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: What is the adjusted cost base of art that was inappropriately seized by a foreign government and then restituted to a Canadian taxpayer?
Position: The adjusted cost base is the fair market value of the art when the Canadian taxpayer acquires legal and beneficial ownership.
Reasons: Any appreciation in the value of the art attributable to the period prior to the time when the Canadian taxpayer acquired legal and beneficial ownership would not be taxable under the Act.
2006-018891
XXXXXXXXXX S. Lewis
(613) 941-7239
December 1, 2006
Dear XXXXXXXXXX:
Re: The Adjusted Cost Base of Property Restituted to a Canadian
Resident by a Foreign Government
We are writing in response to your letter of June 26, 2006, inquiring whether the adjusted cost base of works of art that were confiscated, or unlawfully taken by the Nazi government from Austrian residents during World War II, is the fair market value of the works when they are restituted to a Canadian resident by the Austrian government.
Background
After May 8, 1945, the Republic of Austria enacted legislation to allow the restitution of works of art that had been confiscated or unlawfully taken during the War. Certain residents (or their legal successors) wanted to export the art that was restituted to them but required export permits from Austria. In order to obtain such permits, they were compelled by the Austrian government to give some of their art to Austria. In 1998, Austria recognized that by requiring the residents to give up the art it had inappropriately obtained title thereto. Consequently, Austria enacted legislation (the "1998 Legislation") to authorize the Minister of Finance of Austria to transfer, without consideration, to the original owners (or their legal successors) the title to the works of art had been given to Austria after the War and were being held in the Austrian federal museums and collections.
As a result of the enactment of the 1998 Legislation, a Canadian resident heir (the "Heir") of an Austrian resident who had passed away in 1945, (the "Original Owner"), instituted proceedings to recover certain art (the "Art"). The Art had belonged to the Original Owner during his lifetime and had passed into the ownership of the Austrian government after the War when the Original Owner left Austria. In early 2006, an arbitration panel concluded that the 1998 Legislation applied to the Art and that the Heir was entitled to restitution of the Art. In March 2006, Austria confirmed that it would abide by the decision of the arbitration panel and the Art was restituted to the Heir in that year.
You are concerned whether the adjusted cost base of the Art is its fair market value at the time it was restituted to the Heir by the Austrian government.
As discussed previously (Hewlett, XXXXXXXXXX), it is the Agency's general position that when the property of a victim of war has been inappropriately seized by a foreign government any appreciation in the value of the property attributable to the period prior to when legal and beneficial ownership is reacquired by the original owner, or heirs, is not taxable under the Income Tax Act (the "Act").
In the situation described above, it is our view that the cost of the Art returned to the Heir from the Austrian government would be the fair market value of the Art on the date that the Heir obtained legal and beneficial ownership of the Art, and any appreciation in the value of the Art from the time it was given to the Austrian government to that date would not be taxable for Canadian income tax purposes. When the Heir actually obtained legal and beneficial ownership is a question of fact; however, it was likely in 2006 when Austria confirmed that it would abide by the decision of the arbitration panel and the Art was then restituted.
We trust that these comments will be of assistance.
Yours truly,
Randy Hewlett
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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