12 June 2012 Roundtable, 2012-0442881C6 - STEP CRA Roundtable Question 11 - June 2012

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: Can CRA comment on how it views the case of Lipson v R (2012 TCC 20)?

Position: Comments provided as to the relevant legislative provisions.

Reasons: The Act provides a logical flow for interpretive purposes of the facts in this case.

STEP CRA ROUNDTABLE – June 2012

Question 11:

In a recent case, Lipson v. R 2012 TCC 20, the Court found that an Estate was not a trust for purposes of the subsection 116(3) reporting and the resulting application of penalties. Could the CRA comment on how it views this case?

CRA Response

The decision in Lipson was rendered in respect of two Tax Court cases heard on common evidence. The respective appellants were Howard and Harriet Lipson. The relevant facts in the case can be briefly summarized as follows:

1. Howard and Harriet were two of the three adult children who became the residual legatees of the succession of their mother, who had lived in Quebec and who died in 2003.
2. All of the assets of the succession were located in Canada and all administration was performed in Canada; the succession was at all times resident in Canada.
3. Howard and Harriet were non-residents.
4. Significant capital distributions were made to each of the residual legatees from the succession in five tranches, one in 2003, two in 2004, one in 2005 and the last in 2007.
5. Howard and Harriet were assessed pursuant to subsection 162(7) of the Act for failure to file the notices required under subsection 116(3) in respect of dispositions of taxable Canadian property (“TCP”) as a consequence of the distributions noted in 4 above.

In rendering its decision, the Tax Court noted that under the Civil Code of Québec, a succession is not a trust. (endnote 1) The Court then proceeded to focus its analysis almost exclusively on subsection 104(1), as referred to in the definition of “estate” in subsection 248(1) of the Act; concluding that the effect was “not to treat an estate as a trust”.

In CRA’s opinion, the following provisions of the Act are relevant to the facts in Lipson:

Pursuant to subsection 248(1) of the Act, the terms “estate” and “trust” have the meanings assigned by subsection 104(1). Subsection 104(1) states that references in the Act to a “trust or estate (in this subdivision referred to as a trust)” include a reference “to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the trust property ….” Accordingly, in subdivision k of the Act, any reference to a trust includes an estate.

Subsection 108(1) defines a number of terms which apply for purposes of subdivision k, and for purposes of the Act where subsection 248(1) so directs (such as for the definition of a “capital interest”). Subsection 108(1) specifically provides that:

1. “trust” includes an inter vivos trust and a testamentary trust,

2. “testamentary trust” in a taxation year, means a trust or estate that arose on and as a consequence of the death of an individual…, and

3. “capital interest” of a taxpayer in a trust means all rights of a taxpayer as a beneficiary under the trust…

In our view, the fact that subsection 248(1) defines trust to have the meaning assigned by subsection 104(1), leads to a clear conclusion that the meaning must reflect the application of subsection 108(1), which states that an estate is a trust.

While we recognize that certain provisions of the Act reference an estate as distinct from a trust, we note that in general, they are those provisions that are intended to provide for tax treatment that is unique to the administration of the estate. For example, the ability to carry back capital losses to the terminal return of the deceased under subsection 164(6) and the inclusion of the more favorable treatment accorded capital losses under subsection 112(3.2) “where the trust is an individual’s estate, the share was acquired as a consequence of the individual's death and the disposition occurs during the trust's first taxation year….”.

It should be noted that the notice requirement provided for in subsection 116(3) of the Act applies where a non-resident person disposes of any TCP (other than property described in subsection 116(5.2) and excluded property) in a taxation year. Pursuant to paragraph (h) of the definition of TCP in subsection 248(1) of the Act (as it read during the period relevant to the Lipson case), a capital interest in a trust (other than a unit trust) resident in Canada constituted TCP. Accordingly, in our view, the decision in Lipson should have focused on the fact that the taxpayers had partial dispositions of their respective capital interests as a result of the capital distributions received from the succession.

Phillip Kohnen
2012-044288
June 12, 2012

ENDNOTES

1 See paragraph 17 of the decision. The Court noted that under the Code successions are dealt with in Book 3 (articles 613 – 898) whereas trusts are dealt with in Book 4 (articles 1260 to 1298)