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: In the particular situation, whether the appreciation of value
of the looted property prior to the date on which the taxpayer obtained the restitution of the
property might be considered a non-taxable windfall.
Position: No.
Reasons: Question of fact.
April 16, 2012
XXXXXXXXXX Taxation Services Office HEADQUARTERS
Income Tax Rulings
Directorate
Attention: XXXXXXXXXX XXXXXXXXXX
2011-040427
Restitution to a Canadian resident of Property looted during the Second World War
This is in response to the letter dated February 24, 2011 (the “Letter”), addressed to your tax
services office by Ms. XXXXXXXXXX of XXXXXXXXXX (the “Representatives”),
which you forwarded to us for reply. We apologize for the delay in responding.
In the Letter, the Representatives request a written confirmation that the Canada Revenue Agency
(the “CRA”) agrees with their conclusion with respect to the tax treatment applicable to the sale
of a work of art (the “Artwork”) looted during the Second World War (“WWII”) and
subsequently returned to the heir of the original owner (the “Taxpayer”).
Facts
Our understanding of the facts of the particular situation, based on information provided in the
Letter XXXXXXXXXX, is as follows:
1. The Taxpayer is the sole heir of a family that owned the Artwork.
2. The Artwork was purchased by the family well before the Taxpayer’s birth.
3. At a certain time, when the Taxpayer was a child, a member of the family arranged for
the Artwork to be stored by a storage company.
4. At about the same time, the Taxpayer fled his country XXXXXXXXXX .
5. After WWII was over, the Taxpayer’s XXXXXXXXXX located the
XXXXXXXXXX which was supposed to contain the Artwork, but it was empty. It is
believed that the Artwork had been seized by Nazi or Soviet soldiers during WWII.
After its disappearance, the Artwork went underground.
6. The Taxpayer immigrated to XXXXXXXXXX in Canada at the beginning of the
XXXXXXXXXX .
7. The trail of the Artwork was lost until it resurfaced at XXXXXXXXXX in
XXXXXXXXXX , after which it changed hands several times in XXXXXXXXXX
transactions before reappearing at a XXXXXXXXXX in XXXXXXXXXX .
8. In 1998, the Washington Conference on Holocaust-Era Assets, a government-
organized, international meeting of forty-four governments, was held and the
participants sought to address, among others, the issue of assets seized or looted during
the period of 1933 to 1945 (the Holocaust Era). Although many countries had passed,
early after the end of WWII, restitution laws for the return of properties taken from their
rightful owners during the war, the Washington Conference strengthened the
international commitment to open relevant national archives and other records for
research on, among others, Nazi-looted assets and to promote broad consensus for further
action. One of the benefits of the Washington Conference is that many governments, on
the basis of the principles adopted during that conference, continued their efforts to
clarify the provenance of works of art confiscated or looted during WWII and sought to
provide in rem restitution of publicly-owned property to their rightful owners.
9. In XXXXXXXXXX , the Taxpayer filed a restitution claim to recover the looted
Artwork from the current owner.
10. In XXXXXXXXXX , the Taxpayer reached a settlement with the current owner with
the following key elements:
XXXXXXXXXX
11. The ownership of the Artwork was transferred to the Taxpayer in XXXXXXXXXX
under the conditions set out in the settlement XXXXXXXXXX and, pursuant to the
above-mentioned settlement, the Taxpayer received XXXXXXXXXX of the net
proceeds from the sale of the Artwork.
The Representatives are of the opinion that the Taxpayer should be considered to have acquired
the Artwork in XXXXXXXXXX at the time when the ownership was transferred to him by the
current owner. Further, the adjusted cost base (the “ACB”) of the Artwork should be equal to the
fair market value (the “FMV”) of the Artwork at the time of the transfer, pursuant to paragraph
69(1)(c) of the Income Tax Act (the “Act”). In their opinion, the appreciation in value of the
Artwork attributable to the period prior to the transfer of the ownership should be considered as a
non-taxable windfall and as such not be taxable under the Act.
In support of their opinion, the Representatives refer to the view expressed by the CRA in
Technical Interpretation No. 2006-0188911 stating that the ACB of works of art that were
confiscated or unlawfully taken by the Nazi government from Austrian residents during WWII, is
the FMV at the time of their restitution to a Canadian resident (or to his heir) by the Austrian
government. In 1998, Austria enacted 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 that had been given to Austria after the war and were being held in Austrian federal
museums and collections. As a result of this, a Canadian resident heir of an Austrian resident
who died in 1945 (the “the Original Owner”) instituted proceedings to recover a certain work
of art. The work of 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
work of art and that the heir was entitled to restitution of the work of art. In March 2006, Austria
confirmed that it would abide by the decision of the arbitration panel and the work of art was
restituted to the heir in that year. According to the Representatives, in this Technical
Interpretation the CRA expressed its 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 Act.
In support of their opinion, the Representatives refer also to the Technical Interpretations No.
9329505, 9803715, 9600925, 9226015, 9506145 and 2003-0015117.
