30 March 2006 External T.I. 2004-0105471E5 - affiliation of unadministered estate with others

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: 1. Is the deceased person affiliated with the estate?

2. After the death of a taxpayer, is the deceased person affiliated with his or her spouse or common-law partner? 3. Who is the majority-interest beneficiary in an unadministered estate?

Position: 1.No

2. No 3.Question of Fact.

Reasons: 1. The deceased person is not entitled to any of the assets of the estate and as such is not a beneficiary of the estate.

2. Consistent with the position stated in paragraph 6 of Interpretation Bulletin IT-419R2, Meaning of Arm's Length, it is our position that a spouse or common-law partner is not related to his or her former spouse after the marriage is dissolved by divorce or the death.

XXXXXXXXXX 						2004-010547
								Annemarie Humenuk
March 30, 2006

Dear XXXXXXXXXX:

Re: Application of the Affiliation rules to Estates

This is in reply to your email of November 24, 2004, in which you ask for clarification of the affiliation rules as they relate to property held during the period of administration of a deceased person's estate.

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"). Your questions are as follows:

1. Is the deceased person affiliated with the estate? You note that this might be relevant in the case where the deceased person had transferred property to a self-benefit trust during his or her lifetime. While the amount of any loss that accrued on property held by such a trust would normally be recognized by the self-benefit trust on the deemed disposition of the trust property under paragraph 104(4)(a.4), any loss not so recognized on the death of the deceased person would be reflected in the adjusted cost base of the property to the beneficiary of the trust who received the property from the trust, provided that subsection 107(2) applied to the distribution of that property. Thus, if the value of the property had declined while it was held in an inter vivos trust to which subsection 104(4) did not apply on the death of the deceased person, and the deceased person's interest in the trust was then was transferred to his or her estate following his death at the cost amount set out in subsection 107(2), the estate might realize a loss on the subsequent disposition of the property to a third party. If the estate were not affiliated with the deceased person, any loss realized by the estate in such circumstances would be denied by reason of subsection 107(6).

2. After the death of a taxpayer, is the deceased person affiliated with his or her spouse or common-law partner? In this regard you note that, if the spouse is not affiliated with the deceased person after death, any loss accruing during the lifetime of the taxpayer on property held in an inter vivos trust of which the deceased person was the sole beneficiary prior to his or her death would not be available to a spouse who receives the property from the taxpayer's estate following the death of the taxpayer and the distribution of the property from the inter vivos trust to that estate because of the operation of subsection 107(6). On the other hand, if the deceased person had held the property directly and transferred it to his or her spouse or common-law partner on death, the spouse or common-law partner would not be precluded from claiming such a loss on the subsequent disposition of the property.

3. Who is the majority-interest beneficiary in an unadministered estate? In this regard, you note that it may be difficult to determine each beneficiary's share of the income and capital of the estate if the amount of the testamentary debts is not known. For example, if one beneficiary is entitled to a specific bequest of $100,000 and the other beneficiary is entitled to the residue of the estate, the determination of who is entitled to the majority of the capital of the estate depends on the amount of capital available to be distributed to the beneficiaries after the payment of all of the testamentary debts.

Our Comments

1. In our view an individual is not affiliated with his or her estate within the meaning assigned by subsection 251.1(1) because the deceased person is not entitled to any of the income or capital of the estate.

Where an inter vivos trust is not subject to the deemed disposition rules in subsection 104(4) at the time of the taxpayer's death and the accrued loss on the property would be denied, by reason of subsection 107(6), to the estate or any other person who subsequently disposes of the property to a third party, it may be possible for the inter vivos trust to file an election under subsection 107(2.001) to distribute the property to the estate under subsection 107(2.1) with the result that the estate would acquire the property at its fair market value at the time of the distribution. Provided that the estate is not affiliated with the inter vivos trust at the time that is relevant for the stop loss rules, the inter vivos trust may be able to recognize any loss that had accrued during the deceased person's lifetime on the disposition of the property to the estate.

