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 there is a deemed disposition of a capital property at fair market value in a situation where a taxpayer died and bequeathed by will that capital property to his family (surviving spouse, two sons and two daughters).
Position:
If the conditions of subsection 70(6) apply to the part of the property bequeathed to the spouse, there would be a deemed disposition at fair market value of the part of property bequeathed to the children. If the conditions of subsection 70(6) does not apply to the part of the property bequeathed to the spouse, there would be a deemed disposition at fair market value of the entire property.
Reasons:
Subsections 70(5) and 70(6) of the Act.
XXXXXXXXXX 2000-002893
Sylvie Labarre, CA
Attention: XXXXXXXXXX
August 1, 2000
Dear Sir\Madam:
Re: Death of a taxpayer - Deemed disposition of a capital property
We are writing in response to your letter of May 23, 2000 in which you requested our opinion on whether there is a deemed disposition of a capital property at fair market value in a situation where a taxpayer died and bequeathed by will that capital property to his family (surviving spouse, two sons and two daughters). You have also asked that we advise you of the correct way to handle the disposition of the capital property on the deceased's final tax return.
As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on completed transactions. The confirmation of the tax consequences applicable to your particular client would require a thorough examination of the relevant will and other pertinent information. As such, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are therefore not in a position to give a definitive response to your enquiry concerning the correct way to handle the disposition of the capital property on the deceased's final tax return. Under our Canadian self-assessing system of taxation, it is up to each taxpayer, or in your case the legal representative of the taxpayer's estate, to estimate the fair market value and to determine the relevant adjusted cost base. We are therefore not in a position to comment on either the fair market value or on the adjusted cost base of a property. However, we can offer you the following general comments which may be of assistance.
Where in a taxation year a taxpayer dies, paragraph 70(5)(a) of the Income Tax Act (the "Act") provides the following :
(a) the taxpayer shall be deemed to have, immediately before the taxpayer's death, disposed of each capital property of the taxpayer and received proceeds of disposition therefor equal to the fair market value of the property immediately before the death;
Paragraph 70(5)(a) of the Act does not apply in respect of a property where subsection 70(6) of the Act applies. In essence, subject to several conditions, subsection 70(6) of the Act applies where the property is, as a consequence of the death, transferred or distributed to the taxpayer's spouse who was resident in Canada immediately before the taxpayer's death or to the spouse trust as defined in paragraph 70(6)(b) of the Act.
Where subsection 70(6) of the Act applies, subparagraph 70(6)(d)(ii) provides that there is a deemed disposition of the property and that the proceeds of disposition equal to the adjusted cost base of the property that is not a depreciable property to the taxpayer immediately before the death.
As such, if the conditions of subsection 70(6) apply to the part of the property bequeathed to the spouse, there would be a deemed disposition at fair market value of the part of property bequeathed to the children. If the conditions of subsection 70(6) does not apply to the part of the property bequeathed to the spouse, there would be a deemed disposition at fair market value of the entire property. Section 43 of the Act would apply to compute the taxpayer's gain from the disposition of each part of the property (the one bequeathed to the spouse and the one bequeathed to children) so that the adjusted cost base of each part is such portion of the adjusted cost base to the taxpayer at that time of the whole property as may reasonably be regarded as attributable to that part.
As mentioned previously, the final determination as to whether subsection 70(5) of the Act and/or subsection 70(6) apply to your case is a question of fact and law and would require a thorough review of all documentation by your local Tax Services Office.
In your letter, you mentioned that there would not be sufficient financial resources to pay the income tax which would be owing as a result of a deemed disposition at fair market value. Depending upon how a deceased taxpayer has arranged his/her affairs, it is often found that there are insufficient funds available in the estate to pay the income taxes without liquidating some of the estate's assets. In recognition of this, the Act permits the legal representative to elect to pay the taxes related to certain deemed dispositions, including the additional tax payable where subsection 70(5) applies, in up to ten equal consecutive annual instalments with interest when the conditions in subsection 159(5) of the Act are met. Acceptable security must be provided with respect to the tax, the payment of which is deferred. The prescribed form for an election under subsection 159(5) to defer the payment of certain taxes arising on death is form number T2075. For the election to be valid, it must be filed on or before the day on which the deceased's tax was otherwise due.
We trust our comments will be of assistance to you. However, as indicated in paragraph 22 of Information Circular 70-6R3, this opinion is not a ruling and, accordingly, it is not binding on the Canada Customs and Revenue Agency.
Yours truly,
Marc Vanasse, CA
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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