19 December 2000 External T.I. 2000-0055065 - Death of a Spouse - Matrimonial Regime

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:

A capital property could be the subject of a partition as a consequence of the dissolution of a matrimonial regime created under the civil law in Quebec . One of the spouses dies. What are the fiscal consequences for the deceased spouse and the surviving spouse upon the dissolution of the matrimonial regime? Is the estate taxable on the income from the property and on the capital gain realized?

Position:

General comments.

Reasons:

Question of fact

XXXXXXXXXX 2000-005506
Sylvie Labarre, CA
December 19, 2000

Dear Sir:

Re: Dissolution of a Matrimonial Regime - Death of a Spouse

We are writing in response to your facsimiles of November 7 and November 21, 2000 in which you requested an opinion on whether the Income Tax Act (the "Act") takes precedence over the civil law in Quebec with respect to a community of property.

You mentioned in your letter that this issue came up in the following instance. Spouse A purchases a capital property with her own assets. The property is in her name only. Her marital regime is community of property. She dies leaving her husband a widower. The liquidators of A's estate sell the capital property with a sizeable capital gain. The question arose as to who should report the capital gain and who is taxable on the income from the property after the death of the spouse.

Our comments

As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions 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 therefore not in a position to give a definitive response to your enquiry. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

This Directorate does not interpret nor does it provide any comments on the civil law of Quebec and its application to a particular situation. You must therefore determine the consequences under the civil law of Quebec caused by the death of the spouse in respect of the capital property mentioned in your letter. In your situation, the fiscal consequences under the Act will depend, inter alia, on the consequences under the civil law of Quebec.

For the purposes of this letter, we will assume that the capital property is a property that could be the subject of a partition as a consequence of the dissolution of the matrimonial regime between the spouses and that the deceased spouse was resident in Canada, the surviving spouse was resident in Canada immediately before the death of the spouse and the estate does not have any beneficiary who is a "preferred beneficiary" as that term is defined in subsection 108(1) of the Act.

1. Subsections 248(22), (23) and (23.1) of the Act set out rules that apply to govern property in which both spouses have an interest under a matrimonial regime and which therefore could be subject to partition on dissolution of that matrimonial regime. These rules apply to matrimonial property regimes created under the civil law in Quebec that involve some common interest between the spouses, such as a community of property. These rules clarify the tax treatment of the income and capital gains attributable to the property during the matrimonial regime and upon its dissolution.

2. Subsection 248(22) of the Act deals with the ownership, for the purposes of the Act, of a property that could be subject to partition as a consequence of the dissolution of a matrimonial regime between two spouses. For example, where paragraph 248(22)(a) of the Act does not apply, paragraph 248(22)(b) of the Act deems the property to be owned by the spouse who has the administration of that property and not by the other spouse. Where paragraph 248(22)(b) applies the income or loss and taxable capital gains or allowable capital losses from the property are attributable to the spouse who has the administration of the property. The matrimonial regimes of community of property and of partnership of acquests, created under the civil law in Quebec, provide rules concerning the administrator of a property.

3. A matrimonial regime is dissolved, inter alia, by the death of a spouse. Upon dissolution of a matrimonial regime (such as community of property or partnership of acquests under the civil law in Quebec) following the death of one spouse, the property in which the spouses have a common interest may be allocated between the surviving spouse and the estate of a deceased spouse. This allocation is referred to as a partition in civil law and operates as a judicial division of property. In certain situations, there may be a renunciation to the partition. In order to determine the fiscal consequences arising from a dissolution of a matrimonial regime where a partition has occurred, one must establish who the owner of a particular property is under the civil law in Quebec after such a partitioning has occurred.

4. Paragraph 248(23.1)(a) of the Act will apply in a situation where the deceased spouse was the owner of a capital property subject to a partition upon the dissolution of matrimonial regime under the rules of subsection 248(22) of the Act and where the surviving spouse became the owner, under the civil law in Quebec, of that capital property after the death of the spouse as a consequence of the dissolution of the matrimonial regime. That paragraph provides that if a property is, after the death of a taxpayer, transferred or distributed to a person who was the taxpayer's spouse at the time of death, or acquired by that person, the property shall be deemed to have been so transferred, distributed or acquired, as the case may be, as a consequence of the death of the taxpayer. As a result, such transfer may benefit from the tax-deferred rollover of property between spouses on death, which is provided for in subsection 70(6) of the Act. After that transfer to the surviving spouse, the income or loss and taxable capital gains or allowable capital losses from the property would be attributable to the surviving spouse.

5. In a situation where the deceased spouse was the owner of a capital property subject to a partition upon the dissolution of matrimonial regime under the rules of subsection 248(22) of the Act and where the surviving spouse did not become the owner, under the civil law in Quebec, of that capital property after the death of the spouse as a consequence of the dissolution of the matrimonial regime, the fiscal consequences for the deceased spouse would depend on whether or not the conditions of subsection 70(6) of the Act are met. If subsection 70(6) of the Act does not apply in respect of the capital property, subsection 70(5) would apply. In accordance with subsection 70(5) of the Act, the deceased spouse would be deemed to have disposed of that capital property immediately before his or her death and received proceeds of disposition equal to the fair market value of the property immediately before the death and the person who acquires that property would be deemed to have acquired it at the time of death at a cost equal to its fair market value immediately before the death.

6. In the situation mentioned in paragraph 5 of this letter, if the trust or the estate did not distribute the capital property to the beneficiaries before its disposition to a third party, the rules of section 104 of the Act, applicable to a trust, would apply. The gain resulting from the disposition of the capital property would be computed using the acquisition cost determined under subsection 70(5) or subsection 70(6) of the Act, as the case may be. For income tax purposes, the income from the property and the taxable capital gain realized by the trust is included in computing its income. Any amount of income or taxable capital gain realized by a trust that is paid or payable in the year to a beneficiary is included in the beneficiary's income under subsection 104(13) of the Act unless a designation is made by the trust in its return of income, under subsection 104(13.1) or subsection 104(13.2) of the Act. As a general rule, amounts included in the income of a trust's beneficiary under subsection 104(13) are deductible by the trust under subsection 104(6) of the Act, in computing its income.

You will find enclosed Interpretation Bulletin IT-342R "Trusts - Income Payable to Beneficiaries" and Interpretation Bulletin IT-381R3 "Trusts - Capital Gains and Losses and the Flow-Through of Taxable Capital Gains to Beneficiaries", providing more information on that subject.

7. In a situation where the deceased spouse was not the owner of a capital property subject to a partition upon the dissolution of matrimonial regime under the rules of subsection 248(22) of the Act and where the surviving spouse transferred the property to the deceased spouse's estate, the property would be deemed, in accordance with paragraph 248(23.1)(b), to have been transferred immediately before the time that is immediately before the death of the deceased spouse. As a result, such transfer from the surviving spouse may benefit from the tax-deferred rollover between living spouses, which is provided for in subsection 73(1) of the Act. The deceased spouse would be deemed to have disposed of that property immediately before his or her death and, as stated in paragraph 5 of this letter, the fiscal consequences for the deceased spouse would depend on whether or not the conditions of subsection 70(6) of the Act are met. If subsection 70(6) of the Act does not apply in respect of the capital property, subsection 70(5) would apply. In addition, depending on the particular circumstances, the attribution rules under subsection 74.2(1) of the Act may apply to attribute the capital gain to the surviving spouse. The comments of paragraph 6 of this letter on the fiscal consequences for the trust or the estate and the beneficiaries of such a trust, would be applicable if the property is disposed by the trust before its distribution to the beneficiaries.

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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