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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: A limited partnership has been established to finance the purchase and reproduction of artwork. The partnership proposes to dissolve no later than XXXXXXXXXX . Unsold artwork will either be gifted by the partnership to institutions or public authorities designated under the Cultural Property Export and Import Act or distributed to limited partners or to the general partner prior to the dissolution of the partnership. The former members of the partnership will have an option to donate the artwork they receive to institutions or public authorities designated under the Cultural Property Export and Import Act. The partnership requested rulings on the following issues: 1) the deductibility of the administrative and marketing costs incurred by the partnership for presales of the artwork; and 2) the determination of the fair market value of any artwork donated by the partnership or the limited partners.
POSITION: 1) The expenses will be deductible in computing the income of the partnership provided such expenses and are not restricted by sections 18 or 67 of the Act; and 2) subsection 118.1(10) of the Act deems the fair market value of the artwork gifted to be the value as determined by the Canadian Cultural Property Export Review Board. The ruling is conditional on the gift meeting the criteria set out in the Cultural Property Export and Import Act.
Reasons: 1) The expenses will be incurred for the purpose of earning income; and 2) subsection 118.1(10) of the Act applies.
XXXXXXXXXX 2003-000672
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Partnership")
This is in response to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted Partnership and the persons who will become members of the Partnership.
To the best of your knowledge, and that of the general partner of the Partnership, none of the issues contained in this ruling request is:
(i) dealt with in an earlier return of any prospective member of the Partnership or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any prospective member of the Partnership or a related person;
(iii) under objection or appeal by any prospective member of the Partnership or a related person; or
(iv) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has expired.
Except as otherwise noted, all statutory references in this letter are to the Income Tax Act (Canada), R.S.C. 1985 c.1 (5th Supp.), as amended (hereinafter referred to as the "Act").
Except as otherwise noted, all dollar amounts described herein are to the Canadian dollar.
Our understanding of the relevant facts, proposed transactions and the purpose of the proposed transactions is as follows.
FACTS
1. The Partnership was formed as a limited partnership under the Partnership Act (XXXXXXXXXX) on XXXXXXXXXX.
2. The Partnership was formed to carry on the business of commissioning, publishing, marketing and selling high quality artwork (the "Artwork") in the form of XXXXXXXXXX. The Partnership has a fiscal period ending on XXXXXXXXXX.
3. The general partner ("General Partner") is XXXXXXXXXX, a company incorporated under the Company Act (XXXXXXXXXX), on XXXXXXXXXX. The General Partner is a "Canadian-controlled private corporation" within the meaning assigned by subsection 125(7) of the Act. The authorized capital of the General Partner consists of XXXXXXXXXX common shares without par value of which 1 common share is issued to XXXXXXXXXX, a resident of Canada. XXXXXXXXXX is also the President, Secretary and director of the General Partner.
4. The General Partner will be responsible for the management of the Partnership in accordance with the terms of the Limited Partnership Agreement (the "LP Agreement") and is entitled to a reimbursement for reasonable costs incurred on behalf of the Partnership. The General Partner is liable for all the debts and losses of the Partnership although it has no obligation to pay the liabilities of the limited partners individually or to return capital to the limited partners from its own resources if the business of the Partnership fails.
5. The capital structure of the Partnership consists of general and limited partnership units of which the initial limited partnership unit has been issued to XXXXXXXXXX at a price of $XXXXXXXXXX to facilitate the formation of the Partnership.
6. The General Partner has applied for and obtained a Tax Shelter Identification Number in respect of the Partnership, as required by subsection 237.1(2) of the Act.
PROPOSED TRANSACTIONS
7. The Partnership will distribute directly or through an agent, limited partnership units only to subscribers resident in the provinces of XXXXXXXXXX and, therefore, the Partnership will be a Canadian partnership as defined in subsection 102(1) of the Act. Up to XXXXXXXXXX limited partnership units will be issued at an issue price of $XXXXXXXXXX per Unit. An agent will be paid a sales commission of XXXXXXXXXX% of the gross proceeds realized from the sale of the limited partnership units by the agent.
8. The minimum individual subscription will be $XXXXXXXXXX for XXXXXXXXXX limited partnership units of the Partnership. Payment of the full subscription price will be made in cash, certified cheque or bank draft.
9. Upon acceptance of the first subscription for the limited partnership units, the Partnership will redeem the initial limited partnership unit and make payment thereof to XXXXXXXXXX in the amount of $XXXXXXXXXX.
