25 February 2014 External T.I. 2012-0448431E5 - Reporting of Income by Estate

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) Where the XXXXXXXXXX beneficiaries of an estate sign a distribution agreement and one of them decides to retain the property in the estate, is it the estate or the beneficiary that reports income earned on that property from the date of agreement until the property has been disposed?
2) Where the property is subsequently disposed of resulting in a capital loss, who will report the loss from the sale of the property?

Position: 1) It is a question of law. 2) It is again a question of law.

Reasons: See below.

XXXXXXXXXX
2012-044843
V. Srikanth

February 25, 2014

Dear XXXXXXXXXX:

Re: Reporting of Income by an Estate

This is in response to your correspondence of May 11, 2012 and further to our telephone discussion of October 10, 2013(XXXXXXXXXX/Srikanth/Kohnen). In your enquiry you requested our views regarding the appropriate reporting of income derived from a rental property while it was held by an estate, as well as a loss realized when the property was subsequently sold. Please accept our apologies for the delay in responding.

In the scenario you described, the XXXXXXXXXX sibling beneficiaries of an estate that arose on their mother's death in XXXXXXXXXX signed a distribution agreement in respect of all the assets of the estate. The assets in respect of XXXXXXXXXX of the beneficiaries were subsequently transferred to them. However, the remaining beneficiary chose not to have legal title to the rental property transferred into her name. The rental property was sold in XXXXXXXXXX at a significant loss.

Our Comments

Based on the information you have provided, this appears to be an actual situation. This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings. Where the particular transactions are completed, the inquiry should be addressed to the audit division of the applicable Canada Revenue Agency Tax Services Office.

As was noted during our above-referenced telephone conversation, in our opinion it is a question of law as to whether at a particular time, an estate beneficiary is entitled to enforce payment of the income or capital of the estate and whether beneficial ownership of a property is considered to have passed to the beneficiary. Accordingly, in the context of this response, we cannot make that determination.

In the event that such a determination established that the beneficiary was not entitled to enforce payment of the income in a particular taxation year, then the income for that taxation year will be taxed as income of the estate.

With respect to the sale of the property, here again, if, as a question of law, the ownership of the property has not passed to the beneficiary prior to the sale, then the loss must be reported in the tax return of the estate.

We trust our comments will be of assistance to you.

Yours truly,

Phil Kohnen
For Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch