23 January 2003 External T.I. 2002-0155535 - 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 spouse where the life insurance proceeds are paid to the children of the deceased as part of the administration of the estate.

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

Reasons: N/A

XXXXXXXXXX 	2002-015553
		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 all the issued and outstanding shares of a Canadian controlled private corporation ("Holdco") which in turn owns all the issued and outstanding shares of an operating company. Holdco is the beneficiary of a life insurance policy on the life of Mr. X. The latter passes away and a portion of the life insurance proceeds are allocated to the capital dividend account ("CDA") of Holdco. In his will, Mr. X makes a bequest in the form of money to his children and he stipulates that all residual property is bequeathed to his spouse. The executors advise the directors of Holdco to distribute a dividend and to elect under subsection 83(2) of the Act that the dividend be deemed to be a capital dividend. They use the proceeds of the dividend to pay the children's particular bequest and they subsequently transfer to the spouse the shares of Holdco and all the other residual property.

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

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 any income and 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

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