2. Consistent with the position stated in paragraph 6 of Interpretation Bulletin IT-419R2, Meaning of Arm's Length, it is our position that a spouse or common-law partner is not related to his or her former spouse after the marriage is dissolved by divorce or the death. As a result, a widow or surviving common-law partner would not be affiliated with the deceased person following the death. As stated above, the issue of a denied loss will not arise if the inter vivos trust that was holding the property is an alter ego trust or a self-benefit trust that received the property on a rollover basis, since any such loss would be recognized by the inter vivos trust on the death of the deceased person as a result of the deemed disposition under subsection 104(4). To the extent that the widow or surviving common-law partner is not entitled to claim all or part of a loss on the subsequent disposition of the property because of the application of subsection 107(6), the inter vivos trust may be able to make an election under subsection 107(2.001) and recognize the accrued loss in the inter vivos trust on the distribution of such property to the estate. In such a case, the estate's cost amount for the purpose of subsection 107(2) would be the fair market value at the time of the deceased person's death and any subsequent loss realized by the spouse on the disposition of that property would not have accrued during the period of time that it was held in the inter vivos trust.

Note that if the spouse had had a capital interest in the inter vivos trust prior to the death of the deceased person, subsection 107(6) would have no application to any loss realized by the spouse on the disposition of the property received from the inter vivos trust in satisfaction of her capital interest in that trust.

3. It is a question of fact as to whether any heir is a majority interest beneficiary at any particular point in time. A majority interest beneficiary is defined in subsection 251.1(3) to be "a person whose interest as a beneficiary, if any, at that time

(a) in the income of the trust has, together with the interests as a beneficiary in the income of the trust of all persons with whom the person is affiliated, a fair market value that is greater than 50% of the fair market value of all the interests as a beneficiary in the income of the trust; or

(b) in the capital of the trust has, together with the interests as a beneficiary in the capital of the trust of all persons with whom the person is affiliated, a fair market value that is greater than 50% of the fair market value of all the interests as a beneficiary in the capital of the trust."

Such an interest could be immediate or future, absolute, contingent or discretionary. If the amount of income or capital that the beneficiary may receive under the trust depends on the exercise or failure to exercise a discretionary power by any person, paragraph 251.1(4)(d) must be considered.

In our conversation of November 29, 2005 (XXXXXXXXXX\Humenuk), you noted that it would be difficult, before the estate is fully administered, to determine what portion of the income and what portion of the capital of the estate will ultimately be distributed to any particular heir. It is a question of fact as to whether any beneficiary is entitled to more than 50% of the income or capital at a particular point in time. While it may be difficult at times to value the respective interests in an estate, in most cases, including the period of administration of an estate, it should be possible to make a reasonable estimate of the fair market value of each of the interests such that the majority interest beneficiaries of the estate can be identified. For example, in the case you described where one beneficiary was entitled to a specific amount and the other beneficiary was entitled to the residue, in the absence of any wording in the will to the contrary, the residual beneficiary would presumably be entitled to all of the income of the estate and would be a majority interest beneficiary of the estate. The determination of whether the other beneficiary was also a majority interest beneficiary of the estate would depend on the estimated value of the estate at the relevant time. It is recognized that the status of a beneficiary of an estate as a majority interest beneficiary of the estate could change over the course of time. For example, a disgruntled heir could make a successful court challenge with respect to his or her share of the inheritance with the result that one or more of the majority interest beneficiaries of the estate could lose his or her status as a majority interest beneficiary and another person could become a majority interest beneficiary. A person with a competing claim to challenge the wording of the will would not be considered to be a majority interest beneficiary solely by reason of that claim until such time as the claim is established by the court. If a competing claim is successful and one or more of the beneficiaries of the estate ceases to be a majority interest beneficiary, that beneficiary will cease to be affiliated with the estate at the time that he or she ceases to be a majority interest beneficiary of the estate.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch