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: (see Statement of Principal Issues)
Is the application of subsection 164(6) of the Act, with respect to a non-resident estate, restricted to capital losses from the disposition of taxable Canadian property? (other secondary issues in file).
Position TAKEN:
Yes.
Reasons FOR POSITION TAKEN:
950724
XXXXXXXXXX Jim Wilson
(613) 957-2123
Attention: XXXXXXXXXX
May 15, 1995
Dear Sirs:
Re: Subsection 164(6) of the Income Tax Act (the "Act")
This is in reply to your letter of March 7, 1995, in which you requested our comments on the application of the above-noted provision with respect to a non-resident estate. Specifically, you have described the following facts and circumstances.
Facts
1.The deceased taxpayer was a resident of Canada for more than 5 years prior to her death. Under the terms of the Last Will and Testament (the "Will"), the deceased taxpayer appointed her daughter (the "executrix"), a resident of Hong Kong, the sole executrix of her estate. The executrix will administer the estate in Hong Kong. Two of the beneficiaries of the estate are residents of Canada both of whom were related to the deceased.
2.Immediately prior to death, the deceased taxpayer owned shares of a Canadian private corporation and shares of a Canadian public corporation. Upon death, the deceased taxpayer recognized dispositions of these shares at fair market value pursuant to subsection 70(5) of the Act. The shares of the public corporation would not be considered taxable Canadian property of the estate. The shares of the Canadian private corporation are owned two-thirds by the executrix in her personal capacity and one-third by the estate (i.e. by the executrix in her capacity as trustee).
3.Before the end of the first taxation year of the estate, the executrix will cause the estate to sell the Canadian public corporation shares, which have fallen in value, so that a capital loss will be realized.
4.Before the end of the first taxation year of the estate, the executrix will sell the Canadian private corporation shares owned by the estate back to the private corporation for a price equal to fair market value which is estimated to be equal to the price at the deceased taxpayer's date of death. The private corporation, as consideration, will issue new shares to the estate having a paid-up capital and fair market value equal to the purchase price. The transaction will result in a deemed dividend under subsection 84(3) of the Act and a capital loss. The deemed dividend will be subject to a 25% withholding tax pursuant to subsection 212(2) of the Act.
5.Under the terms of the Will, all income and capital gains of the estate are to be distributed to the beneficiaries immediately.
In addition to the application of subsection 164(6) of the Act, you wish to know whether subsection 85(4) of the Act will apply to deny the capital loss to the estate. You have also requested our opinion regarding the tax treatment of the distribution of the deemed dividend from the estate to the Canadian beneficiaries.
The situation described in your letter involves an actual proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. However, we can offer the following general comments which we hope will be of assistance to you.
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 sets out the Department's guidelines with respect to the determination of the residency of an estate or trust. Where the executrix of an estate is not a resident of Canada and the affairs of the estate are administered solely from outside Canada, the estate would normally be considered a non-resident of Canada.
It is our view that if the estate is a non-resident of Canada, this fact would not, in and by itself, preclude the application of subsection 164(6) of the Act. However, subsection 164(6) of the Act can only have application where the estate of a deceased taxpayer has within its first taxation year, disposed of capital property (taxable Canadian property) of the estate so that the estate's aggregate capital losses (from the disposition of taxable Canadian property) exceeds its aggregate capital gains (from the disposition of taxable Canadian property) and an election is filed in the prescribed time and manner set out in section 1000 of the Regulations to the Act. Accordingly, where the estate is not a resident of Canada, and subject to the application of subsection 85(4) of the Act as discussed below, only a capital loss arising on the disposition of taxable Canadian property would be eligible to be carried back to the deceased taxpayer's final T1 return pursuant to subsection 164(6) of the Act.
