21 July 1995 Internal T.I. 9511736 - EXEMPT CAPITAL GAINS BALANCE - DEATH OF TAXPAYER

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:

Whether the exempt capital gains balance of a taxpayer is reduced to nil upon death or whether it can be transferred to the taxpayer's spouse for his or her benefit.

Position TAKEN:

A taxpayer's exempt capital gains balance is reduced to nil upon death and it cannot be transferred to a spouse.

Reasons FOR POSITION TAKEN:

According to subsection 39.1(7) of the Act, where at any time, an individual ceases to have any interest in a flow-through entity, the individual's exempt capital gains balance in respect of the entity for all taxation years that begin after that time is reduced to nil. This would occur upon an individual's death. In addition, given the absence of a provision in the Act permitting the transfer of the exempt capital gains balance upon death, the balance cannot be transferred to benefit the individual's spouse.

		July 21, 1995

	Client Assistance Directorate	Head Office
	Specialty Publications Section	Income Tax Rulings
	Jackie Rutherford, Acting Chief	and Interpretations
 		Directorate
C. Chouinard
	Attention: Hilde Sorensen	957-8953

		7-951173

Exempt Capital Gains Balance - Death of a Taxpayer

This is in response to your memorandum of April 26, 1995, wherein you requested our comments on the treatment of the exempt capital gains balance on the death of a taxpayer. More specifically, you inquire whether the exempt capital gains balance of a taxpayer is reduced to nil upon death, pursuant to subsection 39.1(7) of the Income Tax Act (the "Act"), or whether it can be transferred to the taxpayer's spouse for his or her benefit.

According to subsection 39.1(7) of the Act, where at any time, an individual ceases to have any interest in a flow-through entity, the individual's exempt capital gains balance in respect of the entity for all taxation years that begin after that time is reduced to nil. In our view, an individual ceases to have any interest in a flow-through entity upon death. In addition, given the absence of a provision in the Act permitting the transfer of the exempt capital gains balance upon death, in our view, the balance cannot be transferred to benefit the individual's spouse.

However, although a deceased taxpayer's exempt capital gains balance cannot be transferred upon death, the deceased taxpayer's representative may nevertheless use the taxpayer's remaining balance of the exempt capital gains balance to exempt the capital gain that may arise from the subsection 70(5) deemed disposition of the deceased's interest in or share of the flow-through entity. Where property is transferred to a spouse upon death, subsection 70(6) of the Act provides for a tax-free rollover of the property to the spouse. However, the deceased taxpayer's representative can elect out of the subsection 70(6) rollover by filing a subsection 70(6.2) election. Where such an election is filed, the property is deemed to have been transferred to the spouse pursuant to subsection 70(5) of the Act, that is, at fair market value. As a result, the deceased taxpayer's representative can use the deceased's exempt capital gains balance to shelter any capital gains on the deemed disposition and the spouse is deemed to have acquired the property at its fair market value at the time of death.

R. Albert
for Director
Business and General Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

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