11 February 2002 External T.I. 2000-0044165 - Cost of Property Inherited

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:

Whether the cost basis of publicly traded shares to a Canadian resident individual who inherits the shares from a foreign relative who was resident in the U.K is subject to paragraph 69(1)(c), paragraph 70(5)(a), or section 107 of the Act?

Position:

In this situation, section 107 of the Act would apply.

Reasons:

Wording of the Act and current positions.

XXXXXXXXXX 2000-0004416
Fouad Daaboul
February 11, 2002

Dear XXXXXXXXXX:

Re: Paragraphs 69(1)(c), 70(5)(b) and 107(2)(b) of the Income Tax Act

This is in reply to your letter of August 22, 2000, wherein you requested our comments on the above mentioned provisions of the Income Tax Act (the "Act") as they relate to the determination of the cost basis of publicly traded shares to a Canadian resident individual who inherits the shares from a foreign relative who was resident in the U.K. We apologize for the delay in replying to your letter. You raise the following questions:

Questions

1. Does paragraph 69(1)(c) of the Act apply to deem the Canadian resident individual's cost base of the inherited shares to be the fair market value at the time he or she acquired them?

2. Does the Canada Customs and Revenue Agency (the "CCRA") consider paragraph 70(5)(b) of the Act to be applicable in determining the cost base of property consisting of shares of the foreign estate?

3. If paragraph 70(5)(b) of the Act is not applicable, how would the cost base of such shares be determined for a foreign trust (the estate), and are there any provisions that would deem the cost to be anything other than nil to the foreign estate?

4. If there are no such provisions, is there an administrative practice at the CCRA to accept the fair market value at the date of death as the cost base for the Canadian taxpayer?

5. Is there any relief provided in the Canada-U.K. Income Tax Convention (1978) (the "Convention") for the potential double taxation, assuming that the foreign relative was subject in the U.K. to foreign tax on the value at the date of death, such as an inheritance tax?

6. What guidelines are there for determining if an estate has actually come into existence for the purposes of applying paragraph 107(2)(b) of the Act, rather than the inheritance having been received from Mr. B and therefore subject to paragraph 69(1)(c) of the Act?

Our Comments

Although a technical interpretation was requested, the scenario presented appears to contemplate an actual fact situation. We provide assurance with respect to actual proposed transactions only by way of advance income tax rulings. If your situation involves completed transactions of actual taxpayers, you may wish to submit all relevant facts and documentation (including taxpayer identification) to the appropriate tax services office for their comments. We are, however, prepared to provide some general comments applicable to the fact scenario described. All references to sections or components thereof are to the Income Tax Act.

Question 1

Subsection 69(1) of the Act provides:

Except as expressly otherwise provided in the Act, ...

(c) where a taxpayer acquires property by way of gift, bequest or inheritance... the taxpayer is deemed to acquire the property at its fair market value.

Where there are no rollover provisions applicable, paragraph 69(1)(c) applies to determine the cost of a property acquired by way of gift, bequest or inheritance, whether the transferor of the inherited property is a "taxpayer" as defined in subsection 248(1) or not.

However, the requirement of paragraph 69(1)(c) that a taxpayer acquires property "by way of gift, bequest or inheritance" are not met where property of a deceased individual is transferred to his estate upon his death because no gift, bequest nor inheritance is provided to the estate and, there can thus be no deemed cost to the estate under paragraph 69(1)(c) of the Act.

Question 2

Under paragraph 70(5)(a), a deceased taxpayer is deemed to have disposed of any capital property owned by the taxpayer immediately before her or his death at fair market value. Under paragraph 70(5)(b), any person who acquires such property as a consequence of the taxpayer's death is deemed to have acquired the property at the time of death at a cost equal to fair market value. In our view, a non-resident individual that is not subject to taxation in Canada, pursuant to subsection 2(3) of the Act, is not subject to the deemed disposition rules in paragraph 70(5)(a). Consequently, we would not expect the provisions of paragraph 70(5)(b) to apply to an estate that acquired property as a consequence of a non-resident person's death in a situation such as described above.

