29 August 1996 GST/HST Interpretation 11750-3 - Distribution of a Title From an Estate to Two Trusts

Dear Sirs:

We are replying to your memorandums, and subsequent telephone conversations, in which you seek our opinion concerning an enquiry by XXXXX regarding the distribution of a XXXXX title from an estate to two trusts. We apologize for the delay in our response.

I. Facts

We understand the pertinent facts to be as follows:

1. The registered owner of a fee simple estate in the XXXXX contained in a parcel of land situated in XXXXX (the XXXXX Property") died intestate on XXXXX Under the appropriate laws of succession, his widow was the sole beneficiary of the XXXXX Property.

2. On XXXXX the widow died, prior to the XXXXX Property being distributed from the estate of her husband.

3. Under the terms of the widow's will, the residue of her estate is to be divided equally between two separate trusts established for the children of her two daughters. The widow's interest in the XXXXX Property will form part of the residue.

4. Title to the XXXXX Property will be transferred directly from the estate of the widow's husband to the trustees of the two trusts.

5. XXXXX.

Issues

The following questions have been posed:

a. Does GST apply to these two estates notwithstanding the fact that both of the deceased persons died prior to GST coming into effect?

b. Can the respective trustees of the two family trusts that are the beneficiaries of the [XXXXX Property] pursuant to the widow's will become registered for GST purposes, if GST applies to the ultimate transfer of the XXXXX interests to the respective trustees of the two trusts?

c. Can the trustees of the two separate family trusts file a GST 22 election form?

d. If GST is triggered, we assume that the value to be used is the value that Revenue Canada Taxation would place on the value of the [XXXXX Property] XXXXX[?]

Response

Based on the information provided, it appears that the events which transpired, or will transpire, are as follows:

As a result of the death of the husband in 1982, the XXXXX Property vested in the personal representative of the estate upon his or her appointment. Thus, the personal representative held legal title to the XXXXX Property while the widow, as beneficiary, held the equitable title. It appears that the situation remained this way until 1990 because the husband's estate was not fully administered. Upon the death of the widow in 1990, the equitable interest formed part of her estate. This equitable interest will be distributed from the widow's estate to the two trusts which are the beneficiaries of the widow's estate, thereby leaving the personal representative of the husband's estate with the legal title to the XXXXX Property and the two trusts as the beneficiaries. Lastly, legal title will be transferred from the husband's personal representative to the trustees of the two trusts.

The Department has previously taken the position that the distribution of property from an estate to a beneficiary of the estate is a distribution from a trust to which section 269 of the Excise Tax Act (the "ETA") applies. The new section 267.1 proposed in the April 23, 1996 Notice of Ways and Means Motion (the "NWMM") confirms this interpretation by clarifying that a trust includes an estate of a deceased individual for the purposes of section 269. These proposed amendments, if enacted in their present form, are retroactive to December 17, 1990.

Pursuant to section 269 (including the amendments proposed in the NWMM), where a trustee of a trust distributes property of the trust to one or more persons, the distribution of the property is deemed to be a supply of the property made by the trust for consideration equal to the amount determined under the Income Tax Act to be the proceeds of the disposition of the property.

Section 269 is applicable to the distribution of the equitable interest in the XXXXX Property by the widow's estate, which would be a supply made to each of the two trusts. However, as proposed in the NWMM, the definition of "financial instrument" in subsection 123(1) will be amended to include an interest in the estate of a deceased individual. As a result, the distribution of the equitable interest would be an exempt supply.

It is our view that when the equitable interest that formed part of the widow's estate has been distributed to the two family trusts, it effectively puts them in the position of being beneficiaries of the husband's estate. Thus, when legal title to the XXXXX Property is transferred to the trustees of the trusts by the personal representative of the husband's estate, there is a further distribution from an estate to which section 269 is applicable. This time, however, the supply is of the property itself and the supply is not exempt on the basis of it being a financial instrument.

In addition, it does not appear that any of the exempting provisions contained in Schedule V of the ETA are applicable. For example, with respect to question c above, the XXXXX Property is, in our view, a capital property used primarily in a business. As a result, the supply of the XXXXX Property to the two trusts would not be made in the course of an adventure or concern in the nature of trade and the election under subparagraph 9(b)(ii) (subparagraph 9(2)(b)(ii) proposed in the NWMM) of Part I of Schedule V would not be applicable. Furthermore, the supply would be excluded from the section 9 exemption by paragraph (a) of that section (proposed paragraph 9(2)(a) in the NWMM).

Consequently, the husband's estate will be deemed to have made a taxable supply for consideration equal to the amount determined to be the proceeds of disposition under the Income Tax Act. Provided that the two trusts are engaged in a commercial activity, they would be able to register for GST purposes.

We hope you have found our comments helpful. If you have any questions, please call Robert Wong at (613) 952-9577.

Yours truly,

J. Sitka
A/Director
Financial Institutions and
Real Property Division

Domus #: 1360 (reg)