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 subsection 118.1(5) applies to a gift by will of a non-qualifying security to a qualified donee where the legal representative of the deceased individual makes a designation under subsection 118.1(6) in respect of the gift of the non-qualifying security for capital gains purposes.
Position: Subsection 118.1(13) applies to a gift of non-qualifying securities. In the case of a gift by will of a non-qualifying security, the timing of the gift is determined by subsection 118.1(5). Paragraph 118.1(13)(a) then applies to deem the gift not to have been made except for the purpose of applying subsection 118.1(6) to determine the proceeds of disposition of the security.
Reasons: Interplay between subsections 118.1(5) and (6) and paragraphs 70(5)(a) and 118.1(13)(a).
XXXXXXXXXX
2013-048670
Long Ip
(613) 948-5273
July 15, 2013
Dear XXXXXXXXXX:
Re: Gift by Will of a Non-Qualifying Security
We are writing in response to your email dated April 24, 2013 and further to your letter of May 7, 2013. You have requested our interpretation on whether subsection 118.1(5) of the Income Tax Act (the "Act") applies to a gift by will of a non-qualifying security ("NQS") to a qualified donee where the legal representative of the deceased individual makes a designation under subsection 118.1(6) in respect of the gift.
You note that the issue arises where the property gifted is a NQS that is deemed by subsection 118.1(13) not to have been gifted except for the purpose of making a designation pursuant to subsection 118.1(6). In such circumstances, it is your view that subsection 118.1(5) applies to deem the gift of the NQS to have been made immediately before the death of the deceased individual for proceeds of disposition equal to the amount designated in respect of the gift by the legal representative of the deceased individual pursuant to subsection 118.1(6). It follows that it is the operation of subsection 118.1(5), rather than paragraph 70(5)(a), that ensures that any capital gain resulting from the gift by will is included in the terminal income tax return of the deceased individual.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. However, we are prepared to offer the following general comments that may be of assistance.
Our Comments
As noted in your submission, paragraph 70(5)(a) deems an individual to have, immediately before the individual's death, disposed of each capital property owned by the individual and received proceeds of disposition equal to the fair market value ("FMV") of the property immediately before death. However, paragraph 70(5)(a) does not deem property that is gifted to be made qua gift immediately before the death of the individual. It is subsection 118.1(5) that deems property that is gifted by will to have been gifted immediately before the death of the individual for the purpose of section 118.1. Under the scheme of the Act, the capital gain arising on the deemed disposition of property on death and the charitable donations tax credit resulting from a gift by will are reported in the deceased individual's terminal income tax return.
Where the conditions set out in subsection 118.1(5.4) are satisfied, subsection 118.1(6) permits the legal representative of the deceased individual to designate an amount in respect of the gift, within specified limits, and such amount is deemed to be the individual's proceeds of disposition of the gifted property and the fair market value of the property that is the subject of the gift in determining the eligible amount of the gift under subsection 248(31). The effect of the designation is to reduce the capital gain and/or the amount of recaptured depreciation that might otherwise result from the gift of property.
In the case of a gift by will of a NQS, the application of subsection 118.1(5) is subject to subsection 118.1(13). Subsection 118.1(13), which applies for the purpose of section 118.1, provides that where at any particular time an individual makes a gift of a NQS (including the time the gift, but for subsections 118.1(4) and (13), would be deemed to be made under subsection 118.1(5)) and the gift is not an excepted gift, the gift is deemed not to have been made. However, paragraph 118.1(13)(a) provides an exception from this deeming rule for the purpose of applying subsection 118.1(6) to determine the proceeds of disposition of the NQS.
Essentially, notwithstanding that a gift by will of a NQS is deemed not to have been made, the legal representative may, by reason of the exception in paragraph 118.1(13)(a), designate an amount as the proceeds of disposition of the NQS under subsection 118.1(6) to reduce the amount of any capital gain that might otherwise result from the disposition of the NQS. In such circumstances, the designated amount in respect of the NQS (rather than its FMV as provided for in paragraph 70(5)(a)) is used in calculating the amount of the capital gain arising on the deemed disposition of the NQS immediately before the individual's death.
In summary, it is our view that subsection 118.1(5) applies to determine the timing of a gift by will of a NQS where a designation is made under subsection 118.1(6). However, for capital gain purposes, paragraph 70(5)(a) operates to deem the NQS to have been disposed of immediately before death but the proceeds of disposition would be the designated amount under subsection 118.1(6).
We trust these comments are of assistance.
Yours truly,
Jenie Leigh
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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