17 April 2003 External T.I. 2002-0158485 - Distrib. to Can. Beneficiary from N/R 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: What are the tax consequences of a distribution to a Canadian beneficiary from a non-resident estate?

Position: General comments only

Reasons: Insufficient detail to identify a specific concern

XXXXXXXXXX 	2002-015848
		Annemarie Humenuk
April 17, 2003

Dear XXXXXXXXXX:

Re: Distribution of Property to a Canadian Beneficiary from a Non-Resident Estate

This is in reply to your letter of August 12, 2002, in which you ask about the Canadian income tax implications applicable to an amount receivable from a deceased person's estate, specifically from the estate of a resident of XXXXXXXXXX. We apologize for the delay in our response.

Your question is very general in nature and the determination of the proper income tax consequences relating to any transaction between a beneficiary and an estate will depend on an analysis of all the relevant facts, documentation and other information pertaining to the particular situation. Written confirmation of the income tax consequences of particular transactions are provided only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in accordance with the guidelines set out in Information Circular 70-6R5, Advance Income Tax Rulings. However, we can offer the following general comments in response to your letter.

All statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1 (the Act), as amended.

Based on our conversation of August 20, 2002 (XXXXXXXXXX\Keable), we understand that you are one of several beneficiaries of XXXXXXXXXX's estate. XXXXXXXXXX was a resident of XXXXXXXXXX and you are a resident of Canada. You describe the settlement of XXXXXXXXXX's estate as follows:

The property of the estate consists of cash that is being held in the estate to generate interest income. Under the terms of the will, XXXXXXXXXX is the main beneficiary and is entitled to all of the income earned by the estate while XXXXXXXXXX is alive. On the death of XXXXXXXXXX, several specific bequests will be made to certain beneficiaries and the remainder of the capital will be divided equally among XXXXXXXXXX of XXXXXXXXXX, including yourself. Although no amount is currently payable to you, it is your understanding that the amount you will eventually receive has been determined.

You ask whether your share of the estate must be included in your income, either currently or when you receive it as a distribution from the estate. You also ask whether any future change in our tax laws will affect our response.

Your description of XXXXXXXXXX's will suggests that the amount you will receive after the death of the income beneficiary will likely be a distribution of capital from the estate. However, whether a particular amount is being distributed to a beneficiary as a distribution of capital or a distribution of income is a question of fact to be determined with reference to all the facts relevant to the particular situation, including consideration of how the distribution to the beneficiary is treated for taxation purposes in the relevant foreign jurisdiction. In this regard, you mentioned that the executors of the estate have certain options available under the law of XXXXXXXXXX relating to the administration of the estate. If the option chosen by the executors in respect of the administration of the estate affects the manner in which the distribution to you will be treated under the laws of XXXXXXXXXX, it will be relevant in determining the Canadian tax consequences as well.

Canada does not impose an inheritance tax or succession duty upon the death of an individual. An estate is considered to be a personal trust and a testamentary trust for Canadian tax purposes. Income earned by an estate is taxed either as income of the estate or as income of the beneficiary or beneficiaries entitled to receive the income. A distribution of capital, on the other hand, will generally not give rise to an income inclusion.

The cost of any property acquired by the Canadian resident beneficiary is computed under paragraph 107(2)(b) unless an election is made under subsection 107(2.001) or 107(2.002). The beneficiary's cost of the property under paragraph 107(2)(b) will typically equal the cost of the property to the trust immediately before the distribution. Where the property has been held by the estate since the death of the original owner of the property, the cost to the estate, and thus the cost to the beneficiary, will be the fair market of the property at the time of the original owner's death. The elections under subsections 107(2.001) and 107(2.002) allow a non-resident estate, or alternatively the beneficiary, to opt out of the application of subsection 107(2) in respect of a particular distribution of capital. The effect of these elections on the beneficiary resident in Canada is that the beneficiary's adjusted cost base of the property received as a result of the distribution that was the subject of the election will typically be equal to the fair market value of the property at the time of the distribution. In the case of the election under subsection 107(2.002) made by the beneficiary, the election may also result in a capital gain on the disposition of the beneficiary's capital interest in the trust.

When the income of a trust, whether resident in Canada or not, is distributed to a beneficiary resident in Canada, the amount is included in the beneficiary's income under subsection 104(13) of the Act in the year it becomes payable to that beneficiary within the meaning of subsection 104(24). The income of a trust will generally only be considered to be payable to the beneficiary if it is paid to the beneficiary or the beneficiary is entitled to enforce payment of such income.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5. In particular, our comments are based on the Act as currently enacted, and any draft legislation released to date. The effect of any future changes to the Act on the general tax consequences discussed above will depend on the nature of such changes. Changes to the Act take effect from the date specified in the enabling legislation and do not normally have a retroactive effect. However, this is not to suggest that such changes would not affect the taxation of amounts that become payable after the proposed changes are first announced.

We trust our comments will be of assistance.

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