24 May 2001 External T.I. 2000-0015655 - ACB of Shares Redeemed by Estate

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: Is the ACB of shares redeemed by an estate subject to 47(1)

when the deceased taxpayer's proceeds of disposition of some of the shares were determined under 70(5) and the proceeds for other identical shares determined under 70(6) -(because some shares are to be distributed to the child of the taxpayer and some are to be distributed to the spouse)?

Position: No.

Reasons: As the estate is not a spousal trust as described in 70(6), 70(6) has no application to the ACB of shares held by the estate.

XXXXXXXXXX 	2000-001565
		Annemarie Humenuk
May 24, 2001

Dear XXXXXXXXXX:

Re: Adjusted Cost Base of Shares Held by an Estate

This is in reply to your letter of March 15, 2000, in which you ask whether subsection 47(1) of the Income Tax Act applies to the calculation of the adjusted cost base of shares transmitted to an estate upon the death of a taxpayer where the taxpayer's deemed proceeds of disposition on death in respect of some of the shares held by the taxpayer is determined under subsection 70(5) and the deemed proceeds of disposition for other identical shares held by the taxpayer is determined under subsection 70(6). We apologize for the delay in our response.

All statutory references in this letter are references to the provisions of the Income Tax Act (the "Act").

You describe a situation in which a taxpayer holds shares in a private Canadian corporation at the time of his death. Under the terms of his will, half of the shares are gifted to his spouse and the other half are gifted to his child. As a result, the taxpayer's proceeds of disposition with respect to the shares to be distributed to the spouse are determined under subsection 70(6) and the proceeds of disposition with respect to the shares to be distributed to the child are determined under subsection 70(5). The adjusted cost base of the shares acquired by the spouse and child are determined under paragraphs 70(6)(d) and 70(5)(b) respectively. Your question relates to the adjusted cost base of the shares to the estate in the event that, instead of distributing the shares to the child, the executor redeems the shares to which the child is entitled and distributes the cash received on the redemption of the shares to the child. For the purpose of our response, we will assume that the terms of the will permit such actions.

Since your situation seems to relate to an actual transaction, we refer you to our policy in this regard, which is set out in Information Circular 70-6R4 dated January 29, 2001. This circular explains that it is our policy not to provide written confirmation of the tax implications inherent in a particular transaction unless the transaction is proposed and is the subject matter of an advance ruling request submitted in the manner set out in that circular. When the transaction related to the enquiry is a completed transaction, the enquiry should be addressed to the relevant tax services office. Nonetheless, we are prepared to offer the following general comments.

When a corporation redeems the shares of its capital stock for an amount in excess of the paid-up capital of the shares at that time, the shareholder is deemed to have received a dividend under subsection 84(3)(b) and such amount is excluded from the shareholder's proceeds of disposition from the disposition of such shares. As a result of the application of subsection 84(3), an estate may realize a capital loss on the redemption of shares. Where an estate realizes such a capital loss in its first taxation year and the legal representative of the deceased taxpayer makes an election under subsection 164(6) in a timely manner, the amount, if any, by which all capital losses realized by the estate exceed the amount of all capital gains realized by the estate in that taxation year may be deemed to be capital losses of the deceased taxpayer to the extent provided by subsection 164(6). In the scenario you describe, the executor redeems the shares which would otherwise be distributed to the child in order to realize a capital loss that can be applied to reduce the capital gain realized on the deceased taxpayer's final return as a result of the deemed disposition in respect of those shares under subsection 70(5).

In the situation where the shares to be distributed to the child are redeemed by the corporation, the adjusted cost base of the shares to the estate is relevant for the purpose of determining the capital gain or loss to the estate. Subsection 70(6) has no application to the cost of property held by an estate where some but not all of the deceased taxpayer's property is distributed to the spouse in accordance with the terms of the will as the estate is not itself a trust described in subsection 70(6). As a result, it is our view that the application of subsection 70(5) to some property of a deceased taxpayer and the application of subsection 70(6) to other property that is identical to the first does not result in the application of subsection 47(1) to the adjusted cost base of the property acquired by an estate as a result of the death of a taxpayer.

We trust our comments will be of assistance.

Yours truly,

T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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