30 November 1993 Income Tax Severed Letter 9322965 - Executor's Year—Loss Carryback to Year of Death Return

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.

                                           932296
XXXXXXXXXX                      C. Bowen
                                           (613) 957-8585

Attention: XXXXXXXXXX

November 30, 1993

Dear Sirs:

Re: Subsection 164(6) of the Income Tax Act ("the Act")

We are writing in reply to your letter of August 10, 1993 concerning the application of subsection 164(6) of the Act to a particular fact situation. We apologize for the delay in responding to your letter.

In your letter you outline a series of proposed transactions which may be undertaken by the executors of the estate of Mr. A. Your request relates to an actual situation and accordingly, should be the subject of an advance income tax ruling request. While we will not comment on the specific situation outlined in your letter, we will offer the following comments which may be of assistance to you.

An article entitled "Legal and Taxation Issues Affecting Estates with Certain Business Assets" by Norm Promislow which starts on page 41:1 of the 1987 Conference Report of the Canadian Tax Foundation has several comments on the duties and obligations of an executor that may be relevant. "...(T)the ability of the personal representative (of the deceased) to take any course of action is always subject to their overriding obligations at law. The duties and powers of the executor arise from a combination of the will, statue law and common law (civil law) (page 41:3). ... (T)the shareholders, by agreement, may require the deceased shareholder's shares to be dealt with in a particular manner upon his (her) death. Subject to the operation of a shareholder's agreement and to the corporate articles and by-laws, however, the holders of shares for the time being are entitled to the benefit of all rights those shares confer (page 41:51). ...(T)the deceased shareholder's estate and beneficiaries will be affected by the terms of the will and any agreement to which the deceased's shares were subject. The will is important not just for its dispositive provisions, but for any special instructions, powers or limitations thereon which it may contain in relation to the shares. ...(T)the personal representative, both as executor and trustee, must determine whether, in light of the will and his (her) duties and obligations at law, he (she) may retain the shares or whether they must be disposed of... (page 41:51). Once the shares are transmitted to the personal representative, he (she) will be a registered shareholder of the corporation, entitled to exercise all the rights of the deceased. After he (she) is registered as a shareholder, the personal representative must first review the rights, privileges, restrictions, conditions, and obligations pertaining to the shares (page 41:63). The trustee- shareholder should exercise extreme caution in determining whether to initiate or participate in corporate restructuring. The trustee must always have primary regard for duties imposed by the will and the law, and should not be keen to risk criticism for taking action not specifically contemplated or directed by the will or clearly in the interests of the estate and all beneficiaries (page 41:67)."

Pursuant to paragraph 70(5)(a) of the Act, a taxpayer is deemed to have disposed, immediately before death, of each capital property of that taxpayer and to have received proceeds of disposition thereof equal to the fair market value at that time. The capital gains or losses arising from this deemed disposition as well as dispositions made in the year before the date of death must be reported in the taxpayer's T1 income tax return for the year of death. The capital gains exemption, as calculated in accordance with section 110.6(1) of the Act, may be available to offset any taxable capital gains reported in the year of death return.

As noted above, the will and/or the relevant laws of the province would determine whether the personal representative of a deceased taxpayer has the right to sell the property of the estate and distribute the cash to the beneficiaries or to simply distribute the property to the heirs. Where prior to 1) the first year following the death of a deceased taxpayer and 2) the winding up of the estate, the executor thereof has the right, on behalf of the estate, to wind up a corporation of which the deceased was the sole shareholder, the amount distributed to that estate on the winding up of the corporation will be subject to subsection 84(2) of the Act. Under that provision, the amount distributed will be a deemed dividend to the estate to the extent that the value of the funds or property distributed exceeds the paid-up capital of those shares.

In order for a taxable dividend received by a Canadian trust (estate) from a taxable Canadian corporation to retain its characteristics as a taxable dividend to a beneficiary of the trust to whom such amount is paid or payable by the trust (in accordance with subsections 104(13) and 104(24) of the Act), a designation under subsection 104(19) of the Act must be made by the trust. As indicated in paragraph 2 of Interpretation Bulletin IT-524 : "In determining whether a portion of a taxable dividend to be designated in respect of a particular beneficiary may reasonably be considered to form part of the beneficiary's income, all the circumstances, including the terms and conditions of the trust arrangement (will), are considered." Where a trust has been wound up and the final T3 return filed for a period that terminates before the end of the executor's year and a designation under subsection 104(19) of the Act has been made by the trust in that return, a taxable dividend will be deemed to have been received by the beneficiary so designated in the calendar year in which the trust is wound up. Where the beneficiary of such a trust is an individual (other than a trust that is a registered charity), the dividend gross-up under paragraph 82(1)(b) of the Act and the dividend tax credit under section 121 of the Act apply.

It is a question of fact as to whether or not a testamentary trust has been wound up. Where an executor requests a clearance certificate based on the return filed for the executor's year and that return is the only one to be filed for the trust, the return will generally be considered to be the final return and the trust will be considered to be wound-up during the executor's year, even where the actual distribution occurs shortly thereafter.

In calculating the capital gain or loss to be reported by the trust from the disposition of shares subject to subsection 84(2) of the Act, the amount of the deemed dividend reduces the proceeds of disposition of the shares (in accordance with paragraph 54(h)(x) of the Act). Where the deemed acquisition cost of such shares to the estate (determined in accordance with paragraph 70(5)(b) of the Act) exceeds the paid up-capital of those shares, the disposition of the shares will give rise to a capital loss to the estate.

Pursuant to subsection 164(6) of the Act, the deceased taxpayer's legal representative may elect in the prescribed time and manner set out in section 1000 of the Income Tax Regulations to apply net capital losses arising in the executor's year of a deceased taxpayer against taxable capital gains reported in the year of death return of that person. However, such net capital losses will be subject to the same provisions that apply to other capital losses realized in the terminal year, except as limited by paragraph 164(6)(f) of the Act. Therefore, the net capital losses carried back to the year of death return will first be applied against taxable capital gains reported in that year and any capital gains exemption previously claimed in that year will be reduced accordingly. As indicated on page 464 of an article entitled Deceased Taxpayers—An Updated Checklist by W.E. Crawford and A.M. Dewling, found in Volume 37, No. 2 (March/April 1989) of the Canadian Tax Journal,:

"Capital losses of the estate that do not qualify as allowable business losses may be deducted against other income of the deceased in the year of the death, however, only to the extent that they exceed the capital gains exemptions claimed in previous years, pursuant to subsection 111(2). Thus, if an election is made, such capital losses ... could potentially be ground down by the capital gains exemption previously claimed by the deceased."

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of the Information Circular 70-6R dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada Customs, Excise and Taxation.

We trust that our comments are of assistance to you.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate Legislative and Intergovernmental Affairs Branch