21 December 2001 Internal T.I. 2001-0093137 - Beneficiary's losses or Estate's losses

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principales Questions:

Whether subsection 164(6) of the Act applies?

Position Adoptée:

Yes.

Raisons POUR POSITION ADOPTÉE:

Shares owned by the estate
December 21, 2001

	Halifax TSO	HEADQUARTERS
	Audit Services, VECR 	Income Tax Rulings Directorate
	Fouad Daaboul
	Attention: Ms. Madelane Chiasson 	(613) 957-2053

2001-009313

Subsection 164(6) - Estate's Losses Carried back to the Deceased's Tax Return

This is in reply to your memorandum of July 16, 2001, wherein you requested our views as to whether shares have been disposed of by an estate or by a beneficiary for purposes of subsection 164(6) of the Income Tax Act (the "Act") in the following situation. XXXXXXXXXX

FACTS

1. XXXXXXXXXX (the "Parent") died on XXXXXXXXXX.

2. In his will (the "Will"), Parent appoints his two sons, XXXXXXXXXX ("Son-A") and XXXXXXXXXX ("Son-B") as executors and trustees of his estate (the "Estate").

3. Probate for the Will was issued by XXXXXXXXXX, and the administration of the Estate was granted to Son-A and Son-B as the Executors.

4. Paragraphs XXXXXXXXXX of the Will provide for the following:

XXXXXXXXXX.

5. Paragraph XXXXXXXXXX of the Will provides that Son-A, Son-B and their sister XXXXXXXXXX are the residual beneficiaries of the Estate in equal shares.

6. XXXXXXXXXX.

7. At the time of his death, XXXXXXXXXX (the "Company"). Pursuant to subsection 70(5) of the Act, there was a deemed disposition of these shares on death, which resulted in a substantial capital gain.

8. The Company was wound up on XXXXXXXXXX. Within the process of winding-up, the Company redeemed all its issued and outstanding shares and capital losses were sustained upon the disposition of those shares. Son-A and Son-B, as executors of the Estate, reported the capital losses as capital losses sustained by the Estate. They filed an election with CCRA pursuant to subsection 164(6) of the Act requesting that the capital losses incurred by the Estate be deemed to be capital losses of Parent for his XXXXXXXXXX taxation year and not a capital loss to the Estate.

9. On the Company's T2 Corporation Income Tax Return (the "T2"), Son-A and Son-B (not the Estate) were indicated as the Company's shareholders for the year ending XXXXXXXXXX. For the year ending XXXXXXXXXX, Parent was indicated as the Company's shareholder.

10. All the specific bequests were made to the various beneficiaries by XXXXXXXXXX with the exception of the Company's shares.

TAXPAYER COMMENTS

Despite the information reported on the T2, Son-B stated that the Company's shares were never transferred to him and to Son-A and up to the time of the dissolution were owned by the Estate. Furthermore, XXXXXXXXXX, of XXXXXXXXXX, states in his letter of May 28, 2001, to John Kelly of the Halifax TSO, that the Company's shares were still registered in the name of Parent at the time that the Company wound up.

Son-B maintains that the Company's shares were owned by the Estate and therefore the capital losses can be carried back to Parent's last tax return pursuant to subsection 164(6) of the Act. Essentially, he claims that the shares were legally registered in the name of the Estate and that the Company was given direction to pay dividends to Son-A and himself merely as a matter of convenience to avoid two transfers of cheques from the Company to the Estate and from the Estate to them. He also claims that the dividends paid were still income of the Estate as a result of the provisions of subsection 56(2) of the Act dealing with indirect payments.

TSO'S POSITION

On XXXXXXXXXX, the Estate assigned the rights associated with the Company's shares to the two beneficiaries, Son-A and Son-B, including the dividends on these shares. As a result, XXXXXXXXXX dividends were paid directly by the Company to Son-A and Son-B but were reported for tax purposes by the Estate, XXXXXXXXXX. One of the dividends was a capital dividend, one was a cash dividend and one was a dividend in kind. The capital loss on the shares is a capital loss of Son-A and Son-B, not the Estate. As a result, there is no capital loss to carry back to the late Parent's final return under subsection 164(6) of the Act.

OUR COMMENTS

XXXXXXXXXX.

