23 November 1993 Income Tax Severed Letter 9321955 - Buy-sell Agreements—Date of Death Rules

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                           932195
XXXXXXXXXX                      Jim Wilson
                                           (613)957-2123

November 23, 1993

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letter dated July 21, 1993, in which you requested our opinion as to the application of section 116 of the Income Tax Act ("Act") on a disposition of property by the above-noted estate pursuant to a buy-sell agreement entered into prior to XXXXXXXXXX(the "deceased") death. Our understanding of the facts is as follows:

Facts

                    XXXXXXXXXX

                    XXXXXXXXXX

Our Comments

The rules in subsection 70(5) of the Act generally apply to property that is subject to a buy-sell agreement. Interpretation Bulletin IT-140R3 (" IT-140R3 ) sets out the Department's views in this regard. Paragraph 2 of IT-140R3 is worded as follows:

"When determining the proceeds deemed to have been received by the deceased pursuant to subsection 70(5), the fair market value of the property subject to the buy-sell agreement must be determined at the time immediately before death. The Department's view is that, where the deceased and the surviving party to the buy-sell agreement (survivor) did not deal at arm's length, it is a question of fact whether the fair market value for the purpose of subsection 70(5) will be determined with reference to the buy-sell agreement."

The estate of a deceased person is treated as a trust for tax purposes. It is a question of fact whether the estate is a resident or non-resident of Canada. Interpretation Bulletin IT-447 (" IT-447 ") sets out the Department's guidelines with respect to the determination of the residency of an estate or trust. We have not been provided sufficient information to enable us to provide a definitive opinion regarding the residence status of the estate. However, based on the fact that one of the two executors is a resident of Canada and the estate's asset (we have assumed that the taxable Canadian property is the material asset in the estate) and the enforceability of the legal rights thereof (see paragraph 4 of IT-447 ) is located in Canada, it is possible the estate is a resident of Canada. A conclusive determination of the estate's residence status would have to be made by your local District Taxation Office.

If the estate is determined to be a non-resident of Canada by the District Taxation Office, section 116 of the Act would apply upon the disposition of the property by the estate to the purchaser (see Information Circular 72-17R4). However, since the parties in the buy-sell agreement were dealing with each other at arm's length, the estate would generally be considered to have acquired the property (i.e. the fair market value immediately before death) at the amount agreed upon in the agreement and no gain will arise upon the disposition of that property by the estate. Where the Department is satisfied that the non-resident estate has no Part I tax liability arising from the disposition of the taxable Canadian property, it would generally be prepared to issue a certificate in accordance with subsections 116(2) or (4) of the Act, as the case may be.

In the event a certificate was not issued pursuant to either subsection 116(2) or (4) of the Act and tax was withheld by the purchaser in accordance with subsection 116(5) of the Act, the tax deducted would be credited against the estate's Part I tax payable (if any) and any excess would be refunded to the non-resident estate upon the assessment of its T3 tax return for that particular year.

We trust you will find the above comments to your satisfaction.

Yours truly,

for Director Reorganizations and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs Branch