23 January 2003 External T.I. 2002-0140925 - Stripping valve on rolled shares

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 subsection 70(6) of the Act would apply to the transfer of shares of a corporation that is the beneficiary of a life insurance policy to a spousal trust where the life insurance proceeds are paid to a family trust as part of the administration of the estate.

Position: We have referred this matter to the Ministry of Finance to assess whether this result complies with the tax policy of subsection 70(6) of the Act.

XXXXXXXXXX 	2002-014092
		Yves Moreno
Attention:  XXXXXXXXXX 

January 23, 2003

Dear XXXXXXXXXX:

Re: Spousal rollover

This is in reply to your letter of May 9, 2002, in which you ask whether the subsection 70(6) of the Income Tax Act (the "Act") would apply in the scenario described hereafter.

Mr. X. owns preferred shares of a Canadian controlled private corporation ("Holdco") having a nominal adjusted cost base and paid-up capital and a high redemption amount. Holdco is the beneficiary of a life insurance policy on the life of Mr. X. The latter passes away and all or substantially all of the life insurance proceeds are allocated to the capital dividend account ("CDA") of Holdco. In his will, Mr. X directs his executors to advise the directors of Holdco to distribute a dividend in the amount of the CDA and to elect under subsection 83(2) of the Act that the dividend be deemed to be a capital dividend. As part of the administration of Mr. X's estate, the will instructs the executors to transfer the capital dividend and such assets that they select to a family trust. The will also provides that subsequently but still as part of the administration of the estate, the executors are required to transfer the residue of the estate to a trust that complies with the requirements of subsection 70(6) of the Act (a "spousal trust").

You ask whether subsection 70(6) of the Act would be applicable to the preferred shares that are transferred to the spousal trust.

We question whether such result would run against the policy that underlies the rollover of property to a trust created for the benefit of the surviving spouse according to subsection 70(6) of the Act, which arguably is to provide for a tax deferral only where the assets and income or capital generated thereon, are available to the spouse during the spouse's lifetime. Accordingly, we have referred this matter to the attention of the Ministry of Finance.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002.

Theresa Murphy
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 3 -