28 August 1989 Ruling 89M08023 F - 1989 Trust Return and Schedules

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.

SUBJECT: 1989 TRUST RETURN AND SCHEDULES

This is in reply to your memorandum of June 9, 1989.

The material of the trust guide, trust return and schedules was assigned for review to different rulings officers.  We are attaching appendix 7 which is the last one covering the material reviewed by Mr. Sandy Parnanzone.

Our review was based on the provisions of the Income Tax Act taking into account the proposed amendments in Bill C-28 (first reading June 20, 1989) and the Draft Amendments to the Income Tax Act and Income Tax Regulations Relating to Saving for Retirement of March 28, 1988.  Unless otherwise stated, the references in the appendix to sections, subsections, etc. are to the Income Tax Act.  We have ignored grammatical and typographical errors, language style and layout, unless they are believed to clearly result in incorrect or misleading information being given to taxpayers.  Title references of departmental publications, other than interpretation bulletins and information circulars, any addresses and telephone numbers of taxation offices have not been verified.

A.G. Cockell DirectorTechnical Interpretations Division Legislative and Intergovernmental Affairs Branch

T3 GUIDE (pp 40-47, 1-18) Trust Schedule 5A - Lines 501 to 520Trust Schedule 5B - Lines 530 to 560Trust Schedule 5C - Lines 570 to 576 Trust Schedule 5D - Line 580 Trust Schedule 5E - Lines 585 to 597 Trust Schedule 5F - Lines 598 to 599

1.      Page 41, 42, Distribution to Beneficiaries.

(a)      The provisions of subsection 107(2) are intended to have application to distributions by personal trust and "prescribed trusts", as indicated in the Explanatory Notes of June 1988 to Bill C-139.

(b)      Since the "cost amount" of non-depreciable capital property is not always the "adjusted cost base" (in fact, the two amounts may be different for a particular property; e.g., debt), we suggest adding "generally" before "its adjusted cost base".

2.      Page 42, 43, Deemed Disposition - 21 Year Rule.

(a)      We suggest that the days when the deemed dispositions occur be fully explained.  The emphasis given to "some trusts" will confuse the reader since the Guide neither describes the class of trusts it is referring to nor comments on the "other" trusts it is excluding from the comments it does make.  In addition, we do not understand the emphasis on post-1971 trusts.

(b)      The exceptions to the 21-year deemed disposition rules do not refer to a master trust in paragraph 149(1)(o.4) nor to an RCA trust defined in subsection 207.5(1).

(c)      As the deemed disposition rules involve transactions or events between non-arm's length persons, ITAR 26(5) may apply to provide that the deemed acquisition cost is other than that provided in section 104.  See paragraph 2 of IT-370.

(d)     If the dispositions are not those arising on the death of the spouse as referred to in paragraph 104(4)(a), the last sentence of the first paragraph should be deleted as it could not apply in 1989.

3.      Page 43, Adjusted Cost Base.

     The reference to IT-456R2 should be IT-456.

4.      Page 44, Median Rule.

     We have four observations to make.  First, we suggest that the Guide mention that the median rule does not apply to depreciable property and interests in partnership (both covered by specific ITAR provisions). Second, although the Guide does not note this, for debt obligations the determinant in the median rule is not simply "the actual cost" but the "amortized cost" (defined in ITAR 26(12)(a) for purposes of the median rule in ITAR 26(3)), as explained in IT-319 and IT-84. Third, although not mentioned in the Guide, modification to the proceeds of disposition (as a determinant in the median rule) will have to be made if any adjustment to the cost was required by section 53, as explained in paragraph 6 of IT-84.  Fourth, while the last comments on page 44 on when a capital gain or capital loss results are correct, such comments might be misinterpreted by a reader as being the method for computing capital gains or losses.

5.      Page 45, Valuation Day Election.

     The ITAR reference should be 26(7) (not 26(5)).  Also, we suggest adding a reference to IT-139R.  Finally, once the V.D. election is made, not all the assets (contrary to what is indicated in the Guide) are necessarily subject to the same election rule (i.e. there are exceptions).

6.      Page 46, Testamentary Trust - 164(6) Election.

     Contrary to what is suggested in the Guide, the election can be in respect of only part of the excess capital losses or terminal loss; the elected portion of excess capital losses is deemed to be a capital loss of the deceased in the year of death; the elective portion of terminal loss cannot exceed the estate's combined non- capital loss and farm loss (both computed before the subsection 164(6) election); and the elected portion of terminal loss will be deductible in computing the income of the deceased in the year of death.

     We observe that, if the estate does not incur a non- capital loss or farm loss (without considering the subsection 164(6) election) in its first taxation year, no part of the terminal loss can be the subject of a subsection 164(6) election.

7.      Page 1, Line 501.

     The reference to paragraphs 110.6(14)(c) and (d) should simply be subsection 110.6(14).

     21(1)(b)

8.      Page 2, Line 502.

     In setting out the definition of "qualified farm property" in the T3 Guide, you may wish to refer to that given in the Capital Gains Tax Guide.  Our suggestion would be to replace the first two lines with the following:

     "QUALIFIED FARM PROPERTY INCLUDES PROPERTY THAT IS:"

9.      Page 4, Line 503.

     We note that subsection 47(3) has been repealed.  Also, we suggest replacing the reference to ITAR 26(8.2) with ITAR 26(8).

10.      Page 5, Line 506, Personal-use Property.

(a)      Change ""Personal-use property" of a trust is property..." to ""Personal-use property" of a trust INCLUDES property..."

(b)      Change as indicated:

     "No capital loss is allowable on personal-use property (except certain debts acquired on disposition of such property and listed personal property)"

See subparagraph 40(2)(g)(iii).

11.      Pages 5-6, Line 506, Principal Residence.

     Delete "or an inter vivos trust under which the spouse is the sole income beneficiary", since the phrase is redundant.

     Also, should the reference to IT-120R4 not be IT-120R3?

12.      Page 6, Line 508.

(a)      Is the reference to Line 508 correct?  (Line 509? Line 507?).

(b)      Replace the second line with "prints, etchings, drawings, paintings, SCULPTURES, OR OTHER SIMILAR WORK OF ART".  The present wording merely gives examples of qualifying works of art but does not embody the eiusdem generis rule; the suggested rewording corrects this.

(c)     It is incorrect to simply state, as the Guide does, that the capital gain on the sale of listed personal property is treated the same as the capital gain on personal use property.  In fact, the first mentioned capital gain is netted against losses on listed-personal property realized in the same year, but never is the second mentioned capital gain; the particular year's excess of capital gains over capital losses from listed-personal property dispositions are netted against listed-personal property losses in the 3-back-7-forward carry-over period, but this never occurs with respect to capital gains on a "regular" personal-use property.

13.      Page 8, Lines 518 and 519, Canadian Cultural Property.

     The reference to IT-407R3 should be IT-407R2.

14.      Pages 8-9, Summary of Capital Gains.

(a)      The line 520 amount is entered on line 2, not 4, of the T3 Return.

(b)      Furthermore, what is entered on line 2 is the total taxable capital gains at line 520 of schedule 5A, not simply 2/3 of capital gains.  The first remember statement is incorrect because taxable capital gains and allowable capital losses in respect of eligible capital property dispositions are not based on a computation of "capital gains", which are defined in section 39.