16 June 2006 External T.I. 2004-0100621E5 - Application of s. 164(6) in a civil law context

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: Whether the loss realized upon the redemption of the shares of an estate can be carried back to the terminal return of the deceased pursuant to subsection 164(6) of the Act where such shares are the object of a legacy by particular title under a valid will under Quebec civil law?

Position: Yes.

Reasons: Notwithstanding the fact that the shares are the object of a legacy by particular title, they would remain registered under the name of the deceased in the corporation's share register (or be registered under the name of the liquidator of the succession) until their transfer to the legatee(s) by particular title is registered in the corporation's share register.

XXXXXXXXXX 						2004-010062
							Éric Allard-Pouliot
June 16, 2006

Dear Sir:

Re: Technical Interpretation Request: Application of subsection 164(6) of the Income Tax Act

This is in reply to your letter of October 27, 2004 regarding the above-noted subject. More particularly, you have requested our opinion as to whether subsection 164(6) of the Income Tax Act (the "Act") could apply in the hypothetical scenario described hereafter. We apologize for the delay in responding.

Facts

Mr. A, a Canadian resident, owns shares of a Canadian controlled private corporation (the "Shares") at the time of his death. The Shares have significant appreciated value and as a result of his death, he is deemed, immediately before his death, to have disposed of the Shares for proceeds equal to their fair market value. Mr. A has executed a valid will under Quebec civil law, which provides for a legacy by particular title of the Shares to Mr. B, a related individual, as well as a universal legacy of the residual succession to specific heirs.

The liquidator, who is Mr. B, would like to effect, by one or more transactions, a redemption of all or part of the Shares, thereby creating a deemed dividend and capital loss for the succession which would be carried back to the terminal return of Mr. A pursuant to subsection 164(6) of the Act.

You have asked us to assume that the will of Mr. A provides sufficient powers to the liquidator of the succession to have the corporation which issued the Shares redeem all or part of them and to effect a transfer of the Shares to another corporation in consideration for shares of the other corporation (the "Substituted Shares").

Question

Having regards to the situation described above, you ask us to confirm that notwithstanding the legacy by particular title of the Shares to Mr. B, provided (i) the Shares or Substituted Shares have not been transferred to Mr. B in his personal capacity under the legacy by particular title and (ii) Mr. B does not deal with the Shares or the Substituted Shares other than in his capacity as liquidator, legal title of the Shares or the Substituted Shares, as the case may be, will be held by the succession at the time the capital loss thereon is realized and consequently subsection 164(6) will apply to the above redemption.

Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

In document E 2001-0093137, to which you referred in your request, we considered the application of subsection 164(6) of the Act to a situation similar to the one described above, except for the fact that in this file the will had been executed under common law rather than civil law. We concluded that legal title to the shares passed to the estate on the death of the testator and, given that no change had been made to the share register of the company prior to the time the shares were redeemed, that title to the shares was still in the name of the deceased, and thus remained with his estate, at the time the shares were redeemed. Consequently, we concluded that any capital loss arising from the redemption of the shares could be carried back to the deceased's final return in accordance with subsection 164(6) of the Act.

Although there are significant differences between civil law and common law as regards the concept of property, for the reasons set out below we are of the view that subsection 164(6) of the Act would still have applied in the above mentioned file even if the will had been executed under civil law rather than common law.

In her article entitled "The Transfer of Property on Death: Ownership, Control and Vesting"¹, Ms. Catherine Brown, having reviewed the case law dealing with the vesting of specific bequest under the common law regime, concluded as follows at page 1458:

"Case law suggests that the earliest point at which vesting would occur in the case of a specific bequest is at death - a vesting which is retroactive following the assent of the executor. In the interim it seems that the beneficiary's beneficial rights are subject to payment of the estate's debts.

Under civil law, the combined effect of articles 645, 741, 813 and 814 of the Civil Code of Quebec (the "CcQ") would yield similar result. While articles 645 and 741 of the CcQ provide that acceptance of a legacy by particular title confirms the transmission of the property of the legacy which took place by operation of law at the time of death, articles 813 and 814 of the CcQ allows the liquidator of a succession to alienate property bequeathed as legacies by particular title if the other property of the estate is insufficient to pay all the debts of the succession, or to reduce the legacies by particular title if the other property of the succession is insufficient to pay all the debts of the succession or all the legatees by particular title. Just like those of a beneficiary of a specific bequest under the common law regime, a legatee by particular title's rights under civil law are therefore also subject to payment of the succession's debts. Moreover, article 804 of the CcQ allows the liquidator to alienate, alone, movable properties of the succession that are perishable, likely to depreciate rapidly or expensive to preserve; the other property of the succession may also be alienated by the liquidator with the consent of the heirs or, failing that, the authorization of the court.

Regarding the retroactive effect to the date of death of the transfer of shares bequeathed as legacies by particular title, in her article entitled "Indefeasible Vesting"², Véronique Denys states, at pages 4:86-7:

"As explained, a legatee by particular title or a successor owns the shares bequeathed to him or received by him under an intestate succession from the time of death of the deceased, and his right of ownership is consolidated at the time of his acceptance. A trust may obviously hold the shares transferred to a trustee as well. However, the legatee by particular title, an heir or a testamentary trust cannot declare themselves to be shareholders in a corporation at the time the property is accepted or the office of trustee is accepted given the requirements imposed by legislation governing corporations.

