20 December 1994 Internal T.I. 9412357 - PROPERTY ADMINISTERED BY JUDICIAL SEQUESTRATOR - TRUST

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.

Principal Issues:

Taxation of income generated from property administered by a judicial sequestrator appointed by the Superior Court of Quebec.

Position TAKEN:

The sequestrator should produce a T3 return when the ownership of the property is established by the Court. The legal owner will add all the income received to his income for that taxation year and will pay the tax accordingly.

Reasons FOR POSITION TAKEN:

			December 22, 1994

	Montreal District Office	Head Office
Business Inquiries	Rulings Directorate
	Section 473-1-1					J. Desparois
(613) 957-8953
Attention: Mr. Carl Deslongchamps

			7-941235

TAXATION OF INCOME GENERATED BY PROPERTY
ADMINISTERED BY JUDICIAL SEQUESTRATOR

We are replying to your memorandum of May 5, 1994 requesting our opinion concerning the above. XXXXXXXXXX

We apologise for the delay in responding to your request.

FACTS

XXXXXXXXXX

QUESTIONS

You have requested that we determine by who and when the rental income should be reported while the property is administered by the judicial sequestrator.

You have asked us to determine if the taxpayer is entitled to deduct the balance of the application fee over the next four years (on a basis of $XXXXXXXXXX per year). Considering the amount involved, you have told us that the deduction was allowed to the taxpayer and you have decided to withdraw your request on that matter.

YOUR OPINION

XXXXXXXXXX

Based on that request, you understand that subsection 150(3) of the Act and subsection 204(1) of Regulations refer only to information return and not to income tax return. Therefore, you are in the opinion that the taxpayer should include in his 1993 tax return the rental income generated from the property.

TAXPAYER'S OPINION

By analogy to the administrative position set forth in the Interpretation Bulletin IT-129R, paragraph 10, concerning the taxation of income generated from lawyers' trust accounts, the taxpayer is of the opinion that the revenue from the property administered by the judicial sequestrator should be taxed only in the year where the Court establishes the ownership of the property. Moreover, to reinforce its position, the taxpayer relies on the concept of beneficial ownership. In his views, he lost the beneficial ownership of the property when the judicial sequestrator was appointed.

OUR OPINION

The taxpayer has referred to the concept of beneficial ownership to reinforce its position stating that he should not be taxed on the income generated by the property until the Court establishes the ownership. The concept of beneficial ownership is a distinction specific to provinces governed by the Common Law. The Civil Code of Quebec does not made such distinction between legal and beneficial ownership. Nonetheless, as his right to receive that income is contingent to the Court decision, we agree with the taxpayer that he should not report the income personally until the Court establishes the ownership of the property.

You pointed out that a T3 return has two functions. We confirm that a T3 is an income tax return and also an information return. The latest is discussed in paragraph 13 below.

Paragraph 150(1)(c) of the Act states the obligation to file a trust income tax return. In order to apply paragraph 150(1)(c) of the Act, a trust must exist.

The Act does not provide any definition of a trust. Under the Civil Code of Quebec, a judicial sequestrator is not a trust. Subsection 248(3) of the Act contains rules that deem certain relationships or arrangements created under the Civil Code of Quebec to be trusts for the purposes of the Act but does not deem any trust where a property is held by a judicial sequestrator. Subsection 104(1) provides that for the purposes of the Act, "a trust shall be read as a reference to the trustee or the executor, administrator, heir or other legal representative having ownership or control of the trust property."

XXXXXXXXXX

XXXXXXXXXX

Subsection 150(3) is another provision of the Act which requires certain persons to file tax return. Subsection 150(3) of the Act reads as follows:

"Every trustee in bankruptcy, assignee, liquidator, curator, receiver, trustee or committee and every agent or other person administering, managing, winding-up, controlling or otherwise dealing with the property, business, estate or income of a person who has not filed a return for a taxation year as required by this section shall file a return in prescribed form of that person's income for that year."