Questions 3, 4 and 6

Subsection 107(2) provides rules that apply when a "personal trust" distributes its properties, including capital properties, in complete or partial satisfaction of a capital beneficiary's interest. Subsection 107(2) will apply in circumstances where there is a distribution that constitutes a disposition of a capital interest in a trust and subsections 107(2.001), 107(2.002), and 107(4) to 107(5) do not otherwise apply.

In a particular situation where a non-resident trust that is a personal trust, distributes property to a beneficiary resident in Canada in satisfaction of the beneficiary's capital interest in the trust, we have previously opined that paragraph 107(2)(b) would apply in determining the cost of the distributed property to the Canadian beneficiary notwithstanding that the non-resident trust may not be subject to tax in Canada. We have also opined that the length of time it takes for a distribution to occur is not relevant in determining whether paragraph 107(2)(b) would apply to a particular situation.

If the shares in your example are distributed to the Canadian resident by a "personal trust" within the meaning of subsection 248(1) that is not subject to section 94, it is our view that the cost of the shares to the Canadian resident would be computed in accordance with paragraph 107(2)(b), using their cost amount to the trust immediately before the distribution time. Since the trust would not pay anything for the shares, the cost amount of the property to the trust would be nil. In this regard, where the cost of a property that is received by a person as a consequence of the death of a taxpayer, is nil in accordance with the Act, the CCRA does not have an administrative practice to accept the fair market value at the date of death as the cost base for a Canadian taxpayer and the cost of property is determined in accordance with paragraph 107(2)(b).

Subsection 107(2.001) allows a trust resident in Canada that distributes property after October 1, 1996, in satisfaction of all or part of a beneficiary's capital interest in the trust to opt out of the application of subsection 107(2) in respect of that distribution. Subsection 107(2.001) also applies to a non-resident trust that distributes either taxable Canadian property or property used in a business carried on by the trust through a permanent establishment in Canada in satisfaction of all or part of a beneficiary's capital interest in the trust.

Subsection 107(2.002) allows a beneficiary of a non-resident trust to opt out of the application of subsection 107(2) in respect of a post-1999 distribution of property that is not eligible for the election described in proposed subsection 107(2.001). In either case, the election must be filed in prescribed form on or before the relevant filing date.

When a beneficiary makes an election under proposed subsection 107(2.002) and subsection 75(2) does not apply to attribute the non-resident trust's income in respect of the disposition to a resident of Canada, paragraph 107(2.1)(d) applies. As a result of the application of subparagraph 107(2.1)(d)(iii), the beneficiary is deemed to have disposed of his or her capital interest in the trust for an amount equal to the fair market value of the property so distributed less any eligible offset as defined in subsection 108(1). Moreover, the cost of the property to the beneficiary will be the fair market value of the property as computed in accordance with paragraph 107(2.1)(d)(ii). Otherwise such a cost would be determined in accordance with paragraph 107(2)(b).

Question 5

Paragraph 8 of Article 13 of the Convention states that

Gains from the alienation of any property, other than that referred to in paragraphs 1, 2, 3, 4 and 5 of this Article shall be taxable only in the Contracting State of which the alienator is a resident.

It appears that this provision would normally be applicable to give Canada the sole right to tax the gain realized by a Canadian resident individual who disposed of publicly traded shares. Any taxes paid to the U.K., in respect of the transfer of the shares by the trust to its beneficiaries in the situation described above, would not be taxes paid by Mr. A, and thus would not be covered by article 21 of the Convention. The transfers from the deceased to his estate and from the estate to the Canadian resident individual would not constitute taxable events under the Convention for the Canadian resident individual.

We trust our comments will be of assistance.

Yours truly,

Alain Godin
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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