Principal Issues: [TaxInterpretations translation] Does the CRA consider that an election under subsection 10(6) of the Act has been made by an artist who has entered zero as year-end inventory when filing his or her income and expense statement?
Is an artist who dies taxed on the value of the artist’s inventory for which the artist had made an election under subsection 10(6)?
Position: Yes.
Inventory in respect of which an election under subsection 10(6) has been made is a right or thing. Consequently, subsection 70(2) could apply subject to the application of subsection 70(3). If subsection 70(2) applies, the value of the inventory at death would be included in the deceased's income. If subsection 70(3) applies, the beneficiary will be required to include the amount received on the realization or disposition of the inventory in income.
Reasons: There are no prescribed forms or procedures.
Paragraph 6 of Interpretation Bulletin IT-212R3
XXXXXXXXXX Sylvie Labarre, CA
2004-009919
April 7, 2005
Dear Sir,
Subject: Inventory of an artistic enterprise
This is in response to your email of October 20, 2004 in which you requested our opinion on the above subject. We apologize for the delay in responding to your request.
Facts
A painter living in Canada died during the year.
Until the time of his death, he operated a sole proprietorship whose activity was the creation and sale of the works of art he had created (sculptures, silkscreens, oils, etc.).
When filing their annual tax returns, artists have generally used Form T2124 "Statement of Business Activities" ("T2124") to report their income and expenses from their business.
The taxpayer never filed a letter clearly indicating that he wished to make the election under subsection 10(6) of the Income Tax Act (the "Act"). However, the amount that appeared on the year-end inventory line on the annually prepared T2124 was always zero. The artist has always acted and considered that his art inventory held at year-end had a zero value.
Questions
You wish to know whether the CRA considers that the artist has made the election provided for in subsection 10(6) by proceeding in this manner.
If the election is accepted, you wish to know what the tax treatment would be on the death of the artist and what the tax consequences would be on the sale of the inventory to the person who received the inventory as an inheritance following the artist's death.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
Subsection 10(6) provides that a taxpayer who carries on an artistic business may elect in the taxpayer’s return of income to have the value of the artist’s inventory deemed to be nil in computing income from that business. There is no prescribed form or format for making that election. Consequently, we are of the view that the CRA could accept that an election has been made even if the taxpayer had not attached a letter to the taxpayer’s income tax return clearly signifying the election. The CRA would accept, as an election made pursuant to subsection 10(6), a taxpayer reporting the number zero under the item "closing inventory" on the T2124 filed with the taxpayer's income tax returns.
Paragraph 6 of Interpretation Bulletin IT-212R3 clarifies that the inventory of an artist that is valued at nil pursuant to subsection 10(6) is a right or thing for the purposes of subsection 70(2).
Subject to subsection 70(3), where a deceased person has rights or things at death the amount of which on realization or disposition would have been included in computing the income of that person, the value of the rights or things at death must be included in computing the income of the deceased person. The legal representative could elect, within the prescribed time, to file a separate return of income for the year of death as provided in subsection 70(2).
Where subsection 70(3) does not apply, the person who acquires the inventory on death is deemed by paragraph 69(1)(c) to have acquired it at a price equal to its fair market value. Based on paragraph 25 of IT-212R3, the disposition of the inventory by the person who acquired it will generally be on capital account, unless the person's activities in relation to the inventory are such that the inventory constitutes a trading asset.
Subsection 70(3) applies where, before the time for making an election under subsection 70(2) has expired, a right or thing has been transferred or distributed to beneficiaries or other persons beneficially interested in the estate or trust (the "beneficiary"). Where subsection 70(3) applies, the value of the deceased's rights or property will not be included in the deceased's income under subsection 70(2), and an amount received by one of the beneficiaries on the realization or disposition of the right or thing shall be included in computing the income of the beneficiary for the taxation year in which the beneficiary received it.
If subsection 70(3) applies, paragraph 69(1)(c) does not apply and the cost of the property to the beneficiary is determined under subsection 69(1.1) to be equal to the total of the part of the cost thereof to the deceased as had not been deducted by the deceased in computing the deceased’s income for any year, and any expenditures made or incurred by the beneficiary to acquire the property. That cost will be used to compute the beneficiary's income when the inventory is sold. If subsection 70(3) applies, the sale of the inventory by the beneficiary will be treated as an income transaction, the income from which will remain fully taxable under that subsection regardless of the beneficiary's use of the works of art following death.
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
Best regards,
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch