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: See below
Position: See below
Reasons: See below
February 1, 2005
Re: Technical Interpretation Request - Distribution by a Non Resident Trust
This is in reply to your request of June 23, 2004, wherein you requested our views on the above-noted subject. You described the following situation.
A non-resident trust (estate) was formed on the death of a non-resident individual. The assets of the non-resident trust consist of an interest in a limited Canadian partnership which owned commercial real estate, a depreciable property. A taxable capital gain from the deemed disposition of the individual's interest in the partnership was reported in the deceased's return of income for the year of death, pursuant to section 115 of the Income Tax Act (the " Act "). The beneficiaries of the estate are the major children of the deceased. The estate will be wound up and all its assets will be distributed to the beneficiaries in July 2004.
You raised four specific questions in relation to the situation described above. Written confirmation of the tax implications inherent in particular transactions is generally given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Enquiries regarding completed transactions are normally handled by the relevant Tax Services Office. Nevertheless, we will try to provide some comments regarding your situation as our comments are general in nature, they may or may not apply to your specific situation depending on the facts.
We assume, in the situation described above, that the partnership described in the above scenario would not qualify as a "Canadian partnership", as defined in subsection 102(1) of the Act, since the partnership has a non-resident partner.
Do the rollover provisions of subsection 107(2) of the Act apply to the distribution of the property to the children on the wind-up of the estate?
Generally subsection 107(2) would not apply to a distribution of property by a trust to a non-resident beneficiary after February 27, 2004. This is because subsection 107(5) is amended by draft legislation released on February 27, 2004 (not yet law). As amended, subsection 107(5) will provide that subsection 107(2.1) will apply (and subsection 107(2) will not) to distributions of property by any trust to a non-resident beneficiary after February 27, 2004. We assume the beneficiaries in the situation described above are non-residents of Canada. In these circumstances, the rollover under subsection 107(2) is not available and instead subsection 107(2.1) of the Act will apply to determine the Canadian income tax consequences of the distribution to the trust and the beneficiary.
Is the adjusted cost base to the beneficiaries deemed to be same as the cost amount to the trust?
Pursuant to subsection 107(2.1) of the Act, the trust is deemed to have disposed of the property for proceeds equal to its fair market value and the beneficiary is deemed to have acquired the property at a cost equal to that fair market value.
Since the estate took capital cost allowance on the properties, would there be any recapture?
Ordinarily, it is the taxpayer that owns the depreciable property that is entitled to claim part of the cost of the property by way of paragraph 20(1)(a) deductions. In the case of a taxpayer who is a partner of a partnership, paragraph 1102(1a) of the Income Tax Regulations (the " Regulations ") deems the classes of property described in Part XI of the Regulations and in Schedule II not to include any property that is an interest of the taxpayer in depreciable property that is partnership property of the partnership. The combined effect of subsection 96(1) of the Act and paragraph 1102(1a) of the
Regulations is that paragraph 20(1)(a) deductions in respect of depreciable property of the partnership are taken into account at the partnership level and cannot be claimed by the partner. In this case, the partnership is required to include in income any recapture in respect of depreciable properties of a prescribed class in respect of which the partnership has already claimed capital cost allowance. It is therefore not clear how and why the estate took capital cost allowance, so we cannot comment on the question of the recapture. We understand from the situation submitted that the asset of the estate that would be distributed to the beneficiaries is an interest in a partnership. An interest in a partnership is not a depreciable property and as such cannot give rise to any recapture.
Should a certificate of compliance be requested, in accordance with subsection 116(1) of the Act, with respect to the proposed disposition?
Subsection 116(1) of the Act applies where a non-resident person proposes to dispose of a taxable Canadian property other than property described in subsection 116(5.2) of the Act and "excluded property" as defined in subsection 116(6) of the Act. Where a non-resident person proposes to dispose of an interest in a partnership that meet the conditions of paragraph g) of the definition of "taxable canadian property" in subsection 248(1) of the Act, such a partnership interest is not excluded from the application of subsection 116(1). A non-resident trust that proposes to dispose of an interest in a partnership that is a taxable Canadian property is required to obtain a certificate of compliance in accordance with section 116 of the Act.
We trust our comments will be of assistance.
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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