18 December 2001 External T.I. 2001-0114795 - Dividends received by an estate

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.

Principal Issues: Whether 70(6) applies to shares transferred to a surviving spouse within 36 months of the death of the taxpayer if the estate receives dividends on the shares prior to the transfer and the dividends are distributed to beneficiaries other than the spouse.

Position: Question of fact as to whether the taxpayer has, under the terms of a particular will, made a specific bequest, residual bequest, charge, or personal obligation, the finding of which may be relevant in determining whether 70(6) applies to a particular situation.

Reasons: As stated in paragraph 26(c) of IT305R4, the fact that an estate uses or distributes income from property bequeathed to a spouse pursuant to a residual bequest does not preclude a rollover under 70(6); however, a specific bequest would normally vest with the spouse immediately after the taxpayer's death.

XXXXXXXXXX 	2001-011479
		Annemarie Humenuk
December 18, 2001

Dear XXXXXXXXXX:

Re: Dividends Received by an Estate and the Application of Subsection 70(6)

This is in reply to your letter of December 11, 2001, in which you ask whether subsection 70(6) would apply to a particular fact situation.

In the situation described in your letter, a taxpayer holds shares in a holding company that owns 50% of the shares of an operating company. Under the terms of the taxpayer's will, the shares of the holding company will pass to the taxpayer's spouse upon his death. The holding company has entered into a shareholder's agreement with the other shareholder of the operating company. Under the terms of the shareholder's agreement, the shares of the operating company held by the holding company will be redeemed upon the death of the taxpayer for an amount equal to the fair market value at that time or the holding company will be required to sell the shares to the other shareholder for an amount equal to the fair market value of the shares at that time.

For the purpose of your question, it is assumed that the holding company will declare a dividend payable to the estate for an amount equal to the proceeds of disposition from the sale or redemption of the shares of the operating company prior to the distribution of the shares of the holding company to the surviving spouse. You further ask that we assume that the amount of the dividend will be included in the income of the estate and a deduction under subsection 104(6) will be available to the trust to the extent that the dividend is payable to any of the beneficiaries of the estate including, but not limited to, the surviving spouse.

You ask whether the taxpayer's proceeds of disposition on the deemed disposition of the shares on death will be determined under subsection 70(6) if the shares are in fact transferred to the surviving spouse within 36 months of the taxpayer's death, even though the value of the shares has been significantly reduced because of the dividend paid to the estate. In the event that subsection 70(6) does apply, you ask whether the Canada Customs and Revenue Agency (the "CCRA") would apply subsection 245(2) to redetermine the taxpayer's deemed proceeds of disposition on death.

Written confirmation of the consequences inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the CCRA.

As stated in paragraph 26(c) of IT-305R4, Testamentary Spouse Trusts, where a trust in favour of a spouse is created under a taxpayer's will out of the residue of his or her estate, the fact that an estate uses income earned on property to be placed in a spouse trust before it is transferred to the spouse trust to pay specific bequests to other beneficiaries does not preclude the spouse trust from qualifying as a spouse trust, provided it otherwise so qualifies. Similarly, the fact that an estate uses the income earned on property to be transferred to the surviving spouse pursuant to a residual bequest before it is so transferred to pay specific bequests to other beneficiaries does not preclude the application of subsection 70(6) to the property in question, provided the property vests indefeasibly in the spouse within the time specified in the Act. Payment of a specific bequest, however, would not generally entitle the estate to a subsection 104(6) deduction for the value of the bequest so distributed.

If the shares are to be transferred to the surviving spouse pursuant to a specific bequest, additional considerations arise. As indicated in paragraph 2 of IT-449R, Meaning of "Vested Indefeasibly", the ownership of property described in a specific bequest in a will normally vests in the beneficiary immediately after the death of the testator. As such, it is reasonable to assume that, in the absence of any express indication to the contrary, the surviving spouse would be the beneficial owner of the shares as of the death of the taxpayer and would be entitled to any dividends declared on those shares after the death of the taxpayer and before the legal ownership of the shares is transferred to her.

Whether a particular will creates a specific bequest of shares to the spouse, a residual bequest to the spouse, a charge on the shares or a personal obligation on the spouse to make payments to the other beneficiaries can only be ascertained after an examination of the will.

Where the terms and conditions of the will do not confer beneficial ownership of the shares on the spouse immediately after the death of the testator, the will should be examined to determine if the property was, in fact, placed in a testamentary trust of which the spouse is but one of several beneficiaries such that the trust does not meet the conditions set out in subparagraph 70(6)(b)(ii). In such a case, subsection 70(5) applies to the property placed in the trust created by the will unless the trust can be "untainted" in the manner described in paragraphs 17 to 26 of IT-305R4. When the shares have been placed in a testamentary trust created by the will, the tax consequences of the subsequent distribution of the shares to the spouse would normally be determined under subsection 107(2).

You also asked about the application of the general anti-avoidance rules ("GAAR") in section 245. The determination of whether or not GAAR would apply to a transaction or to a series of transactions requires an examination of all of the surrounding facts and circumstances. Thus, the CCRA will not comment on the application of GAAR unless all of the facts and circumstances are known.

The comments above are based on our understanding of the law as it applies generally. If you have a client who is considering a plan of distribution of property following his or her death in the manner described in your letter and would like the issue to be considered further, you may submit a request for an advance income tax ruling in the manner set out in Information Circular 70-6R4.

Yours truly,

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