10 April 1995 External T.I. 9504645 F - REAL PROPERTY SUBJECT TO SUBSTITUTION - APPLICATION TO QUEBEC ONLY - SEE ISSUE SHEET

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:

Substitution created before 1989 - deemed disposition and capital gain election

Position TAKEN:

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Reasons FOR POSITION TAKEN:

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XXXXXXXXXX						4-950464

April 10, 1995

Dear XXXXXXXXXX:

Re: Real property subject to a substitution

We are confirming the response given by Mr. Borgo-Gelli during a telephone conversation with you on February 6, 1995 concerning the capital gains election under subsection 110.6(19) of the Income Tax Act (the "Act") for a real property which became subject to a substitution before 1989 as described in your letter of October 14, 1994.

As explained in Information Circular 70-6R2 (copy attached), it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate tax service offices for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

Paragraph 70(5)(a) of the Act provides for a deemed disposition of capital property owned by a taxpayer immediately before the taxpayer's death. Considering that an institute holds a property as proprietor but subject to the rights of the substitute, in our opinion, the opening of the substitution does not lead to a deemed disposition of such property held by an institute. Immediately before the institute dies, he/she is deemed to have disposed of his/her interest in the substitution for proceeds equal to the fair market value at that time. Generally, as the value of such interest decrease with time, it will probably be worthless and without any tax consequences for the deceased. If for any reason that interest has a value, then the capital gain resulting from that deemed disposition has to be reported on the institute's tax return.

In general, the interest of the institute and the substitute are capital property for the purposes of the Act. Therefore, we are of the opinion that they can both elect to increase the cost of their respective interests. However, considering that when the substitution opens the substitute is deemed to acquire the property from the testator this leads us to conclude that an institute can not elect under subsection 110.6(19) of the Act to increase the cost of the property for whoever ultimately obtains the property as the institute simply holds an interest in the property and not the property itself.

The above comments are an expression of opinion only and, as explained in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

We trust that these comments will be of assistance to you.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch