23 June 1995 External T.I. 9509155 - capital gains election & testamentary 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:

deemed gain of a trust payable?

Position:

terms of trust determine what is payable.

Reasons:

deemed gains are a nothing for tax law purposes

		950915
XXXXXXXXXX              	L. Holloway
(613) 957-8953
June 23, 1995

Dear XXXXXXXXXX:

Re: Capital Gains Election by a Testamentary Trust

This is in reply to your letter dated April 4, 1995, enquiring whether a testamentary trust could make a capital gains election to recognize gains accrued to February 22, 1994 and flow the deemed gains out to beneficiaries. In particular you had presented a situation whereby a taxpayer died in July of 1993 leaving the residue of his or her estate to be divided equally among a sister and two nephews. The trust was wound up and the assets distributed on May 31, 1994.

Our Comments

The scenario you have described appears to reflect an actual fact situation, and as stated in paragraph 21 of Information Circular 70-6R2, we are not prepared to comment on specific fact situations other than in the form of an advance income tax ruling. However, we can provide you with the following general comments. All references herein to statute are to the Income Tax Act.

Under paragraph 70(5)(a) a deceased individual is deemed to have disposed of his or her capital property at fair market value immediately before death. Under paragraph 70(5)(b) a person who as a consequence of the individual's death acquires any property deemed by paragraph (a) to be disposed of by the individual is deemed to have acquired it at the time of the death at a cost equal to its fair market value immediately before death. Usually, the person acquiring the property is the estate (trust) (however see Interpretation Bulletin IT-449R) and the heirs have income and capital interests in the trust.

An election under subsection 110.6(19) to recognize unrealized gains on assets held by a personal trust on February 22, 1994, is effective, in part, only where it would result in an increase in the eligible taxable capital gains of the trust that are flowed out to beneficiaries under subsections 104(21) and (21.2). Subsection 104(21) requires, in part, that the net taxable capital gains allocated must be considered to be part of the amount included in the beneficiary's income under subsection 104(13). An amount in respect of a deemed capital gain would only be considered payable under subsection 104(13) where the terms of the trust specifically permit or require an amount equivalent to the deemed capital gain to be paid or payable or the trustees have the discretionary power to pay out amounts that are defined as income under the Act. It is not possible to define a deemed capital gain to be income (or capital) for trust purposes. It is a "nothing" for trust law purposes. The exercise of a general power of encroachment on capital or the payment of an asset in kind is enough to flow through a realized capital gain (because this capital gain is also recognized for trust purposes). It is not enough to flow through a deemed capital gain because it is not recognized as a capital gain for trust purposes.

While we trust these comments will be of assistance, they do not constitute an advance income tax ruling and consequently, are not binding on Revenue Canada.

Yours truly,

A/Chief
Trusts Section
Manufacturing Industries, Partnerships and
Trusts Division
Rulings and Technical Interpretations Directorate
Policy and Legislation Branch