Written confirmation of the tax implications inherent in particular transactions is given by this
Directorate only where the transactions are proposed and are the subject matter of a request for an
advance income tax ruling submitted in the manner set out in Information Circular 70-6R5,
Advance Income Tax Rulings, dated May 17, 2002.
However, although this Directorate does not decide the tax treatment applicable to a specific
situation otherwise than in an advance income tax ruling, it provides regularly Technical
Interpretations containing general comments in respect of the issues raised in opinion requests.
These comments are of a general nature and are not binding on the CRA with respect to a
particular situation, mainly because any particular situation may involve complex legal issues and
the Directorate does not have access to all the facts and documentation relevant to the particular
situation described in the opinion request. For example, in the given factual situation described
above (the “Particular Situation”), it is not clear whether the Taxpayer inherited his rights in the
Artwork during WWII, when his grandparent perished in the Holocaust, or when his
XXXXXXXXXX died. That is why we prefer that tax services offices deal directly with
taxpayers and their representatives with respect to completed transactions.
However, as requested we are prepared to provide you with the following general comments that
we hope will assist you in dealing with the Particular Situation.
We cannot agree with the conclusion of the Representatives with respect to the Particular
Situation for the following reasons.
1. The view expressed in Technical Interpretation No. 2006-0188911 does not support their
conclusion since the facts and the context of that Technical Interpretation are different from
those in the Particular Situation. In that particular Technical Interpretation, the work of art
acquired by the rightful owner in 2006 had been transferred by the original owner to the
Austrian government, at an undetermined time before 1998, XXXXXXXXXX. In the
Particular Situation, the Artwork was never transferred to a government; it was looted or
stolen and went underground. In our view, the property rights of a person whose property
has been acquired by a foreign state pursuant to its laws are fundamentally different than
those of a person whose property has been stolen and is later recovered or restituted. For
that reason alone, the Particular Situation can be distinguished from the situation in the
particular Technical Interpretation and the general comments contained in it do not
necessarily support the Representatives’ view with respect to the Particular Situation.
2. All the other older Technical Interpretations that are referred to by the Representatives in
support of their view concern the tax treatment of immovable property while in the
Particular Situation the property at issue is a movable property. Again, this is a relevant
factual distinction between the Particular Situation and the situations described in the
Technical Interpretations such that, in our view, the Technical Interpretations referred to in
the Letter do not support the position put forward by the Representatives.
3. Technical Interpretation No. 9226015 is the first technical interpretation letter issued by our
Directorate suggesting that, where real property was returned to a Canadian taxpayer by a
government by virtue of any restitution laws, a taxpayer would not acquire the property for
tax purposes until the time when he has acquired both the legal and beneficial ownership of
the property and consequently that the ACB of the property would be the FMV of the
property at that time.
The statement contained in this Technical Interpretation to the effect that “any gains or
income attributable to the period prior to such date [i.e. the date that the taxpayer acquired
both the legal and beneficial ownership of the property] would not be taxable in Canada
since such amounts would be considered to meet the criteria of being considered a
windfall” was based on the decision in The Queen v. Cranswick, 82 DTC 6073 (FCA).
In Cranswick, the court ruled that a sum paid by the majority shareholder of a company to a
minority shareholder to avoid a possible complaint about the sale of part of the company’s
assets was not income in the hands of the recipient. The court rather considered that the
payment was of an unusual and unexpected kind that one could not set out to earn as
income from shares, and it was from a source to which the respondent had no reason to
look for income from his shares. Therefore the payment was in the nature of a “windfall”.
The court also adopted, in this decision, the relevant indicia to be taken into consideration
in determining whether or not a payment could be considered a “windfall”. The CRA
adopted these factors and set them out at paragraph 3 of the Interpretation Bulletin
IT-334R2, Miscellaneous Receipts, dated February 21, 1992.
The point that we wish to make in this regard is that the position adopted in Technical
Interpretation No. 9226015 (and subsequently repeated in other Technical Interpretations)
was based on the decision in Cranswick. The 1992 Technical Interpretation was an early
general position concerning the restitution of real property to the victims of war and their
heirs, and the authors did not have the benefit of the guidance provided by the courts
subsequently.
Indeed, after Cranswick, two relevant cases were heard regarding the issue of determining
whether a receipt was a windfall. In Bellingham v. The Queen, 96 DTC 6075 (FCA), Justice
Robertson stated:
“There is one aspect of Cranswick which does not appear to have been pursued
on appeal. It is open to question whether the taxpayer in that case received the
payment in return for relinquishing the right to seek compensation for losses
suffered as a result of the disadvantageous sale. It would appear that that issue
had to be abandoned since the agreed statement of facts stipulated that the
payment in question was not made by reason of an enforceable claim by the
minority shareholders against the Canadian company. That concession on the
part of the Minister cannot be ignored for as the law presently stands monies
paid in exchange for the discharge of even a questionable legal right may
constitute income in the hands of the taxpayer. This is one of the teachings of
Mohawk Oil Co. v. Canada, supra.”
(Our emphasis)
The comments in Bellingham quoted above were also affirmed in Lavoie v. The Queen,
2009 TCC 293 as follows:
“Cranswick must be read in light of the fact that the trial judge's statement that
the payment was not made by reason of any enforceable claim asserted by the
shareholders of the Canadian subsidiary results from a specific statement to
that effect contained in an agreed statement of facts. As Robertson J.A. said
later in Bellingham v. Canada:
‘That concession on the part of the Minister cannot be ignored for as the
law presently stands monies paid for the discharge of even a questionable
legal right may constitute income in the hands of the taxpayer.’
The distinction between a voluntary payment and one motivated by the
prospect of litigation was central to the decision of the Federal Court of Appeal
in The Queen v. Mohawk Oil Co. These cases demonstrate that, as Robertson
J.A. said in Bellingham:
‘The precise scope of the residual category "windfall gains" has proven
problematic. At best, it can be said that a payment which is unexpected
or unplanned and not of a recurring nature, is more likely than not to be
characterized as a windfall gain. But like all generalizations, this
observation must be scrutinized meticulously’.”
It is our view, based on Bellingham and Lavoie, that if a taxpayer has any rights to claim a
payment or a property, even remotely, the value of the property received would not be
considered a windfall. In Technical Interpretation No. 9226015 as well as in almost all
other Technical Interpretations the Representatives referred to, one could argue that the
original owner (or his heir) is the only person that could make a claim in order to recover
any particular property (whether immovable or movable). For that reason, it appears that a
particular property returned to its rightful owner and the appreciation in value of that
property prior to its return could not be considered as being in the nature of a windfall.
Furthermore, as mentioned before, the factors to be taken into consideration when
determining whether a receipt would qualify as a windfall are listed in paragraph 3 in the
Interpretation Bulletin IT-334R2, Miscellaneous Receipts, as follows:
a) the taxpayer had no enforceable claim to the payment,
b) the taxpayer made no organized effort to receive the payment,
c) the taxpayer neither sought after nor solicited the payment,
d) the taxpayer had no customary or specific expectation to receive the payment,
e) the taxpayer had no reason to expect the payment would recur,
f) the payment was from a source that is not a customary source of income for the
taxpayer,
g) the payment was not in consideration for or in recognition of property, services or
anything else provided or to be provided by the taxpayer, and
h) the payment was not earned by the taxpayer as a result of any activity or pursuit of
gain carried on by the taxpayer and was not earned in any other manner.
Based on these factors, one can argue that, in the Particular Situation, the Artwork would not
qualify as a windfall since the Taxpayer had an enforceable claim to the Artwork, made an
organized effort to receive the Artwork and sought and solicited the Artwork.
For these reasons, we cannot agree with the view of the Representatives with respect to the tax
treatment applicable to the Particular Situation.
In our view, in the Particular Situation, assuming that the Artwork was capital property of the
Taxpayer, the Taxpayer would have realized a capital gain on the sale of the Artwork in
XXXXXXXXXX under subsection 40(1) of the Act.
More specifically, in the Particular Situation, we are of the view that the Taxpayer would have
acquired his rights to the Artwork when he inherited them from XXXXXXXXXX; the ACB of
the Artwork to him could not be the FMV of the property in XXXXXXXXXX ; paragraph
69(1)(c) of the Act would not apply to the Taxpayer in XXXXXXXXXX ; and the appreciation
in value of the Artwork attributable to the period prior the sale of the Artwork in
XXXXXXXXXX could not be a windfall.
It is our view that such a result in the Particular Situation would also be in accordance with the
basic tax principles of equity and fairness in Canada. Where, in other circumstances, a Canadian
taxpayer recovers a previously stolen work of art and subsequently sells it, the gain on the sale of
the property would not be considered to be in the nature of a windfall. In the Particular Situation,
the tax consequences should be the same.
Our view with respect to the Particular Situation does not mean that the proceeds of looted works
of art during WWII would always give rise to a taxable event. For example, a payment derived
from the so-called “Mauerback Sale” held in Austria in 1996 (an auction of Nazi-confiscated
works of art which could not be restituted to the former owners or their heirs, the proceeds from
which were held for the benefit of Holocaust victims) appears to us be in the nature of a windfall
for a Canadian beneficiary.
XXXXXXXXXX
In conclusion, we suggest that the Taxpayer be assessed on the basis that a taxable gain is derived
by him from the sale of the Artwork. We will be pleased to provide any assistance you require in
the determination of the gain in the Particular Situation.
We trust the above comments will be of assistance.
Please contact XXXXXXXXXX if you have any questions.
For your information, unless exempted, a copy of this memorandum will be severed using the
Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library.
A severed copy will also be distributed to the commercial tax publishers for inclusion in their
databases. The severing process will remove all material that is not subject to disclosure,
including information that could disclose the identity of the taxpayer. Should the taxpayer request
a copy of this memorandum, they may request a severed copy using the Privacy Act criteria,
which does not remove taxpayer identity. Requests for this latter version should be made by you
to Ms. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for
delivery to the taxpayer.
Yours truly,
XXXXXXXXXX
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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