Principal Issues: Whether the 21-year deemed realization rule applies where an estate holds gross royalty trust certificates on which income continued to be paid to the estate after the deceased's death.
Position: Yes, where the gross royalty trust certificates are capital in nature.
Reasons: Where gross royalty trust certificates are capital in nature, the 21-year deemed realization rule would apply pursuant to subsection 104(4) of the Act.
XXXXXXXXXX
2012-045953
Saskia deLang-Lenters
September 6, 2013
Dear XXXXXXXXXX:
Re: Gross royalty trust certificates
This is in response to your email query concerning gross royalty trust certificates held by an estate administered by your office (the "Public Trustee"). You described a hypothetical situation in which a trust return is required to be filed for an estate of a deceased person who held gross royalty trust certificates on which royalty income continued to be paid to the estate after the deceased's death. You noted an estate can remain open for extended periods of time where, for example, income earning properties remain in the estate and beneficiaries of the estate cannot be found. Where the estate is not wound up within 21 years, you queried whether the 21-year deemed realization rule in subsection 104(4) of the Income Tax Act (Canada) (the "Act") would require the estate to report a deemed disposition of the gross royalty trust certificates it holds.
Our Comments
Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled Advance Income Tax Rulings, dated May 17, 2002. However, we are prepared to provide you with the following general comments which may be of assistance.
As discussed with you in our telephone conversation of October 1, 2012, the determination of whether an interest in a gross royalty income trust is capital or income property is one that would to be made based on the facts of a particular situation. We also referred you to Interpretation Bulletin 479R, Transactions in Securities, and its special release, in particular paragraphs 9 to 13, which discuss the "course of conduct" and "intention" tests that the courts have applied in order to determine whether a transaction is on income or capital account. The bulletin and its special release are available on the Canada Revenue Agency website at http://www.cra-arc.gc.ca/E/pub/tp/it479r/README.html and http://www.cra-arc.gc.ca/E/pub/tp/it479rsr/it479rsr-e.html.
Pursuant to subsection 104(1) of the Act, an estate is a trust for purposes of Act. This trust is generally created on the day that a person dies. Subparagraph 104(4)(b)(ii) of the Act provides for a deemed disposition at fair market value of certain capital property owned by a trust 21 years after the day on which the trust was created.
Thus, where the trust has not been wound up within 21 years of the commencement of the deceased's estate, and based on the facts it is determined that the interests in the gross royalty trust certificates are capital property, the 21-year deemed realization rule will apply.
We trust our comments will be of assistance to you.
Steve Fron, CPA, CA
Manager, Trust Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
