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: whether 104(4)(a) deemed disposition and reacquisition of debt by trust prevent trust from continuing to claim capital gains reserve on property disposed of before the application of 104(4)(a)
Position: no
Reasons: debt is not deemed extinguished
1999-001142
XXXXXXXXXX Denise Dalphy
(613) 957-9231
Attention: XXXXXXXXXX
May 15, 2000
Re: Capital Gains Reserve and Deemed Disposition by Trust
We are writing in reply to your facsimile transmission dated September 21, 1999 wherein you inquire about the interpretation of subparagraph 40(1)(a)(iii) of the Income Tax Act (the "Act").
You have asked whether a trust that was created as a testamentary spousal trust (the "trust") and that claimed a capital gains reserve in a particular taxation year with respect to the disposition of a capital property (the "original property") is entitled to a capital gains reserve in the following taxation year - when the sole beneficiary (the "spouse") of the trust died and paragraph 104(4)(a) of the Act applied - and in the following three taxation years during which the mortgage is outstanding.
Although you have asked for a technical interpretation, the scenario described seems to involve proposed transactions. As explained in Information Circular 70-6R3, it is not the practice of the Canada Customs and Revenue Agency (CCRA) to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction 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 actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation to the relevant tax services office for their views. We are, however, prepared to offer the following general comments concerning the application of the attribution rules contained in subparagraph 40(1)(a)(iii) of the Act in the scenario described.
Paragraph 104(4)(a) of the Act, which you advise applied on the death of the spouse, deems a trust to have, at the end of the date of death of the spouse, disposed of each capital property of the trust for proceeds equal to its fair market value and to have reacquired the property for fair market value. There is no restriction on the applicability of this paragraph in the Act, and it therefore applies, inter alia, for the purposes of the capital gains reserve in subparagraph 40(1)(a)(iii) of the Act. If the debt taken back by the vendor-trust on the disposition of the original property is a capital property, paragraph 104(4)(a) of the Act deems that debt to have been disposed of and reacquired by the trust, at the fair market value of the debt.
Our response to Question #41 at the 1993 Canadian Tax Foundation Round Table stated:
"If there is extinction of the debt in law, the vendor is considered to have accepted the new debt obligation as "absolute payment" of the old debt obligation and would thus be denied a reserve under subparagraph 40(1)(a)(iii) after that date because there is no longer anything due to the vendor from the purchaser in the original transaction.
On the other hand, if the note or mortgage is modified without being extinguished in law within the time limits set out in subparagraph 40(1)(a)(iii), a reserve will continue to be available to the vendor." [emphasis added]
Although paragraph 104(4)(a) has deemed the debt disposed of, and reacquired, at fair market value, this paragraph does not deem the debt to have been extinguished. Accordingly the position described above, in our response to the aforementioned Question #41 would apply to permit the trust to continue to claim a capital gains reserve in respect of the sold property.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an advance income tax ruling and accordingly are not binding on the CCRA. Our practice is to make this disclaimer in all instances in which we provide an opinion.
Yours truly,
Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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