10. If the offering is fully subscribed, the Partnership will raise $XXXXXXXXXX, of which approximately $XXXXXXXXXX will be used to cover selling commissions and offering costs. The Partnership will use the net proceeds to pay expenses related to the production, marketing and sale of the Artwork. These expenses are estimated to be as follows:
Artists' Fees
$ XXXXXXXXXX
Artists' Marketing Fees
XXXXXXXXXX
Production costs
XXXXXXXXXX
Administrative, Marketing and Promotion
XXXXXXXXXX
Total expenses
$ XXXXXXXXXX
11. The General Partner, on behalf of the Partnership, will enter into an agreement (the "Artwork Agreement") with each of XXXXXXXXXX (referred to individually as "Artist" and collectively as "Artists") whereby each Artist will create, XXXXXXXXXX (each referred to herein as a "XXXXXXXXXX"). The XXXXXXXXXX will be marketed and sold by the General Partner on behalf of the Partnership.
12. Pursuant to each Artwork Agreement, the Partnership will pay the Artist who is party thereto an aggregate of $XXXXXXXXXX (US) for each XXXXXXXXXX, of which XXXXXXXXXX will be payable to create the Artwork and deliver the completed inventory to the Partnership (described in paragraph 10 above as Artists' Fees) and the balance of which is to be payable as a consulting fee (described in paragraph 10 above as Artists' Marketing Fees). The Artists Marketing Fees are paid to the Artists to assist the Partnership in securing the cooperation of galleries to sell the Artwork. The Artists Marketing Fees are also intended to cover the Artists' travel and attendance at public unveiling ceremonies, secure the Artists' assistance in the development of promotional materials, introductions to private gallery owners, public museum directors and curators, and private collectors, as well as for services relating to the interpretation of the Artwork for the various galleries.
13. Of the $XXXXXXXXXX (US) fee payable to each Artist for each XXXXXXXXXX will be paid upon execution of the Artwork Agreement with such Artist, XXXXXXXXXX will be paid when the Artwork which is the subject of the XXXXXXXXXX is created and the proofs have been delivered to the General Partner on behalf of the Partnership, and XXXXXXXXXX will be paid when the XXXXXXXXXX have been signed and delivered to the General Partner on behalf of the Partnership.
14. Production costs include those costs related to services for editioning, producing and XXXXXXXXXX the Artwork created by the Artists. All the costs related to the creation of the Partnership's Artwork (i.e. Artists' Fees and Production costs) will be treated as the cost of inventory and will not be deducted until the revenue from the sale of the Artwork is realized. The Artists' Marketing Fees (as described in paragraph 12 above) will be deducted in computing the income of the Partnership in the year or years the Artist renders such services to the Partnership. The Administrative, Marketing and Promotion costs are intended to cover costs relating to the operation of the Partnership and include such items as salaries, supplies, and rent. The Administrative, Marketing and Promotion costs are also intended to cover advertising costs as well as costs relating to the participation in art exhibitions and museum presentations.
15. It is projected that the Partnership will generate the following revenue:
XXXXXXXXX.
The General Partner anticipates most sales will be made in the United States and in European markets.
16. The LP Agreement will specify that the net income or loss of the Partnership will be allocated as follows:
a) For fiscal periods ending before XXXXXXXXXX, the net income or loss of the Partnership will be allocated at the end of each fiscal period as XXXXXXXXXX% thereof to the General Partner and XXXXXXXXXX% thereof to the limited partners allocated equally among them on a unit pro rata basis.
b) Thereafter, the net income or loss of the Partnership will be allocated at the end of each fiscal period as XXXXXXXXXX% thereof to the General Partner and XXXXXXXXXX% thereof to the limited partners allocated equally among them on a unit pro rata basis.
17. The LP Agreement will specify that the Partnership will make a distribution to the partners, by XXXXXXXXXX of each fiscal period it is in existence. The amount distributed to the partners in a particular fiscal period will be cash generated from the operations of the Partnership for the preceding fiscal periods less amounts allocated for anticipated operating and capital expenditures and liabilities for the particular and future fiscal periods. The minimum distribution to be made by the Partnership will be an amount that represents a partner's estimated tax liability in respect of the allocation of net income of the Partnership for the immediately preceding fiscal period as described in paragraph 16 above.
18. The cash distributions to the Partners will be made on the following basis:
a) For fiscal periods ending before XXXXXXXXXX % thereof to the General Partner and XXXXXXXXXX% thereof to the limited partners allocated equally among them on a unit pro rata basis.
b) Thereafter, available cash will be distributed as XXXXXXXXXX% thereof to the General Partner and XXXXXXXXXX% thereof to the limited partners allocated equally among them on a unit pro rata basis.
