3 June 2003 External T.I. 2002-0155735 - Cost of property inherited

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: Follow-up to our letter 2000-004416.

Position: The cost of a property acquired by a non-resident estate, as a consequence of the death of a non-resident individual would be determined in accordance with paragraph 70(5)(b), and not paragraph 69(1)(c) of the Act.

Reasons: In accordance with our position.

XXXXXXXXXX 2002-015573
Fouad Daaboul
June 3, 2003

Dear XXXXXXXXXX:

Re: paragraph 69(1)(c) of the Income Tax Act (the "Act")

This is in reply to your letter of July 31, 2002, requesting clarification on the following conclusion reached in our document 2000-0044165:

However, the requirement of paragraph 69(1)(c) that a taxpayer acquires property "by way of gift, bequest or inheritance" are not met where property of a deceased individual is transferred to his estate upon his death because no gift, bequest nor inheritance is provided to the estate and, there can thus be no deemed cost to the estate under paragraph 69(1)(c) of the Act.

Your comments

Your letter states that you disagree with this conclusion because, at common law, upon the death of an individual, the assets of the individual devolve generally upon the personal representatives named in the will. The representatives hold the assets for the purpose of administering the estate and serve in a fiduciary capacity. According to you, an estate is an arrangement that does not derogate from the fact that a property is to be received by the heir under the will by way of bequest or inheritance, and as such, paragraph 69(1)(c) should operate to apply to the heir.

Our comments

The Act does not provide any definition of a trust, except in subsection 108(1) where it is said to include an inter vivos and a testamentary trust. Pursuant to subsection 248(1) of the Act, "estate" has the meaning assigned by subsection 104(1) of the Act. Subsection 104(1) of the Act states that, in subdivision k, an estate is referred to as a "trust", and provides that for the purposes of the Act, a trust "shall, unless the context otherwise requires, be read to include a reference to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the trust property".

Under subsection 104(2), a trust is deemed, in respect of the trust property, to be an individual for the purposes of the Act and pursuant to the definition in subsection 248(1) of the Act, an "individual" means a person other than a corporation.

On death, a testamentary trust of a deceased individual is considered to have acquired a property owned by the deceased when the trustee acquires the title of the property for the benefit of the beneficiaries under the trust, and such an acquisition cannot be said to be for the benefit of the trust. With respect to the application of paragraph 69(1)(c) of the Act, we have previously opined that the requirement under this paragraph that an estate must acquire a property "by way of gift, bequest or inheritance" would not be met because no gift, bequest nor inheritance was provided to the estate and, there can thus be no deemed cost to the estate under paragraph 69(1)(c) of the Act.

The preamble of subsection 69(1) of the Act provides: "Except as expressly otherwise provided in the Act". We interpret this to mean that paragraph 69(1)(c) only applies where there are no roll-over provisions. We consider that subsection 107(2) is such a transfer provision in that it allows the distribution of trust property at the cost of property to the trust. The March 2001 Technical Notes to paragraph 69(1)(c) issued by the Department of Finance state:

Subsection 69(1) of the Act provides rules that deal with gifts and non-arm's length dispositions of property, except where such transactions are covered by other express provisions in the Act (e.g., section 85, subsections 107(2) and (2.1) and new subsection 107.4(3)).

Consequently, where there is a distribution made by a trust to a beneficiary in accordance with subsection 107(2) of the Act, the provisions of paragraph 69(1)(c) do not apply.

Since your concern relates to the question on the determination of the cost of shares received by a Canadian resident from a non-resident trust, as described in our document 2000-0044165, we take this opportunity to reproduce hereafter our new position, following the revision of the position taken in the said document:

Under paragraph 70(5)(a), a deceased taxpayer is deemed to have disposed of any capital property owned by the taxpayer immediately before her or his death at fair market value. Under paragraph 70(5)(b), any person who acquires such property as a consequence of the taxpayer's death is deemed to have acquired the property at the time of death at a cost equal to fair market value. As the deceased non-resident's property is acquired by the estate of that individual, in our view the provisions of paragraph 70(5)(b) would apply to the estate that acquired the property as a consequence of the non-resident person's death. In effect, the estate would be deemed to have acquired the property at an amount equal to its fair market value immediately before the death.

We trust these clarifications will be of assistance.

Yours truly,

Alain Godin
Section Manager
for Division Director
International and trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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