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: Did shares vest indefeasibly with the surviving spouse with 36 months of death?
Position: Yes
Reasons: Finding of fact based on information presented.
August 29, 2006
London Tax Services Office HEADQUARTERS
Audit Division Annemarie Humenuk
Attention: Giannina Pepe
2006-019311
Subsection 70(6) and the Meaning of Vested Indefeasibly
This is in response to your email of June 27, 2006, concerning the meaning of vested indefeasibly as it applies to the transactions taken by the executors of the estate of XXXXXXXXXX following his death on XXXXXXXXXX.
Our understanding of the relevant facts are as follows:
1. XXXXXXXXXX died on XXXXXXXXXX.
2. Pursuant to the terms of his will, his spouse, XXXXXXXXXX ("Spouse"), was to receive XXXXXXXXXX% of his estate before the payment of any testamentary debts. The will also provides that the executors were entitled to hold the property of the estate in trust for as long they considered necessary.
3. On the filing of XXXXXXXXXX final return, the executors reported a deemed disposition in respect of XXXXXXXXXX% of XXXXXXXXXX holdings in XXXXXXXXXX, that is, in respect of XXXXXXXXXX common shares and XXXXXXXXXX Class A special shares of XXXXXXXXXX . The executors were did not report any disposition with respect to the remaining shares on the basis that subsection 70(6) would apply to deem the proceeds of disposition of the remaining shares to be equal to XXXXXXXXXX cost such that no capital gain would arise in respect of the remaining shares.
4. Prior to XXXXXXXXXX, the directors of XXXXXXXXXX. determined that the minute book of XXXXXXXXXX had been lost. As a result, on XXXXXXXXXX, the directors of XXXXXXXXXX. passed a resolution confirming their understanding of the shareholders of record as of that date. Based on that resolution, the estate held XXXXXXXXXX common shares and XXXXXXXXXX Class A special shares of XXXXXXXXXX at that time. This resolution is consistent with the information you have on file.
5. A trust agreement was prepared on XXXXXXXXXX which states that the executors of XXXXXXXXXX estate hold the shares of XXXXXXXXXX in trust for the Spouse, subject to any claim made against the estate for income taxes or other indebtedness.
6. Pursuant to a director's resolution dated XXXXXXXXXX redeemed XXXXXXXXXX% of the outstanding shares effective XXXXXXXXXX for $XXXXXXXXXX. Despite the apparent irregularities in the director's resolution concerning who requested the redemption, we understand that it was the XXXXXXXXXX % of the shares held by the estate for the children and testamentary debts that were redeemed and not the shares that were transferred to the trust for the benefit of the Spouse. You advised us that XXXXXXXXXX. has not yet paid the proceeds of redemption to the executors of the estate and that the amount is still outstanding.
7. On XXXXXXXXXX, you sent a proposal letter to the executors of the estate of XXXXXXXXXX, proposing to adjust the capital gain realized on the deemed disposition of the shares of XXXXXXXXXX. to reflect the fair market value of all shares of XXXXXXXXXX held by XXXXXXXXXX immediately before his death, based on the premise that no portion of the shares had vested indefeasibly in the Spouse at that time.
8. On XXXXXXXXXX, the executors, as the trustees of the trust created on XXXXXXXXXX, transferred XXXXXXXXXX common shares and XXXXXXXXXX Class A special shares of XXXXXXXXXX to the Spouse pursuant to a document called "XXXXXXXXXX". The directors of XXXXXXXXXX confirmed that transfer by way of a director's resolution.
You ask for our comments on the validity of the trust deed dated XXXXXXXXXX and whether the documents dated XXXXXXXXXX support a finding that the XXXXXXXXXX common shares and XXXXXXXXXX Class A special shares of XXXXXXXXXX. have vested indefeasibly in the Spouse within 36 months of his death.
All statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"). For the purpose of our response, we assume that the relevant Business Corporations Act governing XXXXXXXXXX permits the issuance of a fractional share.
You question the ability of the executors to establish a trust by means of the document dated XXXXXXXXXX and the relationship of that trust presumably created by that document to the will. We agree that there is doubt that such a trust was ever a valid trust. Clause XXXXXXXXXX of the will provides that XXXXXXXXXX of the estate is to be transferred to the Spouse and clause XXXXXXXXXX of the will specifies that the Spouse's share of the estate is to be computed before the payment of any testamentary debts. In CRA document 9525537, we were asked to consider a similar situation and determine whether a particular will provided the trustee with the authority to create a spousal trust when the terms of the will specified that the property was to be transferred to the spouse for her exclusive use once the administration of the estate was complete. In that case, we concluded that a valid trust had not been created.
However, whether or not a valid trust was created on XXXXXXXXXX, it seems clear that the executors, in their capacity as executors, were authorized to distribute the shares to the Spouse on XXXXXXXXXX pursuant to the terms of the will. Similarly, if the document dated
XXXXXXXXXX did create a valid trust, the terms of that alleged trust did not preclude a distribution of the shares to the Spouse on XXXXXXXXXX.
Subject to the conditions set out in subsection 70(6), subsection 70(6) applies to property that is transferred to a spouse or to a post-71 spousal or common-law partner trust within 36 months following the death of an individual. Thus, in the case under review, subsection 70(6) would be applicable if the property is transferred either to the Spouse or to a post-71 spousal or common law partner trust for her benefit within 36 months of XXXXXXXXXX. Because the terms of the will allow the executors such time as they require to distribute the assets of the estate and do not specify what property is to be transferred to the Spouse, it cannot be said that the shares have vested indefeasibly in either the Spouse or a post-71 spousal or common law partner trust until such time as they are actually transferred to her or to a post-71 spousal or common law partner trust.
XXXXXXXXXX
In our conversation of July 24, 2006 (Pepe\Humenuk), you asked about the ability of the executors to rescind or cancel the trust without court approval in order to distribute the shares to the Spouse. If, as we suspect, the executors did not have the authority to place the Spouse's share of the estate in a trust and the trust is not a valid trust, no action is necessary on the part of the executors to rescind or cancel the trust. If the trust is a valid trust notwithstanding the lack of authority to create such a trust, the terms of that trust do not preclude the executors from distributing the shares to the Spouse at any particular time.
Thus, in the absence of a finding of sham, it is our view that the document, "XXXXXXXXXX", dated XXXXXXXXXX and the corresponding director's resolution of XXXXXXXXXX. confirm that XXXXXXXXXX common shares and XXXXXXXXXX Class A special shares of XXXXXXXXXX. were transferred to the Spouse on XXXXXXXXXX and within the time specified in subsection 70(6). It is also our view that the tax consequences set out in subsection 70(6) would apply in respect of the deemed disposition of XXXXXXXXXX common shares and XXXXXXXXXX Class A special shares of XXXXXXXXXX upon the death of the late XXXXXXXXXX. The remaining shares would be subject to subsection 70(5) upon his death.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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