8 November 1994 Internal T.I. 9426387 - TRANSFER OF PRE 1972 PROPERTY TO A 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.

		November 8, 1994

	Audit Division	Rulings Directorate
	Vancouver District Office	L. Holloway
S. McKenzie - Chief of Audit	(613) 957-8953

Attention : Mr. Denis McClure

		942638

XXXXXXXXXX

This is in reply to your memorandum dated October 12, 1994, and further to the telephone conversation (Holloway/McClure) wherein you requested our opinion on the application of ITAR 26(5) in a situation specific to the above named taxpayer.

Facts

A husband owned shares of a corporation prior to V-Day. He died sometime in the 1970's (after 1976) leaving everything to his wife by will. All property was transferred to his spouse, XXXXXXXXXX directly under subsection 70(6) of the Act without the creation of a spousal trust. XXXXXXXXXX died in 1992, leaving her assets to her estate. During this time the shares transferred to her estate upon death were redeemed creating a deemed dividend and a capital loss to the estate. XXXXXXXXXX was reassessed and the Department applied ITAR 26(5) to the transferred shares thereby decreasing the loss on the redemption of the shares. The taxpayer's representatives are arguing that ITAR 26(5) does not apply to this situation as a transfer from a deceased to his or her estate, is not a transaction to which ITAR 26(5) applies. They have also submitted correspondence confirming this view issued by the Department in 1973.

Our Comments

Paragraph 6 of IT 132R2 states that :

"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."

As such a transfer is not an arm's length transaction or event, it is therefore a non-arm's length transaction or event to which ITAR 26(5) would apply thereby denying access to the V-Day rule in ITAR 26(7).

The portion of ITAR 26(5) preceding paragraph (a) was amended by 1974-75-76, c. 26, s. 131(1), applicable in respect of transactions or events occurring after May 6, 1974. That part formerly read as follows:

"(5) Where any capital property (other than depreciable property or an interest in a partnership) that was owned by a taxpayer (in this subsection referred to as the "original owner") on June 18, 1971 has, by one or more transactions between persons not dealing at arm's length, become vested in another taxpayer (in this subsection referred to as the "subsequent owner") and the original owner has not made an election under subsection (7) in respect of the property, notwithstanding the provisions of the amended Act, for the purposes of computing, at any particular time after 1971, the adjusted cost base of the property to the subsequent owner...." (Emphasis ours)

Since the introduction of this transitional provision, the word "transactions" was the subject of uncertainty as it was thought that it did not clearly include unilateral actions such as a disposition to, or a winding-up of, a trust. The amendment to ITAR 26(5) to cover "transactions or events" where they occur after May 6, 1974 was made in order to remedy this problem.

In addition, in response to a Hotline question on February 28, 1974, the Department wrote: "The Department of Finance has advised us that this subsection was originally, and continues to be, intended to apply to transmissions on death. In order that the subsection may apply we should take the position that transmissions on death are non-arm's length transactions." Therefore, it appears that the words "or events" were added for greater certainty.

In a letter dated December 3, 1975, to XXXXXXXXXX the Department stated:

"It is correct that before the words "or events" were added to subsection 26(5) ITAR in 1974, the Department agreed that the devolution of property on death of a taxpayer could be considered something other than a transaction to which the concept of a "non-arm's length" transaction applies. However, the amendment to subsection 5 to read "transactions or events between persons not dealing at arm's length" has made it quite clear that this concept applies to the devolution of property on death. In fact, the purpose of this amendment was to clarify the original intent of subsection (5) that it apply to gifts and bequests as well as to other non-arm's length property transfers."

CONCLUSION

While the words "or events" were added to ITAR 26(5) for greater certainty, the intent of the legislation as apparently confirmed by the Department of Finance was to always include dispositions/bequests at death. However, prior to the amendment in 1974 it was the Department's public position that ITAR 26(5) could not apply where a transfer by will or intestacy was involved. In spite of the fact that the taxpayer's representatives have copies of correspondence confirming the pre-1974 position, the Department changed it's position in 1974 and the reassessment of the estate reflects the current position as expressed in IT-132R2 and should be upheld.

T. Murphy
for Director
Manufacturing, Partnerships &
Trusts Division
Rulings Directorate
Policy and Legislation Branch