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 CRA's position of not permitting the arbitrary subdivision of capital property for purposes of subsection 70(6.2) has changed.
Position: No
Reasons: Subsection 70(6.2) refers to "any property of the deceased taxpayer", not to a portion thereof. There is nothing in the provision that permits an election in respect of only a portion of the property.
STEP CRA Roundtable June 2012
QUESTION 9
On death, where property is transferred to a spouse or a spousal trust, it is possible to elect for the transfer to occur at fair market value rather than tax cost. CRA has taken the position that the election under subsection 70(6.2) of the Act is to be made on a property-by-property basis in respect of "a property". In certain circumstances, this may cause complications in the tax planning which might be carried out for the deceased, since it may be desirable to create a particular amount of capital gain at death. For example, suppose that the deceased owned a Canadian controlled-private corporation which would qualify as a small business corporation, but he or she held only one share of that corporation. Another example might be holding an interest in a partnership which is not denominated in units, such that the deceased held only one property, being the partnership interest.
In these circumstances, CRA has previously taken the position that an election cannot be made on a fraction of a property. Thus if the shareholder holds one share of the corporation, the election must be made in respect of that one share, and cannot be made in respect of a fraction of a share. Nevertheless, it is common today for fractional shares to be the subject of transactions and such fractional shares are recognized by corporate law. There appears to be no reason why a fraction of the partnership interest cannot be transferred if the partnership interest itself can be transferred.
Could the CRA provide an update on its view concerning this matter?
RESPONSE
Subsection 70(5) of the Act deems a taxpayer to dispose of each of his capital properties immediately before death for proceeds equal to the property's fair market value. Any person who as a consequence of the taxpayer's death acquires the property is deemed to have acquired the property at a cost equal to its fair market value.
Where certain conditions are met, subsection 70(6) provides a rollover to the taxpayer's spouse who was resident in Canada immediately before the taxpayer's death or to a spousal trust created by the taxpayer's will. Where subsection 70(6) applies the taxpayer is generally deemed to dispose of his non-depreciable property immediately before death for proceeds equal to the adjusted cost base of the property and to dispose of depreciable property for the lesser of the capital cost and the cost amount to the taxpayer of the property immediately before death.
Where a subsection 70(6.2) election is filed by the deceased taxpayer's legal representative in respect of a particular property, subsection 70(6) will not apply to that property and subsection 70(5) will apply. An election is typically filed where the deceased taxpayer has unused capital losses or a capital gains exemption. Subsection 70(6.2) specifically refers to "any property of the deceased taxpayer".
We have opined in the past that each share of the capital stock of a corporation is a separate property. Accordingly, the 70(6.2) election may be made with respect to a partial shareholding of a corporation. For example, where a shareholder owns 1,000 shares of ACo, the election under subsection 70(6.2) may be made in respect of some of the shares, and subsection 70(6) will apply to the remainder of the shares.
Where, however a single share was held by the deceased taxpayer prior to death, it is the CRA's position that the single share represents a property of the deceased taxpayer and as such the legal representative cannot elect in respect of a fraction of that single share so as to apply subsection 70(5) to an arbitrary portion of that share and subsection 70(6) to the balance of the share. We acknowledge that the definition of a share in subsection 248(1) includes a fraction of a share; however, in our view, this has no relevance in interpreting subsection 70(6.2). The legal representative cannot fractionalize a whole share after a taxpayer's death to enable the deceased's representative to utilize the subsection 70(6.2) election.
As far as recognizing a fraction of a partnership interest, we continue to hold the view that an election under subsection 70(6.2) must be filed in respect of the deceased taxpayer's total interest in a partnership, as the partnership interest constitutes a single property of the taxpayer. There is no provision which allows the legal representative to file an election in respect of only a portion of that interest.
Julie White
2012-044292
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