19 May 1994 External T.I. 9408755 - EXPENSES OF WRITERS OF XXXXXXXXXX

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 Department.

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

Principal Issues:

1.Whether subsection 10(6) of the Act applies to writers of educational books?

2.Whether expenses incurred in producing educational books can be deducted as current expenses?

Position TAKEN:

1. Subsection 10(6) does not apply to writers.

2. Question of fact.

Reasons FOR POSITION TAKEN:

1.Subsection 10(6) only applies to income derived from artistic endeavours which is defined as the business of creating paintings, prints, etchings, drawings, sculptures or similar works of art. It does not include writing books. (Ref.: 930900)

2.The expenses are only deductible to the extent the taxpayer has a reasonable expectation of profit and the expenses otherwise meet the general requirements of the Act regarding the deductibility of expenses. (Ref.: 5-7457, EC1625)

											3-940875
XXXXXXXXXX							     C. Chouinard

May 19, 1994

Dear Sir:

Re: Subsection 10(6) of the Income Tax Act

We are writing in reply to your letter of March 24, 1994 wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX Further to our telephone conversation (Chouinard/XXXXXXXXXX) and as indicated in our previous letter of April 15, 1994, we are treating your ruling request as a request for a technical interpretation concerning the above-captioned provision. A refund of your deposit will be sent under separate cover.

Specifically, you have asked whether subsection 10(6) of the Income Tax Act (the "Act") will apply to your client, XXXXXXXXXX You also ask whether the costs incurred in producing these XXXXXXXXXX can be deducted as a current expense or whether they must be written off against the proceeds of sale of the finished product.

Our Comments

Unless as otherwise stated, all references to statute are to the Income Tax Act, S.C. 1970-71-72, c.63, as amended and consolidated to June 10, 1993.

In determining the value of inventory, subsection 10(1) of the Act provides that for the purpose of computing income from a business, the property described in an inventory shall be valued at its cost to the taxpayer or its fair market value, whichever is lower, or in such other manner as may be permitted by regulation. In addition, for the purpose of computing the income of an individual other than a trust for a taxation year from an artistic endeavour, subsection 10(6) of the Act allows the individual to make an election in his return of income for the year that would deem the value of his property in inventory for that year to be nil.

The expression "artistic endeavour" of an individual is defined in subsection 10(8) of the Act to mean the business of creating paintings, prints, etchings, drawings, sculptures or similar works of art, where such works of art are created by the individual, but does not include a business of reproducing works of art. Clearly, the business of writing books does not meet this definition and therefore, the election under subsection 10(6) would not be available to an individual that is a writer. This view is consistent with the comments found in Interpretation Bulletin IT-504R which deals with the determination of the income of a person who carries on a business, in a self-employed capacity, as a visual artist or as a writer. The comments in IT-504R concerning an artist's inventory do not apply to the inventory of a writer.

With respect to the expenses incurred in writing a book, in order to be able to deduct expenses relating to the writing activity, the writer must have a reasonable expectation of profit. Whether or not a taxpayer has a reasonable expectation of profit is an objective determination to be made from all the facts. In this respect, we refer you to paragraph 3 of Interpretation Bulletin IT-504R which describes some of the more common factors that are considered by the Department in determining whether or not a writer has a reasonable expectation of profit.

In addition, in order to be deductible, the expenses must comply with the Act. Thus, they must have been incurred by the taxpayer for the purpose of gaining or producing income from a business, they must not be personal or living expenses, nor must they be capital expenditures, and they must be reasonable in the circumstances.

As regards your question concerning the reporting of losses by investors, it is not clear from your letter whether the investors will be mere creditors, joint venturers or members of a partnership. As the tax consequences will vary depending on the facts of a particular situation, we are unable to address your query regarding the availability of losses to the investors.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch