8 November 1993 External T.I. 9315385 F - Non-Arm's Length Relationship Between Deceased, Estate

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Subsection 1102(14) of the Income Tax Regulations (the "Regulations")

This is in reply to your letter of May 20, 1993, concerning the application of paragraph 1102(14)(d) of the Regulations when capital property of a deceased person subject to the Quèbec Civil Code is acquired by a taxpayer either 1) by direct bequest under a will or 2) by distribution from a trust created by a will. We apologize for the delay in responding to your letter.

Your request appears to relate to a situation which arose in respect of a specific taxpayer. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 (the "Circular"), a request for a written opinion on a completed transaction is generally considered by the taxpayer's local district taxation office. Therefore, while we are unable to provide an opinion in respect of the situation outlined in your letter, we are prepared to offer the following general comments.

A) Direct Bequest of Property

For income tax purposes, paragraph 70(5)(a) of the Income Tax Act (the "Act") deems a deceased person to have disposed of his/her capital property immediately before his/her death and paragraph 70(5)(b) of the Act deems a taxpayer who receives such property pursuant to a direct bequest in a deceased person's will to have acquired the property after the death of the deceased person. This deemed acquisition is consistent with the timing of the receipt of property under the Quèbec Civil Code, which provides that property of a deceased person bequeathed directly to an heir is received by the heir after the testator's death.

According to the court case Estate of Karma May, 88 DTC 1189 (T.C.C.), a taxpayer's non-arm's length relationship (within the meaning of paragraphs 251(1)(a) and 251(2)(a) of the Act) with a related family member disappears when that family member dies. However, in accordance with the principles stated in the court cases May Estate, Estate of Thomas Rodman Merritt, 69 DTC 5159 (Ex.Ct.C.) and Special Risks Holdings Inc., 86 DTC 6035 (F.C.A.), it is our opinion that, pursuant to paragraph 251(1)(b) of the Act, property acquired by a taxpayer as a consequence of the death of a related family member and in accordance with that deceased person's will is acquired from a person from whom the taxpayer is not dealing at arm's length. Therefore, paragraph 1102(14)(d) of the Regulations would apply to such property acquired by that taxpayer.

B) Property Distributed from a Testamentary Trust

The second last sentence of paragraph 6 of Interpretation Bulletin IT-132R2 states: "The Department considers that a transfer of property from a deceased to a trust created by his will is not an arm's length transaction or event." It is our opinion that the decision in the case May Estate supports this position since the court held that, as a question of fact under paragraph 251(1)(b) of the Act, the trust created by the deceased person's will did not deal at arm's length with the deceased person. Therefore, it is our opinion that paragraph 1102(14)(d) of the Regulations would apply to property deemed to have been acquired, pursuant to paragraph 70(5)(b) of the Act, by a trust created pursuant to the will of a deceased person. The above comments apply to such a trust whether it is governed by the Quèbec Civil Code or common law.

Paragraph 17 of IT-419 indicates that the Department will presume that a trust and a beneficiary thereof are not dealing at arm's length unless the facts of the situation indicate the contrary. Paragraphs 11 to 14 of that bulletin summarize criteria that have been examined by the courts in making a question of fact determination for the purposes of paragraph 251(1)(b) of the Act. It is our opinion that the determination of whether an arm's length relationship exists between a trust and a beneficiary thereof who is an individual must be made in accordance with paragraph 251(1)(b) of the Act and not paragraph 251(1)(a) of the Act. Where depreciable capital property held in a testamentary trust is distributed to a beneficiary thereof and the facts of the situation indicate that paragraph 251(1)(b) of the Act applies to the relationship between the trust and the beneficiary, then it is our opinion that paragraph 1102(14)(d) of the Regulations will apply to the property acquired by that beneficiary.

As the determination as to whether a trust and a beneficiary thereof deal at arm's length is a question of fact, we will not provide examples of hypothetical situations where a trust and its beneficiary would be dealing with each other at arm's length.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of the Circular, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Customs, Excise and Taxation.

We trust that our comments will be of assistance.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch