21 November 2000 External T.I. 2000-0017625 - Bump on winding-up

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. Application of paragraph 88(1)(d.3) where a controlling interest in the shares of a corporation are acquired by a deceased taxpayer's estate upon death of the taxpayer?

2. Does the application of subsection 104(4) when the spouse dies result in an acquisition of control of a corporation?

Position: 1. Yes paragraph 88(1)(d.3) will apply.

2. No - legal control remains with the spousal trust at all times.

Reasons: The law.

XXXXXXXXXX 2000-001762

November 21, 2000

Dear XXXXXXXXXX:

Re: Paragraph 88(1)(d.3)

This is in response to your facsimile letter dated March 28, 2000, wherein you requested our opinion on the application of paragraph 88(1)(d.3) of the Income Tax Act ("the Act").

In your letter you noted that prior to the enactment of paragraph 88(1)(d.3) of the Act the Canada Customs and Revenue Agency ("CCRA") expressed the view that when the taxpayer's estate acquired shares of the capital stock of a corporation from the deceased person those shares were acquired by operation of law and not because of a bequest or inheritance for the purposes of former paragraph 88(1)(d.2) of the Act. As a result, where control of the corporation was acquired by the taxpayer's estate in such circumstances paragraph 88(1)(d.2) of the Act would not have applied to deem the estate to have last acquired control of the corporation immediately after the time of death from an arm's length person for the purposes of computing the "bump" under paragraph 88(1)(d) of the Act. You ask that we confirm that paragraph 88(1)(d.3) of the Act would now apply where the taxpayer's estate acquires control of a corporation in the above described circumstances.

In a separate matter you refer to Question 10 at the 1999 APFF Conference wherein it was stated that where subsection 104(4) of the Act deems a spousal trust to have disposed of the shares of the capital stock of a corporation it controls for their fair market value at the end of the day on which the spouse dies and to re-acquire those shares immediately thereafter paragraph 88(1)(d.3) of the Act would not apply. This was because the spousal trust still held the shares such that there could be no acquisition of control. You believe that it is arguable that such a spousal trust did acquire control of the corporation since there appears to be a moment in time between the deemed disposition and deemed re-acquisition under the Act where the spousal trust does not own any shares and you ask our views on this matter.

Our Comments

Where the deceased individual's estate acquires shares of the capital stock of a corporation that were owned by that individual immediately before the time of the individual's death and such acquisition results in the estate acquiring control of the corporation such acquisition would arise as a consequence of the death of the individual. Accordingly, in such a situation paragraph 88(1)(d.3) of the Act would apply where the corporation's winding-up commences after December 20, 1991.

With respect to your question concerning the situation described in question 10 of the 1999 APFF we do not agree with the view that subsection 104(4) of the Act could result in an acquisition of control of a corporation. The terms "control" and "acquisition of control" are not specifically defined in the Act and accordingly one must generally look to the facts to determine whether a person legally controls or has acquired control of a corporation. Generally, the trustee of a trust is considered to own the trust property and the trustee is responsible for administering such property in accordance with the terms of the trust for the beneficiaries until such time as the trust is dissolved (or the particular trustee is replaced). The fact that subsection 104(4) of the Act deems a spousal trust to have disposed of its shares of the capital stock of a corporation and re-acquired those shares would not, by itself, result in an acquisition of control of that corporation at that time since legal ownership of those shares by the spousal trust never changed. We note, however, that if the terms of the spousal trust provide for the distribution of the shares to the beneficiaries as a consequence of the death of the spouse then paragraph 88(1)(d.3) might apply when the shares are subsequently distributed to the beneficiaries.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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