5 October 1988 Income Tax Severed Letter 7-2994 - [881005]

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.

October 5, 1988

HEAD OFFICE Financial Industries Divisiion W.C. Harding (613) 957-3499

SUBJECT: XXXX This is in reply to your memo of April 11, 1988 to the Technical Applications Section which was referred to us for our consideration.

In accordance with your submissions the facts of the case, as we understand them are:

XXXX

You have now asked us:

1. Did a spouse trust exist,

2. when did the properties vest in the residual beneficiaries, and

3. if a life interest in the assets existed, should the net income have been allocated to XXXX or to the residual beneficiaries.

XXXX

In our research, we failed to determine the existence of such a policy but did, in fact, note a number of Rulings Directorate opinion letters which would contravene such a rule. We could not confirm whether or not Audit Directorate had such a policy, however, we would not expect so, as it would be contrary to our published position as expressed in IT-449R .

A part of the problem may stem from the wording of, and the changes to the provisions of subsection 70(6) of the Act and other similar provisions. For taxation years after 1984, in order to have that section apply, property has to vest in a spouse of the deceased or a spouse trust within 36 months or such longer period as is warranted. For these years the provisions of IT-449R , paragraph 7, have application and the allowable vesting period may be extended if application has been made to a court under a dependent's relief act or a family law act and application, to the Department, for a time extension has also been made within 36 months.

For years prior to 1985, however, the law required vesting to occur within 15 months (6 prior to 1972). 15 months or such longer period as necessary was then allowable, on application, in order to substantiate that vesting had occurred within the applicable period. The provisions of paragraph 7 of IT-449R , as noted above, cannot be used to extend the vesting period for these years as it now can for years after 1985.

To answer your questions we would like to set out what should have happened in your case by virtue of bott. trust and tax law.

XXXX

(We will restrict our remaining comments to the real property.) The provisions of subsection 70(5) of the Act would have had application except to the extent subsection 70(9) applied in respect of transfers of farms to children. Several ITAR provisions could also have been applicable.

At this time the estate was not a spouse trust.

XXXX

At this point, for tax purposes, any assessment of XXXX under subsection 70(5) would have remained valid. The properties however would have been acquired by the restructured Trust and not by the children and any assessment under subsection 70(9) would have had to be reassesses as the properties would not have been transferred to the children.

Treatment would not be available under subsection 70(6) as the transfer was not made in time.

XXXX

If the trust was not a spouse trust, the effective consequence was the passage of the properties to the children at the trust's cost of acquisition under subsection 70(5) of the Act.

If the trust was a spouse trust, whether or not subsection 70(6) had previously applied, on XXXX death a deemed disposition is considered to have occurred, in accordance with the provisions of subsection 104(4)(a). Therefore, previously untaxed gains/losses would be taxed in the trust prior to distribution of the properties to the residual beneficiaries. An exception to this rule is found in subsection 70(9.1) with respect to the transfer of farm property.

A number of the above consequences, as noted, rest upon a determination of whether or not the trust is a spouse trust. In our opinion it may not be XXXX

If this $XXXX maximum is less than the income or the trust for the period then the provisions of subparagraph 70(6)(b)(i) of the Act would have been contravened. Secondly, since the trust is considered to have existed from the time of probate, it would be a tainted spouse trust by virtue of its testamentary debts outstanding at the time of probate if it had not made a proper election under the provisions of subsection 70(7) of the Act. This question must be left for your review and determination.

In our view, an amicable resolution of this case should be attainable:

1. For XXXX if an assessment was required under subsection 70(5), it is now statute-barred in all probability.

2. For the estate, it will presently be subject to (re)assesment of capital gains and recapture, if it is a spouse trust, by virtue of paragraph 104(4)(b) except to the extent that subsection 70(9.1) may have application. The trust is deemed to dispose of its properties at Fair Market Value on the death of the spouse. These properties are then transferable to the residual beneficiaries using the provisions of section 107 of the Act. ITAR will have application to these calculations.

A spouse trust will remain as such even if the provisions of subsection 706) of the Act were not applied due to the delays in vesting of the properties.

If the estate is not a spouse trust there is no deemed disposition at the time of XXXX death. The properties were held by the trust at values determined at the time of XXXX death in accordance with subsection 70(5) of the Act ITAR. At the time of XXXX death these properties will again rollover to the children at these same values in accordance with subsection 107 and ITAR.

We trust these comments will be of benefit to you. The documents submitted are returned herewith.

for Director Financial Industries Division. Rulings Directorate