As a first step, whether the deceased was a shareholder of a company incorporated under the Quebec Companies Act [R.S.Q., c. C-38.] or under the Canada Business Corporations Act [R.S.C. 1985, c. C-44 (hereinafter "C.B.C.A.").], the liquidator of the succession administers the shares that belonged to the deceased immediately before his death. If the liquidator wishes the issuing corporation to acknowledge his role, he must be registered in this capacity in the shareholder's register. [Art. 42 Companies Act and ss. 51(7)-51(9) C.B.C.A. [...]] However, failure to register does not preclude the liquidator from proceeding to the second step: the distribution of the shares. [[...] See art. 51(2)(a) C.B.C.A.] Distribution is effected by ordinary transfer recorded in the company's transfer register, to the persons entitled to the shares. [[...]S. 74 Companies Act.] [...]

Before agreeing to register a transmission of shares, the corporation requires evidence of the entitlement to the shares. Once the proof has been made, the transfer may take place, and the liquidator of the succession then loses the seisin of the shares."

The liquidator's power of administration are provided for, among others, in article 777 of the CcQ, which provides that

"Art. 777. The liquidator has, from the opening of the succession and for the time necessary for liquidation, the seisin of the heirs and the legatees by particular title.

The liquidator may even claim the property against the heirs and legatees by particular title. [...]"

Although pursuant to articles 625 and 739 of the CcQ an heir or a legatee by particular title is seised, by the death of the deceased, of the patrimony of the deceased or of the legacy, as the case may be, article 777 of the CcQ ensures that the liquidator's seisin has priority over that of the legatees and heirs during the administration of the succession. Such an interpretation has been accepted by the Supreme Court of Canada in Hall v. The Queen, 98 DTC 6112, where Gonthier, J. stated:

"The testamentary executor's seizin must thus be given a certain priority over that of the legatee for purposes of administration. Even though the universal legatee is the real owner of the bequeathed property, art. 918 C.C.L.C. provides that the executor's seizin prevails over that of the legatee. The legatee therefore cannot exercise his or her rights in the bequeathed property until the executor's seizin has terminated. [...]

The testamentary executor's seizin gives him or her control over the estate patrimony, and legatees can demand their shares only once that seizin has terminated. The legatee's rights are secondary to those of the testamentary executor, who controls the property of the estate in accordance with the instructions set out in the will.

Furthermore, the provisions of the new Civil Code of Quebec (hereinafter "C.C.Q.") seem to have clarified Quebec law regarding the operation of seizin. The new art. 777 C.C.Q., which replaces art. 918 C.C.L.C., provides that during the administration of the estate the liquidator has priority over the legatees and heirs [...]"

In this case, the Supreme Court of Canada came to the conclusion that dividends paid on shares bequeathed to a residuary legatee prior to the termination of the administration of the estate did not have to be included in the legatee's income for the purposes of the Quebec Taxation Act. Such a result is consistent with article 1302 of the CcQ, which provides that:

"Art. 1302. An administrator charged with the simple administration is bound to collect the fruits and revenues of the property under his administration and to exercise the rights pertaining to the property.

He collects the debts under his administration and gives valid acquittance for them; he exercises the rights pertaining to the securities administered by him, such as voting, conversion or redemption rights." It flows from the foregoing that the shares of a deceased that are bequeathed as legacies by particular title under civil law would remain registered under the name of the deceased in the corporation's share register (or be registered under the name of the liquidator of the deceased's succession in its capacity as such) until their transfer to the legatee(s) by particular title is registered in the corporation's share register. Consequently, having regards to the hypothetical scenario described in your request, we confirm that notwithstanding the legacy by particular title of the Shares to Mr. B, provided (i) the Shares or Substituted Shares have not been transferred to Mr. B in his personal capacity under the legacy by particular title and (ii) Mr. B does not deal with the Shares or the Substituted Shares other than in his capacity as liquidator, the capital loss realized by the succession upon the redemption of the Shares could be carried back to the terminal return of Mr. A pursuant to subsection 164(6) of the Act. Our conclusion would be the same if the shares were bequeathed as legacies by general instead of particular title (see ruling E 2003-0018823 where we confirmed that subsection 164(6) of the Act would apply with respect to the loss realized upon the redemption of shares bequeathed as legacies by general title).

In our view, subsections 104(1) and (2) of the Act, which provide that a reference to a trust or estate includes a reference to the liquidator of a succession and that an estate is deemed to be an individual in respect of the estate property, support such a conclusion.

The above comments are an expression of opinion only and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5. We trust that the foregoing will be of assistance to you.

Alain Godin
Section Manager
For Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

¹ Catherine BROWN, "The Transfer of Property on Death: Ownership, Control and Vesting", in Canadian Tax Journal (1994), Volume 42, No. 6.

² Véronique DENYS, "Indefeasible Vesting", in The Harmonization of Federal Legislation with Quebec Civil Law and Canadian Bijuralism, Second Collection of Studies in Tax Law (2005), Montreal, APFF, 2005.