ANALYSIS

The executor's year refers to the initial 12-month period following the death of an individual during which the executor of the deceased's estate is expected to complete the administration of the estate. In this regard, an article entitled Post Mortem Tax Planning by Mary Louise Dickson in the 1984 Conference Report has the following comments:

Under the common law, a personal representative of a deceased person's estate cannot be forced to pay any legacies within one year of the death of the deceased, even though legacies are expressly directed to be payable within the year (based on paragraph 1232 of Halsbury's Laws of England- stated below).... In Re Neeld((1962) 2 All E.R. 335 (C.A.)), it was held that beneficiaries of specific devises and bequests obtain beneficial proprietary rights in estate assets from the death of the testator; however, no beneficiary, whether a specific legatee or residuary legatee, has any right to demand the payment or distribution of capital from an estate while it is being administered. (pages 412 and 413)

Halsbury's Laws of England, 4th edition, Volume 17, states, in part, that:

The bequest of a legacy, whether general or specific, transfers only an inchoate property to the legatee: the executor's assent is necessary to render it complete and perfect. (paragraph 1345 at page 697)

In "Oosterhoff on Wills and Succession", 4 ed., 1995, p.438, A.H. Oosterhoff mentioned that "A specific testamentary gift is a gift of an identifiable property or object which the testator has described with sufficient particularity to distinguish it from his or her general estate. ...

A specific legacy is subject to ademption."

In Dushinsky Estate v. M.N.R., 1990 DTC 1390, (T.C.C.), the issue was whether cattle sold within a few months after the testator's death was transferred to the beneficiary of the estate prior to the sale.

The court held that the executor's assent, whether express or implied, was necessary before there could be such a transfer. Support for that position was based on paragraphs 1345 and 1347 of Halsbury's Laws of England (noted above) and several statements in Solomon including the following one: "(t)he will becomes operative so far as its dispositions of personality are concerned only if and when the executor assents to those dispositions."

It would seem that on the death of the testator the legal title in the specific bequest passes to the executor and the beneficial title passes to the named beneficiary. However, the beneficiary rights are subject to the payment of the estate's debts. This position was also recognized for shares in the case of F.A. Fawcett & Son Ltd. v. The Queen, 80 DTC 6195 (FCA). Thus, it would seem that the legal title to the shares passed to the Estate on the death of Parent and that Son-A and Son-B received the beneficial interest in the shares. However, they could not request the transfer of the shares prior to the end of the executor's year, which would be after XXXXXXXXXX.

It seems that the transfer of the Company's shares to Son-A and Son-B, as the specific beneficiaries under the Will, did not occur and that when the Company redeemed its shares in the course of its winding-up on XXXXXXXXXX, title to these shares was still in the name of Parent and thus remained with his Estate. This would indicate that the Company did not make any changes to its shares register, although the T2 for the year ending XXXXXXXXXX indicates that Son-A and Son-B owned jointly the Company. Consequently, it is difficult to refute the taxpayers' assertion that the Estate (and not Son-A and Son-B) possessed the legal title to the shares during the executor's year as there is no evidence that the legal title was transferred to Son-A and Son-B.

It would seem that although the Will provided for the specific bequest of the Company's shares to Son-A and Son-B, the executors did not make the specific bequest; presumably they were aware and consented by their actions to the non-distribution of the specific gift. Although the T2 for the taxation year ending XXXXXXXXXX says otherwise, we are of the view that there is sufficient evidence to consider that the legal title of the Company's shares was with the Estate at the time of the redemption. Consequently any capital loss from their disposition can be carried back to the Parent's final tax return under subsection 164(6) of the Act.

We would like to draw your attention to the possible application of subsection 112(3.2) of the Act, since the Estate has received some dividends. As a result, the amount of the loss of the Estate may be reduced such that the loss deemed by subsection 164(6) of the Act to be a loss of Parent for the taxation year in which Parent died may be reduced to the extent that dividends received on the shares by the Estate exceed 1/3 of the lesser of the Parent's capital gain arising as a result of the deemed disposition on death and the Estate's capital loss otherwise determined.

We trust our comments will be of assistance to you. Should you wish to discuss our comments further do not hesitate to call us.

Alain Godin
For Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch