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.
Principal Issues: Clarification of the calculation of the computation of the capital gain on the deemed disposition of a capital interest in a non-resident inter vivos personal trust under paragraph 128.1(1)(b). See file 2003-001953.
Position: The capital gain on the deemed disposition under paragraph 128.1(4)(b) will generally equal to the beneficiary's share of any accrued gain on the trust's property as determined at the time of the disposition.
Reasons: A numerical example is provided.
February 27, 2004
Re: Deemed Disposition of Property on Emigration from Canada
This is further to our letter to you of January 7, 2004 concerning the deemed disposition of an interest in an inter vivos personal trust resident in the U.S. when the beneficiary of the trust ceases to be resident in Canada.
In our previous letter, we stated that the beneficiary would generally not realize any capital gain as a result of the disposition of the beneficiary's interest in an inter vivos personal trust resident in the U.S. when the beneficiary ceases to be resident in Canada because the application of paragraph 107(1)(a). We have reconsidered the matter and wish to clarify our response as follows:
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
As stated in our previous letter, a resident of Canada would be subject to the deemed disposition rules in paragraph 128.1(4)(b) in respect of his or her interest as a beneficiary in an inter vivos personal trust that was not resident in Canada when he or she ceased to be resident in Canada. However, the amount of the gain realized on the deemed disposition will approximate the beneficiary's share of any accrued gains on property held in the trust, as shown in the following example:
An inter vivos personal trust was established in the U.S. for the benefit of four siblings. The trust is resident in the U.S. and is not deemed to be resident in Canada under paragraph 94(1)(c) or proposed 94(3). The current fair market value of the trust's property is $110,000 and the trust has liabilities of $10,000. The adjusted cost base (ACB), or cost amount of the trust's property is $60,000. Each sibling is entitled to an equal share of any distribution of income or capital from the trust. All interests have vested indefeasibly. One of the siblings, who has been resident in Canada since before the creation of the trust, is emigrating from Canada. In addition, the ACB of the beneficiary's capital interest in the trust had not previously been adjusted under paragraph 53(2)(g.1) at any time in the past in respect of a forgiven debt.
The capital gain from the deemed disposition of property under paragraph 128.1(4)(b) is computed as the proceeds of disposition less the ACB of that property. The amount of the proceeds of disposition from the deemed disposition of property under paragraph 128.1(4)(b) is the fair market value of the property at the time of disposition referred to in that paragraph. Subsection 107.4(4) provides a formula which is generally applicable in computing, at any particular time, the fair market value of a capital interest in trust that has vested indefeasibly.
The ACB of the beneficiary's interest in the trust before the application of paragraph 107(1)(a) is its cost amount. Under subsection 107(1.1), the cost of a beneficiary's interest in a personal trust is nil unless the individual had previously made an election under subsection 110.6(19), or had acquired the interest from a person who was a beneficiary immediately before that acquisition, or the interest had been subject to the deemed disposition rules when the beneficiary immigrated to Canada or, in the case of a corporate beneficiary, the cost of the interest had been adjusted as a result of a change in control of that corporate beneficiary. As none of these conditions apply in this example, the cost of the beneficiary's interest in the trust before the application of paragraph 107(1)(a) is nil and since none of the adjustments in section 53 apply to the interest, the ACB is also nil.
For the purpose of computing the capital gain on a capital interest in a personal trust, paragraph 107(1)(a) provides that the ACB of the beneficiary's interest will be the greater of the amount determined under subparagraph 107(1)(a)(i) and the amount determined under subparagraph 107(1)(a)(ii). The amount determined under subparagraph 107(1)(a)(i) is the ACB otherwise determined, which is nil in our example. The amount determined under subparagraph 107(1)(a)(ii) is the amount, if any, by which the cost amount of the beneficiary's interest immediately before the disposition exceeds the total of all amounts deducted under paragraph 53(2)(g.1) in computing ACB of the beneficiary's interest immediately before the disposition.
The cost amount for the purpose of subparagraph 107(1)(a)(ii) is defined in subsection 108(1). In our example, it is the formula in paragraph (b) of that definition, (A-B) x C/D, that is relevant. The variables used in the formula in paragraph (b) of the definition of cost amount in subsection 108(1) are as follows:
A is the total of all money of the trust on hand immediately before that time, and all amounts each of which is the cost amount to the trust, immediately before that time, of each other property of the trust,
B is the total of all amounts each of which is the amount of any debt owing by the trust, or of any other obligation of the trust to pay any amount, that was outstanding immediately before that time,
C is the fair market value at that time of the capital interest or part thereof, as the case may be, in the trust, and
D is the fair market value at that time of all capital interests in the trust.
Thus, the capital gain on the deemed disposition of the departing beneficiary's interest in the trust in the above noted example is calculated as follows:
Proceeds of Disposition:
Fair market value of the beneficiary's interest in the trust at the time of the beneficiary's departure as determined under subsection 107.4(4):
ACB as adjusted under paragraph 107(1)(a):
Amount determined under subparagraph 107(1)(a)(i), which is the ACB of the beneficiary's interest in the trust determined without reference to paragraph 107(1)(a):
Amount determined under subparagraph 107(1)(a)(ii), which is the cost amount of the interest in the trust (see calculation below) less any adjustment to the ACB of the interest under paragraph 53(2)(g.1):
$12,500 - 0 =
"Cost Amount" of the beneficiary's interest in the trust as determined under paragraph (b) of the definition of "cost amount" in subsection 108(1) immediately before emigration, using the formula (A-B) x C/D:
(60,000-10,000) x 25,000/100,000 =
Capital Gain (Proceeds of Disposition less ACB):
$25,000 - 12,500 =
Taxable Capital Gain (50% of the capital gain):
$12,500 x 50% =
As a result of the above-noted calculation, a beneficiary entitled to a 25% interest in the $50,000 accrued gain on property held by the trust would realize a capital gain of $12,500 on the deemed disposition of his or her interest in the inter vivos personal trust that is not resident in Canada. Please note, however, that the calculation of the capital gain in any particular circumstance is dependant on the facts, valuations and amounts applicable to the particular situation. In addition, please note that the adjustment described in paragraph 107(1)(a) only applies for the purpose of the capital gain realized on the disposition of all or part of an interest in a personal trust and not to any capital loss that might arise as a result of such a disposition.
We regret that our previous reply was not complete and hope that the foregoing comments, although not binding on the Canada Revenue Agency, clarify the tax consequences applicable to a deemed disposition of an interest in personal trust that is not an "excluded interest" within the meaning of subsection 128.1(10).
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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