25 September 2001 External T.I. 2001-0091755 - Estate Cap. Gains, Non-Resident Beneficiary

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: Can taxable capital gains earned within a trust be allocated to a non-resident beneficiary?

Position: No.

Reasons: Subsection 104(21) does not provide for the flow-through of capital gains to non-residents.

XXXXXXXXXX 2001-009175
M. P. Sarazin, CA
September 25, 2001

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letter of July 4, 2001, requesting our views regarding the apportioning and reporting of capital gains realized by the XXXXXXXXXX for purposes of the Income Tax Act (the "Act").

XXXXXXXXXX, a Canadian resident, died on XXXXXXXXXX. At the time of her death, she owned shares in a public company. The capital gains that accrued to the date of death were reported on the deceased taxpayer's final return. Under the terms of her last will and testament, the shares in the public company were to be delivered to the deceased's non-resident sister. On XXXXXXXXXX, as a result of a share split undertaken by the public company, shares of another public company were issued in the name of the deceased taxpayer (hereinafter reference to the shares of both public companies is the "Shares"). With the approval of the deceased's non-resident sister, the estate's trustee sold the Shares on XXXXXXXXXX. The capital gain realized on the Shares during the period XXXXXXXXXX was approximately $XXXXXXXXXX. The proceeds of disposition and the income earned on the proceeds of disposition continue to be held by the estate's trustee.

You want to know how to report the capital gains realized by the estate (the "Estate") in respect of the XXXXXXXXXX disposition. You are aware that capital gains may not be allocated to non-resident beneficiaries and you would like clarification regarding this position.

Comments

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

The determination of legal and beneficial ownership of estate property at any point in time is a question of fact. In order to make this determination, you will have to look at common law and trust law, as they relate to your particular facts. Since the Estate's trustee disposed of the Shares and still holds the proceeds of disposition in respect of those Shares, our comments will be based on the assumption that the Estate disposed of the Shares for purposes of the Act.

The Canada Customs and Revenue Agency's general views regarding capital gains realized by trusts are found in Interpretation Bulletin IT-381R3 entitled "Trusts - Capital Gains and Losses and the Flow-Through of Taxable Capital Gains to Beneficiaries". Paragraphs 3 to 9 of IT-381R3 deal specifically with capital gains realized by the trust and the flow-through of taxable capital gains to a beneficiary of the trust. You should note that paragraph 4 of IT-381R3 states that, under subsection 104(21) of the Act, net taxable capital gains of a Canadian trust (other than a mutual fund trust) will only flow-through to Canadian resident beneficiaries. Consequently, taxable capital gains cannot flow-through to non-resident beneficiaries of a testamentary trust. Accordingly, where an estate or trust that is resident in Canada realizes a capital gain on the disposition of shares in a public company (i.e., non-taxable Canadian property), regardless of whether one or all of the beneficiaries are non-residents of Canada, the gains will be subject to tax under either Part I at the estate or trust level or Part XIII in the hands of the non-resident beneficiary where subsection 104(13) and paragraph 212(1)(c) of the Act apply. This would be consistent with the tax treatment had the estate or trust not sold the Shares and simply distributed the Shares to its non-resident beneficiary (refer to subsections 107(2.1) and 107(5) of the Act).

We trust these comments will be of assistance.

Yours truly,

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