18 May 2001 External T.I. 2000-0026525 - Equitable Charges Under the Terms of a Will

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:

1. If the terms of a will require a beneficiary to assume an equitable charge in order to receive a bequest of a "right or thing", is the amount of the equitable charge added to the cost amount of the right or thing under 69(1)(c)?

2. If the terms of a will require a beneficiary to assume an equitable charge in order to receive a bequest of capital property, is the amount of the equitable charge an "eligible offset" as defined in the amendments to 108(1)?

3. Are payments made by the beneficiary pursuant to an equitable charge taxable to the recipient under 105(1)?

4. Does the definition of beneficiary include an individual who is entitled to a bargain purchase price under the terms of a will such that the rollover provisions in section 70 can apply to such transactions?

Position: 1& 2. Question of fact 3. No 4. Yes.

Reasons:

1. One would not ordinarily expect the terms of a will to impose an equitable charge on a bequest of a right or thing since the value of, and even the existence of, a right or thing is dependant on the circumstances existing at the time of death. Suggest a ruling be obtained in respect of a will drafted to impose such a condition.

2. The proposed def'n of eligible offset only applies to obligations that can reasonably be considered to be applicable to the property transferred to the beneficiary. This would not include an equitable charge imposed on one beneficiary to make distributions to other beneficiaries.

3. Our response is based on the assumption that the beneficiary does not hold the property in trust for the recipient. 105 only applies to benefits received from or under a trust.

4. Whether or not the purchaser is a beneficiary of the estate within the meaning of subsection 248(25), the rollovers described in 70(6) and (9) only apply where the property is acquired "as a consequence of death" within the meaning of 248(8). The transaction in the Husel case can be distinguished from bargain purchase options provided under the terms of a will in that the beneficiary of the Husel estate negotiated the purchase with herself as executor separately, since the deceased had died intestate.

XXXXXXXXXX 						2000-002652
						Annemarie Humenuk
May 18, 2001

Dear XXXXXXXXXX:

Re: Equitable Charges and Testamentary Options Under a Will

This is in reply to your letters of May 16, 2000, as clarified in our telephone conversation of October 13, 2000 (XXXXXXXXXX\Humenuk) in which you ask for our views on various issues related to equitable charges imposed under the terms of a will. We apologize for the delay in our response.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

You describe a situation in which a beneficiary is bequeathed property under the terms of a will on condition that the beneficiary undertakes to pay a sum of money to another party. You refer to this as an equitable charge. Your questions are as follows:

1. Where the property to be distributed by the estate is a right or thing as described in subsection 70(2), you ask whether the amount of the equitable charge is added to the cost of that right or thing under subparagraph 69(1.1)(b)(ii).

2. Where the property to be distributed by the estate is capital property, you ask whether the amount of the equitable charge will reduce the beneficiary's proceeds of disposition from the disposition of the beneficiary's capital interest in the estate as determined under paragraph 107(2)(c) or 107(4)(f). In particular, you would like to know if the term "legal obligation" as referred to in paragraphs 107(2)(c) and 107(4)(f) includes an equitable charge of any kind imposed under the terms of the will and ask if our response would be different if the equitable charge imposed under the terms of the will relates to cash bequests to other beneficiaries under that will.

3. You ask whether the payment made by the beneficiary pursuant to a charge is taxable to the recipient.

4. Finally in the context of a bargain purchase price or testamentary option offered under the terms of a will, you ask for a definition of "beneficiary" for the purpose of the Act.

Our Response

We understand that an equitable charge is a security device attached to the specific property from which the payment is to be made. The holder of the property subject to the charge may or may not be personally responsible for any shortfall should the property fail to produce the expected sum payable. See, for example, the Law of Trusts in Canada (Second Edition), in which Donovan Waters states that an equitable charge may arise in a number of ways. As demonstrated in the cases of Wilson v. MNR (55 DTC 1065), No. 369 v. MNR (56 DTC 544) and Cunliffe v. MNR (63 DTC 408), when a taxpayer acquires property under the terms of a will on condition that the taxpayer make payments to another party, the will must be examined carefully in order to determine whether the testator has, among other things, made a charge on the property, imposed a personal obligation on the taxpayer or has imposed both a personal liability and a charge. For the purpose of this letter, we assume that the will in question does not create a trust.

1. We have not had an opportunity to review a factual situation such as you describe in this question. Ordinarily, one would not expect the terms of a will to impose an equitable charge in respect of a bequest of a right or thing since the value of, and even the existence of, a right or thing as described in subsection 70(2) depends on the facts and circumstances existing at the time of death. Some of the published commentary surrounding the introduction of subsection 69(1.1) suggests that the expenditure most likely to be incurred by a beneficiary in acquiring a right or thing would be legal fees. If your query relates to a completed transaction of a particular taxpayer, it would be appropriate that the relevant tax services office make a determination, or if the interpretation sought is in respect of a proposed transaction, you may consider requesting an advance income tax ruling. The process for requesting advance rulings is described in Information Circular 70-6R4 dated January 29, 2001.

