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: Is there a deemed disposition on depreciable property used in a business carried on in Canada by a trust where the business has been transferred to a spousal trust in anticipation of the emigration of the settlor and his spouse?
Position: No, provided that the only property so transferred is property described in 128.1(4)(b)(i) to (iii).
Reasons: On actual emigration, depreciable property used in a foreign business is deemed to have been disposed of under 128.1(4)(b) which may result in a terminal loss under 20(16) or recapture of CCA under 7(13) as well as a capital gain on that property. There is no deemed disposition of depreciable property used in a business carried on in Canada for the person emigrating as such depreciable property is taxable Canadian property as defined in 248(1) and there is an exception in 128.1(4)(b)(i) which eliminates the deemed disposition in respect of such property.
XXXXXXXXXX 2004-010495
Annemarie Humenuk
Attention: XXXXXXXXXX
November 4, 2005
Dear Sirs:
Re: Deemed Disposition of Depreciable Property
This is in reply to your letter of November 19, 2004, in which you ask for clarification of the application of subsection 104(5) to depreciable property used in a business carried on in Canada that has been transferred to a spousal trust under subsection 73(1) in anticipation of the transferor ceasing to be resident in Canada.
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").
It is your understanding that subsection 104(5) will apply to all depreciable property held by a spousal or common-law partner trust on the day on which the settlor ceased to be resident in Canada (that is, the end of the first day following the settlor's emigration if the day on which the settlor emigrated had ended immediately after the settlor's emigration), irrespective of whether the depreciable property is taxable Canadian property or not.
Subsection 104(5) deems each trust other than a trust described in paragraphs (f) and (g) of the definition of trust in subsection 108(1) to have realized a deemed disposition at the end of each day determined under subsection 104(4) in respect of that trust. Each of the following days are described in one or more of the paragraphs in subsection 104(4):
? the day on which the spouse or common-law partner of the settlor dies;
? the day on which the settlor dies;
? the later of the day on which the settlor or the spouse or common-law partner of the settlor dies;
? the day on which a distribution is made to a capital beneficiary in respect of the beneficiary's capital interest in the trust;
? the day on which the settlor ceased to be resident in Canada (that is, the end of the first day following the settlor's emigration if the day on which the settlor emigrated had ended immediately after the settlor's emigration);
? the day that is 21 years after the latest of January 1, 1972, the day the trust was created and the day on which an deemed disposition under 104(4)(a), (a.1) or (a.4) occurred; and
? the day that is 21 years after a deemed disposition under 104(4)(b).
While subsection 104(5) applies to every trust (other than a trust described in paragraphs (f) and (g) of the definition of trust is subsection 108(1)), the depreciable property held by that trust will only be deemed to have been disposed on one of the days listed above if it is a trust that meets the conditions set out in one or more of the paragraphs of subsection 104(4). Thus, a trust will only realize a deemed disposition in respect of its depreciable property on one or more of the days listed above if that day is "a day determined in respect of" that trust. For example, a trust which is not a spousal or common-law partner trust will not realize a deemed disposition on the death of the settlor's spouse or common-law partner because the day on which that spouse dies is not one of the days determined in respect of that particular trust. Likewise, provided that a particular capital distribution to a beneficiary is not financed by a liability of the trust that was incurred in whole or in part for the purpose of avoiding taxes otherwise payable under this Part as a consequence of the death of any individual, the day on which that distribution is made will not be a day determined in respect of that particular trust.
Assuming that property was transferred to the spousal or common-law partner trust on a rollover basis in anticipation of the transferor's emigration from Canada in the example cited in your letter, it is our view that the trust will not realize any deemed disposition of its property under subsection 104(4)(a.3) or (5) on that day provided that the only capital property transferred to that post-1971 spousal or common-law partner trust was property described in subparagraphs 128.1(4)(b)(i) to (iii).
You state that the trust cannot avoid the application of 104(4)(a.3) and (5) by changing its residence before the emigration of the settlor. If the trust emigrates after receiving the property on a rollover basis, 128.1(4)(b) will apply at the time of the trust's emigration such that the increase in value of any property held by the trust other than property described in 128.1(4)(b)(i) to (iv) will have been subject to tax in Canada. As a non-resident entity and assuming that subsection 94(1) is inapplicable, the trust would only be subject to tax in Canada on its capital gains realized on taxable Canadian property. As a result, the application of 104(4)(a.3) and 104(5) to create a deemed disposition after the trust's emigration from Canada would typically not result any gain or loss being required to be included in income under section 115 provided that the only property held by the trust was taxable Canadian property. Please note that these comments apply equally to all other transfers of capital property to a trust under subsection 73(1), including transfers of capital property to alter ego trusts and joint spousal or common-law partner trusts. This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.
We trust our comments have clarified our position in this matter.
T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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