DEC 5 1989
Head Office Business and General Division A.W. Larochelle (613)9572140 XXXX
This is in reply to your memorandum of October 18, 1989, wherein you requested our views on the tax treatment arising on the disposition by the above of a number of paintings left to them by XXXX upon his death in XXXX
1. 2. 3. 4. 5. 6. 7. 8. 9. XXXX
Based on the above information you have requested our comments on the following points:
1. As it would appear that XXXX was operating a business, through an agent, and the paintings on hand were considered to be inventory; XXXX
Inventory or capital property?
2. Would the sale of the remaining paintings be considered income from a business or income subject to the capital gains provision of the Income Tax Act?
Our Comments
In answer to your first question, in our viewm, the beneficiaries of the late XXXX estate would receive their inheritance as capital property and/or personal property.
With respect to your second question we doubt if the courts would support the conclusion that the taxpayers were carrying on a business in disposing of their inheritance. It seems to us that in order to class the sale of the paintings as business income we would have to look at the taxpayers whole course of conduct. In examining such course of conduct the following factors would have to be considered: (1) intention; (2) the relation of the transactions to the taxpayer's regular business; (3) the nature of the transactions and the type of asset being disposed of; (4) the number and frequency of the transactions. As long as the taxpayers are not directly involved with the operations of the XXXX or operating their own gallery, we believe that the taxpayers should be viewed as merely carrying out the normal disposal of their inheritance in a prudent manner, with no business connotation to be attributed to the sale fo the paintings. We miht add that we had a somewhat similar case referred to us by a District Office a number of years ago and the same treatment as we are suggesting here was given to that taxpayer.
In summary, we recommend that the taxing of these paintings be given capital treatment.
As far as demanding prior years returns as discussed in out telephone conversation we leave this matter entirely to your discretion and appropriate action.
We trust our comments will be of assistance.
for Director Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch G. Thornley (613)957-2101