1993 Internal T.I. 9325537 F - Election Under Sub

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.

November 24, 1993

Saskatoon District Office Business and General Division

S. Labarre 957-2121

Attention: Frank Metanchuk

Business Audit

7-932553

XXXXXXXXXX

164(6) Election

We refer to your memorandum of September 7, 1993, wherein you asked for our opinion with respect to an election under subsection 164(6) of the Income Tax Act (hereinafter "the Act"). The facts as we understand them are as follows:

XXXXXXXXXX

XXXXXXXXXX

Your opinion

You request if there is any provision in the Act which would deny the election under subsection 164(6) of the Act in that situation and if there is a way of attacking this type of transaction. You are concerned about the beneficial ownership of the shares at the time of the disposition of the shares, the date the loss occurred and the application of any anti-avoidance provision.

-     You state that if it can be established that the beneficiaries had beneficial interest in the shares (in their capacity as residual beneficiaries), then it could be argued that the beneficiaries disposed of the shares through their agent, the executors. You ask the following questions relating to that fact:

-     Is the loss realized by the estate or by the beneficiaries of the estate? - Are the shares owned by the estate (and as such the estate is the shareholder) or just held by the estate on behalf of the beneficiaries? - If the dividends flowed through to the beneficiaries then, in fact, does that demonstrate that the shares vested indefeasibly and the beneficiaries had beneficial ownership of the shares? If the beneficiaries took the income, are they then not entitled to the shares that generated the income?

-     As an alternative argument, you state that the loss is realized after the first taxation year of the Estate because the corporation was not technically dissolved until the date of Application of Dissolution or the date the Certificate of Dissolution was issued which was, in either case, after the first fiscal year of the estate and as such the loss could be denied for that reason.

-     Finally, you think that the transactions entered into by the executors and beneficiaries is an abuse of the provisions of subsection 164(6) of the Act.

Our Comments:

1.      Our view is that the loss on the disposition of the shares was realized by the estate because when the disposition occurred, the shares were owned by the estate. From the date of death until the end of the period of the administration of the estate, the executors have legal and beneficial title of the estate property.

The beneficiaries of the estate have no interest in the estate property until the estate has been fully administered, until then they have only a right of action against the executor for proper administration of the estate. The estate is the shareholder and doesn't act on behalf of the beneficiaries. The executors are not the agent of the beneficiaries because the executors cannot affect the legal relationship of the beneficiaries with third party, the executors don't have to obey the instructions of the beneficiaries, they don't render services to the beneficiaries.

For purposes of the Income Tax Act, from the date of death until the end of the period of the administration of the estate, there are three groups of taxpayers: the deceased, the estate and the beneficiaries. The estate is considered as a trust and is deemed to be an individual in respect of the trust property. A trust exists until all of its property has been disposed of.

While an estate is under administration and before the residue is ascertained, no beneficiary at law has the right to demand the payment or distribution of capital. There is no mention in the will of an obligation to distribute the estate property after a period of time. Under common law, the executors have one year before they are required to distribute assets. There is no specific powers or directions given in the will relating to the distribution of the remaining assets in specie or to convert them into cash. Certains powers are conferred on executors by the Trustee Act and these powers apply automatically unless specifically excluded by the terms of the will. Even if the executors had not the powers to decide the winding-up of the corporation, our view is that the liquidation would be effective provided the executors acted in the best interest of the beneficiaries. The fact that the beneficiaries didn't use their right of action against the executors would tend to confirm this position.

The fact that shares were converted into cash facilitated the distribution to the residual beneficiaries and the executors had good reasons to do it this way. The conversion into cash wasn't forbidden by the law. Moreover, to convert the shares into cash instead of distributing the shares is not an indication that the property was already distributed to the beneficiaries before the conversion.

2.      The fact that the dividends income flowed through to the beneficiaries does not demonstrate that the beneficiaries had beneficial ownership of the shares. In this case it would demonstrate that the dividends were paid before the end of the estate taxation year or that the income was payable to the beneficiaries before the end of the estate taxation year. An amount is considered to be payable if it is paid in the year to the person to whom it is payable or the person to whom it is payable is entitled in the year to enforce payment thereof. As stated in IT-286R2, where the initial taxation year of a testamentary trust coincides with the executor's year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the Department will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24). The income payable to the beneficiaries is included in their income pursuant to subsection 104(13) in case where there is no designation under subsection 104(13.1).

3.      A disposition takes place when a share is cancelled during the process of a voluntary dissolution of a corporation pursuant to clause 54(c)(ii)(A) of the Act. Even if the shares were not cancelled before the dissolution, the Department is prepared to accept that there has been a disposition of the shares of the corporation by a shareholder for the purposes of section 88 of the Act where the corporation has been wound up and the shareholder has received his portion of any final liquidating distribution by the corporation.

If the shares were cancelled before July 22,1992, the taxpayer's legal representative has, within the first taxation year of the estate, disposed of capital property. The loss from the disposition of the capital property of the estate could not be denied by stating that the corporation was not technically dissolved within the first taxation year of the estate.

4.      Finally, we are of the opinion that the general anti-avoidance rule does not apply in the particular situation.

5.      The decision of the Federal Court of Appeal in the Estate of the Late Alexander Boger (hereinafter "Boger case") (1993 DTC 5276) could be viewed as supporting your argument that the beneficiaries disposed of the shares. Mr. Boger died on March 1979. An interest in the residue of the estate was left to the deceased taxpayer's children. Farm lands form part of the residue.

Certain capital distribution were made in September and December 1981 and in May and September of 1982. In August 1982, the executor sold the farm lands before they were conveyed to the children. The issue was whether the farm lands owned by the deceased were transferred and vested indefeasibly in his children upon his death and whether the subsection 70(9) rollover applied.

In the Boger case, it was decided that the farm lands were transferred or distributed and that the property had become vested indefeasibly in the children. Subsection 70(9) applied. A decision of the Appeals & Referrals Division was issued indicating that the objections and appeals dealing with identical or similar situations should be resolved in accordance with this judgment.

However, in our view, the situation of the XXXXXXXXXX estate is clearly distinguishable from the Boger case in that the decision in the Boger case was taken in the context of a subsection 70(9) rollover. We doubt that the decision would have been the same in the context of an election under subsection 164(6) of the Act where the words used in the provision are: "the taxpayer's legal representative has ... disposed of capital property of the estate".

We trust that the above comments will be of assistance to you.

Maurice Bissonfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs and Branch