2. Bill C-22, which was tabled in the House of Commons on March 21, 2001, proposes to amend paragraphs 107(2)(c) and 107(4)(f). In particular, the bill proposes to replace the reference to a debt or other legal obligation in paragraph 107(2)(c) with the term "eligible offset" which is defined in the proposed amendments to subsection 108(1). Under the proposed changes to paragraph 107(4)(f), the tax consequences applicable to a distribution described in that paragraph are found in proposed subsection 107(2.1) and the term "eligible offset" is used in proposed subparagraph 107(2.1)(c)(iii). An eligible offset is the portion of any debt or obligation assumed by the beneficiary that can reasonably be considered to be applicable to the property distributed to the beneficiary and which the beneficiary must assume in order to receive the property from the trust or estate. While the reference to an obligation in the definition of "eligible offset" is not modified by the word "legal", a reference in the Act to an obligation generally refers to a legal obligation. In addition, we note that in order to qualify as an "eligible offset", an obligation must, among other things, reasonably be considered to be applicable to the property which the beneficiary acquires as a result of assuming the obligation in order to qualify as an "eligible offset" within the meaning of subsection 108(1). In our view, an equitable charge to fund other bequests made under the will would not ordinarily be considered an obligation which can reasonably be considered to be applicable to the property. However, the interaction of paragraphs 107(1)(a) and 107(2)(c) or (2.1)(c) will generally ensure that the beneficiary of an estate does not realize any capital gain on the disposition of his or her capital interest in the estate as a result of acquiring property from the estate, including property which is subject to an equitable charge.

3. Our general position with respect to the taxation of amounts paid pursuant to a charge is set out in Interpretation Bulletin IT-446R, Legacies. As subsection 105(1) only applies to benefits received from or under a trust, subsection 105(1) has no application to amounts paid by one individual to another pursuant to a charge on the property held by the first individual. If you need assistance with respect to a situation not covered by the comments in the bulletin, you should submit all the relevant details, including the name and social insurance number of the taxpayers involved and a copy of the will, to the local tax services office for their comments.

4. The term "beneficiary" is defined in subsection 108(1) to include any person who is beneficially interested in a particular trust and the term "beneficially interested" is defined in subsection 248(25). While the jurisprudence cited in your letter concerning the application of subsection 70(9) in respect of property acquired by an individual pursuant to an option in a will discusses the issue in terms of whether or not a particular person received property qua beneficiary or in some other capacity, the issue in those cases was not the definition of beneficiary but rather, whether or not the property was transferred or distributed to the person as a consequence of the death of the testator. In our conversation of October 13, 2000 (XXXXXXXXXX\Humenuk), you asked whether the findings in Penner v. M.N.R. (84 DTC 1444) mean that the use of the word "sale" in a will or other testamentary instrument precludes a rollover under subsection 70(6) or (9) upon the death of the testator, assuming one of these provisions would otherwise apply, on the basis that the property in question would not in fact be transferred or distributed to the beneficiary as a consequence of death. This issue was addressed in 1985 by the introduction of subsection 248(8).

The technical notes issued by the Department of Finance at that time stated:

"Concern has been expressed that these rules would not apply where consideration has been paid by the beneficiary to the deceased's estate in satisfaction of the terms of a testamentary instrument. This could occur, for example, where a farmer has more than one child and in his will leaves the family farm to one of them provided that the child pays sufficient consideration to the estate to fund bequests to the other beneficiaries. In such circumstances it is not clear that the transfer is made "as a consequence of the death" of the testator since it may instead result from the payment of the consideration. The rollovers under section 70, however, apply only to transfers made as a consequence of the death of a taxpayer. New paragraph 248(8)(a) ensures that the rollovers will be available in these circumstances."

In a case arising after the enactment of subsection 248(8), Husel v. MNR (94 DTC 1765), the issue was whether or not the surviving spouse acquired the shares as a consequence of her spouse's death, having consideration of the extended meaning of that term in subsection 248(8). In that case, there was no will and there was no testamentary option. While the shares did vest with the surviving spouse within the timeframe required by subsection 70(6), she acquired the shares by negotiating a sale with the estate. As a result, it could not be said that the shares were transferred or distributed to her as a consequence of the death of her spouse in her capacity as an heir of the estate and as a result, the appeal was dismissed.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R4. Please note that our comments relate solely to the application of the Act and do not necessarily apply for any other purpose or legislation.

We trust these comments will be of assistance to you.

Yours truly,

T. Murphy
Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch