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 property distributed to the beneficiary in satisfaction of his capital interest is 1000 shares of Corporation X can the subsection 107(2.001) election be made in respect of only 500 of those shares as long as an election is not made with respect to a fraction of a share? 2. How is the election under subsection 107(2.001) made as there is no prescribed form?
Position: 1. Yes 2. Attach a letter to the trust's T3 Income Tax and Information Return for the year in which the distribution is made.
Reasons: 1. Subsection 248(1) defines property to include a share. The election may apply to one or more shares of all the shares distributed. The election may apply to a fraction of a share where the share is legally subdivided before the distribution date.
XXXXXXXXXX 2012-047039
April 18, 2013
Dear XXXXXXXXXX,
This is in reply to your email dated November 16, 2012 in which you enquired about the election under subsection 107(2.001) of the Income Tax Act (Canada) ("the Act").
Specifically you asked whether an election under subsection 107(2.001) of the Act can be made by a trust in respect of only a portion of the total shares of a corporation held by the trust which are distributed to a beneficiary of the trust in full or partial satisfaction of the beneficiary's capital interest in the trust. In your email you provide an example of a trust which holds 1000 shares of X Co. You have asked whether the subsection 107(2.001) election may be made in respect of only 500 of those shares, as long as the election is not made in respect of a fraction of a share, with the remaining 500 shares subject to subsection 107(2). You would also like to know how to make the subsection 107(2.001) election as there is no prescribed form available.
Our Comments
Subsection 107(2.001) applies where a trust makes a distribution of a property to a beneficiary of the trust in full or partial satisfaction of the beneficiary's capital interest in the trust. Subsection 107(2.001) allows the trust to elect out of the rollover rules in subsection 107(2) where it meets the following conditions:
(a) the trust is resident in Canada at the time of the distribution,
(b) the property is taxable Canadian property, or
(c) the property is capital property used in, eligible capital property in respect of, or property described in the inventory of a business carried on by the trust through a permanent establishment (as defined by regulation) in Canada immediately before the time of the distribution.
If the election under subsection 107(2.001) is made, the distribution is subject to the rules in subsection 107(2.1) of the Act. Where subsection 107(2.1) applies the trust is deemed to have disposed of the property for proceeds equal to fair market value. The beneficiary will be deemed to have acquired the property at a cost equal to those proceeds, and generally, the beneficiary will be treated as having disposed of the capital interest for an amount equal to the fair market value of the property less any capital gain realized by the trust.
Subsection 107(2.001) refers to "a distribution of a property to a beneficiary". The words "a property" refers to a singular property, such that the election can be used in respect of only one share. It is our position that where the trust is distributing more than one share to a beneficiary in satisfaction of his capital interest or a part thereof, the trust may make the election in respect of one or more shares of the total number of shares distributed. Therefore, in the example you provided in your email the trust may make the subsection 107(2.001) election in respect of 500 of the 1,000 shares of X Co distributed, to the extent that the conditions in subsection 107(2.001) are otherwise met. Subsection 107(2) will apply to the remaining 500 shares distributed.
The definition of "share" in subsection 248(1) includes a fraction of a share. Where the trust holds a legally subdivided share before the date of distribution, that share is "a property" of the trust that can be distributed to the beneficiary using the subsection 107(2.001) election. Where the share is not legally subdivided before the distribution date, the subsection 107(2.001) election cannot be made on an arbitrary portion of the share, it must be made on the share as a whole.
The subsection 107(2.001) election is made by providing a letter with the trust's T3 Income Tax and Information Return for the taxation year in which the distribution is made. A list of the information that should be included in the letter is provided on page 28 of the T3 Trust Guide which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/t4013/t4013-12e.pdf,
We trust that our comments will be of assistance to you.
Yours truly,
Steve Fron CA
Acting Manager, Trust Sections II
For Director
Financial Industries and Trust Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2013
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2013
Email this Content