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. Whether the subsection 107(2.001) election can be applied on a property by property basis. 2. As there is no prescribed form available in respect of the subsection 107(2.001) and the subsection 107(2.11) elections, how should a trust elect under these provisions?
Position: 1. The subsection 107(2.001) election can be applied on a property by property basis. 2. Both the subsection 107(2.001) and the 107(2.11) elections should be filed by way of a letter attached to the trust's T3 Trust Income Tax and Information Return for the year the distribution takes place.
Reasons: 1. Subsection 107(2.001) refers to a "distribution of a property to a beneficiary". The words "a property" refers to a singular property, which implies that the election can be made on a property by property basis.
XXXXXXXXXX
2012-047106
July 11, 2013
Dear XXXXXXXXXX,
This is in reply to your email dated November 27, 2012 in which you enquired about the election under subsection 107(2.001) of the Income Tax Act (Canada) ("the Act"). Specifically, you have asked whether the subsection 107(2.001) election applies to all property that is distributed to a beneficiary in full or partial satisfaction of the beneficiary's interest in a trust or whether a trust can make the election on a property by property basis.
You also asked how to file the election under both subsection 107(2.001) and subsection 107(2.11) as there is no prescribed form available for either election.
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:
(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 property of all the property distributed. For example, if the property being distributed is shares of a corporation, the trust may elect in respect of a single share out of all the shares being distributed to the beneficiary in settlement of his capital interest or part thereof to the extent that the conditions in subsection 107(2.001) are otherwise met. Note, however, that this election cannot be made in respect of a fraction of a share unless the share was legally subdivided prior to the distribution date.
Both subsection 107(2.001) and subsection 107(2.11) require an election to be made by the trust in prescribed form filed with the trust's return of income for the year. A prescribed form is not available for either election. In place of a prescribed form, a letter should be filed with the trust's T3 Trust Income Tax and Information Return for the year the distribution occurs, setting out all the pertinent information in respect of the distribution. With respect to the subsection 107(2.001) election, a list of the information that should be included in the letter is provided on page 28 of the 2012 T3 Trust Guide which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/t4013/t4013-12e.pdf.
With respect to the subsection 107(2.11) election the following information should be included in the letter attached to the T3 Trust Income Tax and Information Return:
- a declaration to elect under subsection 107(2.11) of the Act,
- the name of the trust,
- the trust account number,
- the name of the beneficiary to whom the distribution is being made and whether the particular beneficiary is a resident or non-resident of Canada,
- a description of the property distributed to the beneficiary,
- the adjusted cost base of the property to the trust, and
- the fair market value of the property at the time of distribution.
We trust our comments will be of assistance.
Yours truly,
Steve Fron CPA, CA
Manager, Trust Sections II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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