19. In the course of managing the day-to-day operations of the Partnership, the General Partner may, from time to time, approve on behalf of the Partnership, the gifting of certain Artwork to institutions or public authorities in Canada, which are designated under subsection 32(2) of the Cultural Property Export and Import Act (the "CPEIA). The Partnership will obtain a certificate, issued under subsection 33(1) of the CPEIA from the Canadian Cultural Property Export Review Board establishing that the Artwork meets all of the criteria set out in paragraphs 29(3)(b) and (c) of the CPEIA. The Partnership will include, in computing its income, the fair market value of the gifted Artwork as determined by the Canadian Cultural Property Export Review Board.
20. The Partnership will continue until the earliest of:
a) the bankruptcy, dissolution or winding up (except a dissolution as a consequence of a merger, amalgamation, consolidation or other corporate reorganization) of the General Partner or the occurrence of any other event which would permit a trustee or receiver to acquire control of the General Partner's affairs unless such General Partner is replaced with a new General Partner concurrently with the occurrence of such event;
b) the date on which the Partnership is dissolved by operation of law or by judicial decree; and
c) XXXXXXXXXX.
21. The Partnership will have no assets on hand prior to the dissolution of the Partnership, other than unsold Artwork. Prior to the date of dissolution of the Partnership, limited partners may choose to receive any unsold Artwork from the Partnership as a distribution, at fair market value, against their respective capital accounts. Any Artwork not distributed to the limited partners will be distributed to the General Partner such that no Artwork will remain in the Partnership immediately prior to the dissolution of the Partnership.
22. Following the dissolution of the Partnership, former limited partners of the Partnership may elect to gift all or part of the Artwork received from the Partnership (in the manner described in paragraph 21 above) to institutions or public authorities in Canada, which are designated under subsection 32(2) of the Cultural Property Export and Import Act (the "CPEIA). The limited partner will obtain a certificate, issued under subsection 33(1) of the CPEIA from the Canadian Cultural Property Export Review Board establishing that the Artwork meets all of the criteria set out in paragraphs 29(3)(b) and (c) of the CPEIA. The General Partner may provide assistance in the making of such gifts.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the Proposed Transactions is to raise capital in order to finance the production of a XXXXXXXXXX by internationally recognized artists that will be distributed and sold through the Partnership.
RULINGS
Provided that: (a) the facts, proposed transactions and their purposes have been fully disclosed and, as described above, are accurate, (b) the Partnership is a valid and subsisting partnership at law for any period of time covered by these rulings, and (c) the proposed transactions are carried out as described above, our rulings are as follows:
A. The administrative, marketing and advertising expenses described in paragraphs 10 and 14 above, will be deductible in computing the income for the Partnership, within the limitations of sections 18, 20 and 67 of the Act, in the taxation year in which the Partnership incurs the expenses.
B. Subsection 98(2) of the Act will apply to the distribution of the Artwork, as described in paragraph 21 above, to deem the Partnership to have disposed of the Artwork and for each partner to have acquired the Artwork, at an amount equal to its fair market value.
C. Subsection 40(3.1) of the Act will apply, at the end of each fiscal period of the Partnership, to a limited partner's interest in the Partnership, such that the amount determined under subsection 40(3.11) of the Act is deemed to be a gain from the disposition, at the end of the fiscal period, of the limited partner's interest in the Partnership.
D. Provided that a gift of a particular piece of Artwork is made in the manner described in paragraphs 19 and 22 above, subsection 118.1(10) of the Act will apply to deem the fair market value of such Artwork to be the fair market value determined by the Canadian Cultural Property Export Review Board, for purposes of paragraph 110.1(1)(c) and the definition of "total cultural gifts" in subsection 118.1(1) of the Act.
E. Subsection 245(2) of the Act will not apply, as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.
CAVEAT
The above rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R5 dated May 17, 2002, and are binding on the Canada Customs and Revenue Agency ("CCRA") provided the distribution of the units of the Partnership and the Artwork Agreement are completed before XXXXXXXXXX. The above rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Nothing in this letter should be construed as implying that the CCRA has agreed to or accepted:
(a) the reasonableness of any expenditures referred to in this letter;
(b) the fair market value of any property referred to in this letter other than expressly provided in this letter;
(c) whether or not any persons or partnerships referred to in this ruling deal at arm's length;
(d) the applicability or non-applicability of paragraph 96(2.2)(d) and subsection 143.2(2) of the Act;
(e) whether a partnership unit held by a partner is held on income or capital account and whether any outlay or expense described herein is on account of income or capital;
(f) the GST implications of any of the proposed transactions; and
(g) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.
Yours truly,
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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