As both the taxpayer and the previous owner will file their own personal tax return, we are of the opinion that, technically, subsection 150(3) of the Act does not apply to the present situation even though the income generated from the property administered by the judicial sequestrator is not be reported by any of them.

In our views, to apply subsection 150(3) of the Act to a judicial sequestrator, this subsection should be interpreted by implying the following words "in respect of the property in question" after the second word "return" in subsection 150(3). The consequence of implying those words to subsection 150(3) of the Act would be the filing of a T3 tax return by the judicial sequestrator and the payment of tax on the income generated by that property. We recommend that subsection 150(3) of the Act should be read without implying those words. Thus, we are of the opinion that you should not assess the judicial sequestrator in respect of the income generated from property under subsection 150(3) of the Act.

Subsection 159(2) of the Act requires, inter alia, that judicial sequestrator should pay all taxes owing before distributing the property to the eventual owner. Subsection 159(2) of the Act reads as follows:

«(2) Certificate before distribution. Every person (other than a trustee in bankruptcy) who is an assignee, liquidator, receiver, receiver-manager, administrator, executor or any other like person (in this section referred to as the "responsible representative") administering, winding up, controlling or otherwise dealing with a property, business or estate of another person shall, before distributing to one or more persons any property over which the responsible representative has control in the capacity of the responsible representative, obtain a certificate from the Minister, by applying therefor in prescribed form, certifying that all amounts

(a)for which any taxpayer is liable under this Act in respect of the taxation year in which the distribution is made, or any preceding taxation year, and

(b)for the payment of which the responsible representative is or can reasonably be expected to become liable in his capacity as the responsible representative

have been paid or that security for the payment thereof has been accepted by the Minister."

In our opinion, XXXXXXXXXX the sequestrator could be required to produce a T3 tax return when the ownership of the property is established by the Court and to pay tax at that time under subsection 159(2) of the Act.

The judicial sequestrator is obliged to file annually an information return under paragraph 221(1)(d) of the Act and subsection 204(1) of the Regulations which read as follow:

"221(1) The Governor in Council may make regulations

(...)

(d)requiring any class of persons to make information returns respecting any class of information required in connection with assessments under this Act;"

"204.(1) Every person having the control of, or receiving income, gains or profits in a fiduciary capacity, or in a capacity analogous to a fiduciary capacity, shall make a return in prescribed form in respect thereof."

In our views, the duty of the sequestrator falls in a capacity analogous to a fiduciary capacity and for that reason, technically, an information return has to be filed under subsection 204(1) of the Regulations. To simplify administration, we recommend that the judicial sequestrator should file an information return when the Court establishes the ownership of the property.

For all the above reasons, we recommend on an administrative basis that the judicial sequestrator should file a T3 tax return when the Court establishes the ownership of the property. Then, the judicial sequestrator should report all the accumulated income and should distribute it to the legal owner of the property ending up with a nil return. The sequestrator should also file a T3 supplementary form showing the aggregate amount distributed to the legal owner. When the legal owner receives all the income, he should then add it to his income for that taxation year and should pay the tax accordingly.

Such a practice will result in the same tax treatment as provided by the administrative practice settled in Interpretation Bulletin IT-129R, paragraph 10, for interest on funds of litigants held by a lawyer pending a court order. Paragraph 10 of Interpretation Bulletin IT-129R reads as follows:

"10. Where funds deposited with a lawyer by a litigant or litigants for safekeeping and investment, pending a court order or settlement establishing their proper disposition, earn income the Department considers such income to be income of a trust and recognizes that the beneficial owner is the eventual recipient of the funds. Therefore, conditional upon waivers being filed by each of the litigants and the lawyer-trustee for the relevant taxation years, the Department will defer assessment of the income until the recipient is finally determined."

If you have any questions or wish to discuss any of the above, please contact the writer.

Acting Section Chief
Manufacturing Industries, Partnerships
and Trusts Section
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Policy and Legislation Branch