qualify for the Grants. This process includes the completion of a detailed application by the artist that includes a project description, financial information (including a budget), and identification of support material. The Council evaluates all applications on the basis of artistic merit using the published criteria for each program, and informs the applicant, by letter, within three to five months of the amount of the Grant to be paid.
Your letter refers to a document entitled "General Grant Terms and Conditions for Individuals" (the "Terms and Conditions"). According to the Terms and Conditions, unused potions of the Grants remain the property of the Council and Grants are required to be repaid to the Council on request. Moreover, a Grant must be repaid at the request of the Council, in whole or in part, if the recipient:
? has knowingly provided any false information in the application for the grant;
? relinquished their artistic and creative control before completing the project;
? used the grant funds for purposes not agreed upon by the Council; or
? breached any of the provisions of the agreement.
In the letter, you also state that the Council routinely awards Grants to a single recipient where the Grant is in fact intended to fund collaborations among several artists. The collaborations may be in the form of a partnership, joint venture or contractor /
sub-contractor relationship. You have asked us to provide comments on how Council Grants should be reported for purposes of determining income under the Income Tax Act (the "Act") and more specifically on the following items:
1. The timing of income inclusion with respect to the Grants; and
2. The method of reporting grants awarded to an artist, working in collaboration with other artists.
Written confirmation of the tax consequences that apply to a particular fact situation is given by this directorate only in the context of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide the following general comments.
Depending on the nature of the Grant, the status of the recipient, and the arrangements or circumstances under which it is provided, the Grant may be considered:
(a) income from business;
(b) income from an office or employment; or
(c) a scholarship, fellowship, bursary, prize or research grant
In providing you with our comments, we have assumed that the Grant constitutes income from a business. For additional information on Grants received under (b) or (c) above, we refer you to Interpretation Bulletins, IT-257R, Canada Council Grants and IT-75R4, Scholarships, Fellowships, Bursaries, Prizes, Research Grants and Financial Assistance.
Timing of Income Inclusion
Generally, a taxpayer carrying on a business may be entitled to some form of financial assistance from a government source, such as a Grant from the Council. When assistance is received in the course of earning income from a business, the application of well-accepted business principles for the purpose of calculating profit or loss under section 9 of the Act commonly requires the amount of an expense to be reduced by any reimbursement or similar payment that relates to the expense incurred. If the application of well-accepted business principles relating to the calculation of profit or loss for the purpose of section 9 does not require the government assistance to be included in income, or to reduce the amount deductible as an expense, paragraph 12(1)(x) of the Act would generally apply to require the amount to be included in income.
Paragraph 12(1)(x) of the Act provides, inter alia, that government assistance received in respect of an outlay or expense by a taxpayer, in a taxation year, in the course of earning income from a business must be included in income to the extent that the amount was not otherwise included in income (such as pursuant to section 9 of the Act) or did not reduce the amount of an outlay or expense under subsection 12(2.2) of the Act.
Subsection 12(2.2) of the Act provides that a taxpayer may elect to reduce the amount of an outlay or expense (whether deductible or not) incurred in the year, the immediately following year or any preceding year, by all or part of the government assistance received in the year in respect of the outlay or expense and which would otherwise be included in income under paragraph 12(1)(x). The election must be made by the filing due date for the taxpayer's income tax return for the taxation year of such receipt or, if the related outlay or expense is not incurred until the following taxation year, by the filing due date for the tax return for that following year. The amount elected by the taxpayer reduces the amount of the receipt that would otherwise be required to be included in income under paragraph 12(1)(x). Subsection 12(2.2) applies only in those cases where the set-off of an expense or outlay against a related receipt does not otherwise result under the Act.
Where government assistance that was previously included in income under paragraph 12(1)(x) or would have been so included but for an election made under subsection 12(2.2) is repaid, paragraph 20(1)(hh) of the Act provides for a deduction for the repayment of the assistance in the year of repayment.
We refer you to Interpretation Bulletin, IT-273R2, Government Assistance - General Comments for further information on this issue.
Collaborations
The reporting of the Grants for purposes of computing income is dependent on the determination of the underlying legal relationship between the artists working in collaboration. This determination can only be made after analysing all documents related to the collaboration.
As a general rule of thumb, and subject to the comments provided above, the following guidelines can be used:
Partnership arrangement - The partnership includes the Grant in income in the year it is received. Repayments of Grants, if any, would be deducted by the partnership in the year of repayment. Each partner would include in his/her income, for the taxation year in which the partnership's taxation year ended, his or her pro rata share of the net income of the partnership.
Joint Venture arrangement - Each joint venture participant would include in income, for the taxation year in which the joint venture's taxation year ended, his or her pro rata share of the Grant in the year it is received. Each joint venture participant would deduct from income his or her pro rata share of the repayment of a Grant, if any, in the year it is repaid.
Contractor / Sub-contractor arrangement - The applicant contractor would include the Grant in income in the year it is received. The contractor could generally deduct from income payments made, if any, to a sub-contractor, in the year paid or payable. The sub-contractor would include in income the amount received from the contractor in the year it is received.
We cannot provide more definitive comments without reviewing all of the facts and documentation related to a particular grant, including the relevant application documents, the terms of the grant, and the legal relationship between the artists. Such a review would normally only be undertaken in the context of an advance income tax ruling submitted in the manner outlined in Information Circular IC 70-6R5.
The publications referred to above are available on our website at www.cra.gc.ca.
We trust our comments will be of some assistance.
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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