11 October 2013 External T.I. 2013-0496431E5 - Subsection 107(2.002) election

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: How to file a subsection 107(2.002) election where there is no prescribed form available.

Position: The beneficiary should send a letter attached to the return of income for the year of the distribution. Where the beneficiary files the return of income electronically the election, which can not be filed electronically, must be sent to the CRA separately.

Reasons: See below

XXXXXXXXXX
2013-049643
J. White

October 11, 2013

Dear XXXXXXXXXX,

This is in response to your correspondence dated June 27, 2013 in which you noted there is no prescribed form to file an election under subsection 107(2.002) of the Income Tax Act (Canada) (the Act). Accordingly, you asked how the election should be filed.

Our comments

Where a non-resident trust makes a distribution of a property (other than property described in paragraphs 107(2.001)(b) and (c) of the Act) to a beneficiary in full or partial satisfaction of the beneficiary's capital interest in the trust, the beneficiary may make an election under subsection 107(2.002) to elect out of the rollover rules in subsection 107(2) such that the rules in subsection 107(2.1) apply.

Where the beneficiary makes the subsection 107(2.002) election, the election must be filed with the beneficiary's return of income for the taxation year in which the non-resident trust distributes the property. As there is no prescribed form available for the subsection 107(2.002) election, the beneficiary should attach a letter to their return of income for the year in which the non-resident trust distributes the property. Where the beneficiary files their return of income electronically, the election should be sent to the CRA separately. The letter should include the following information:

• a declaration to elect under subsection 107(2.002) of the Act;
• the name and address of the beneficiary;
• the beneficiary's CRA identification number (for example, social insurance number, business number etc.);
• the taxation year;
• a description of the property being distributed in satisfaction of the capital interest in the trust;
• the cost amount of the property to the trust;
• the fair market value of the property at the time of the distribution;
• the adjusted cost base of the beneficiary's capital interest in the trust;
• description and name of the trust;
• name and address of the trustee(s); and
• country of residence of the trust.

Under paragraph 107(2.002)(b), the cost amount of the capital interest to the beneficiary is deemed, for purposes of subparagraph 107(1)(a)(ii), to be nil. Generally, the beneficiary's proceeds of disposition in respect of the capital interest are calculated in accordance with paragraph 107(2.1)(d). 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 the portion of the distribution that is a payment to which paragraph (h) or (i) of the definition of "disposition" in subsection 248(1) applies, and any eligible offset as defined in subsection 108(1). As a result, the beneficiary may realize a capital gain on the disposition of their capital interest in the trust.

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