The Department's position with respect to the application of subsection 85(4) of the Act to this type of situation is currently under review. In the meantime, the Department will continue to follow the position set out in its response to question 42 of the 1991 Canadian Tax Foundation Revenue Canada Round Table, that subsection 85(4) of the Act will not apply where the majority of the voting shares of a corporation are, immediately following the disposition, controlled by the estate's legal representative in his or her personal capacity unless, immediately following the disposition, the corporation is "controlled, directly or indirectly in any manner whatever", by the estate. In this regard, it must be noted that we are dealing with two concepts of control. The executrix, in her personal capacity, may have de jure control by virtue of owning more than 50% of the voting shares of the corporation. However, subsection 85(4) of the Act refers to the corporation being "controlled, directly or indirectly in any manner whatever", which, pursuant to subsection 256(5.1) of the Act, includes the concept of de facto control. Although the estate may own only one-third of the voting shares of the corporation, it could still be in a position to exercise some influence over the corporation which would result in it having de facto control over the corporation. For example, if the shares owned by the estate are repurchased for consideration consisting of retractable preferred shares and the retraction of such shares by the estate would have an adverse impact on the operations of the corporation, then the estate could be considered to have some influence which could result in de facto control of the corporation. The determination of whether the estate has any such influence over the corporation can only be made following a consideration of all of the facts related to a particular situation.
Pursuant to paragraph 108(5)(a) of the Act, dividends and other types of income flowing through the non-resident estate to the Canadian resident beneficiary will lose its character and will represent "income from a property that is an interest in a trust". With respect to any Part XIII tax withheld on the payment of the deemed dividend to the non-resident estate, there are no provisions in the Act which permit such tax to be considered as an instalment payment made on behalf of the beneficiaries' Part I tax liability, nor does the Act provide for any flow through of Canadian withholding taxes paid by a non-resident estate on income which is subsequently distributed to a Canadian beneficiary. Subsection 104(22) of the Act is not applicable since the deemed dividend is not from a source in a country other than Canada and the trust was not throughout the year a resident of Canada. The Part XIII taxes paid by the non-resident estate would not be considered "foreign" taxes for the purposes of section 126 of the Act since they were not paid to the government of a country other than Canada. The Canadian beneficiaries would not be entitled to claim a foreign tax credit with respect to any Part XIII tax paid by the non-resident estate (see paragraph 4 of Interpretation Bulletin IT-372R).
A distribution by the estate of the portion of the deemed dividend that was payable to the Canadian beneficiary shall be included in computing the income of the beneficiary in accordance with paragraph 104(13)(c) of the Act. The deemed dividend received by the estate, which would otherwise form part of the estate's (i.e. the deemed non-resident corporation) foreign accrual property income ("FAPI") for purposes of paragraph 94(1)(d) of the Act, would be deducted from such FAPI pursuant to subsection 94(4) of the Act.
The Canadian private corporation would be liable for tax pursuant to subsection 116(5) of the Act, subject to paragraphs 116(5)(a) and (b) of the Act, when it acquires its shares from the estate. The Canadian private corporation would also be liable for tax under subsection 215(6) of the Act if it has failed to deduct or withhold any amount as required by subsection 215(1) of the Act with respect to the deemed dividend received by the non-resident estate.
The foregoing comments represent our general views with respect to the subject matter of your letter and is based on the legislation as enacted at the date of this letter. As indicated in paragraph 21 of the aforementioned Information Circular this is not an advance income tax ruling and is therefore not binding on Revenue Canada, Customs, Excise and Taxation.
With respect to the comments on subsection 85(4) of the Act, it should be noted that on April 26, 1995, Secretary of State Doug Peters released draft legislation which proposes to replace subsection 85(4) of the Act by proposed subsections 40(3.3) and (3.4). In the case of capital property which is a share of a corporation which is disposed of to the corporation, proposed subsection 40(3.4) will apply to deny any loss which would otherwise arise on the disposition if the corporation is affiliated with the estate immediately after the disposition. The amount of the loss which is denied will be added to the adjusted cost base of any other shares owned by the estate in the acquiring company. The expression "affiliated persons" is defined in proposed subsection 251.1(1) which provides, inter alia, that a corporation and a person by whom the corporation is controlled are affiliated persons. Proposed subsection 251.1(2) provides that for the purposes of determining whether persons are affiliated with each other, the expression "controlled" means controlled directly or indirectly in any manner whatever.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings
and Interpretations Bulletin
Policy and Legislation Branch
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