4 October 1995 External T.I. 9515095 - DISPOSITION OF TRUST PROPERTY

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 deemed disposition of property by UK trust under UK tax law affects the cost amount of the property under the Act.

Position TAKEN:

The cost amount of non-depreciable property held by the trust immediately before the distribution is its original cost as adjusted by section 53 of the Act.

Reasons FOR POSITION TAKEN:

Definition of cost amount.

		951509
XXXXXXXXXX	A. Seidel

Attention: XXXXXXXXXX

October 4, 1995

Dear Sirs:

This is in reply to your facsimile dated May 17, 1995 which was forwarded to us by the Ottawa Tax Services Office.

You have requested our opinion with respect to the adjusted cost base ("ACB"), as defined in section 54 of the Income Tax Act (the "Act"), of the assets distributed to a beneficiary of a trust in the situation where a trust (the "Trust") was established in the UK in 1980, one of the beneficiaries of the Trust became a resident of Canada in 1988, there was a deemed disposition of the Trust's property under UK tax law in 1990 when the trust property vested and there was a distribution of the Trust's property to the beneficiary resident in Canada in 1995. The distribution in 1995 resulted in a disposition of all of the capital interest in the Trust by the beneficiary resident in Canada.

Pursuant to former subsection 48(3) of the Act, a taxpayer was deemed to have acquired each property owned by the taxpayer at the time the taxpayer became a resident of Canada at its then fair market value. This would have included the property consisting of the capital interest in the Trust. The deemed cost of the beneficiary's capital interest in the Trust would be equal to its fair market value at the time the beneficiary became a resident of Canada. Where subsection 48(3) of the Act is applicable, it is our view that subsection 107(1.1) of the Act will not apply to deem the adjusted cost base of the capital interest in the Trust to be nil.

Pursuant to paragraph 107(2)(b) of the Act, a taxpayer is deemed to have acquired any property that is distributed by a trust in satisfaction of the taxpayer's capital interest in a trust at a cost equal to the total of the cost amount of that property to the trust immediately before that time and the amount by which the ACB of the capital interest of the taxpayer exceeds the cost amount, within the meaning of subsection 108(1) of the Act, of the capital interest.

In the situation described above, the cost amount of any non-depreciable property held by the Trust immediately prior to the distribution thereof to the beneficiary would be its ACB, ie. original cost to the Trust as adjusted by section 53 of the Act. Pursuant to paragraph 107(1)(a) of the Act, the ACB of the beneficiary's capital interest immediately before the disposition thereof is deemed to be the greater of the ACB otherwise determined and the cost amount thereof to the beneficiary immediately before the disposition. Therefore, for purposes of paragraph 107(2)(b) of the Act, the beneficiary will be deemed to have received the property distributed by the Trust in 1995 at a cost equal to the ACB to the Trust of each property distributed to the beneficiary plus an amount equal to the adjusted cost base of the beneficiary's capital interest in the Trust, in this case the amount determined pursuant to subsection 48(3) of the Act, over the cost amount of the beneficiary's capital interest in the Trust. Any increase in the cost of the Trust property for UK tax purposes as a result of the deemed disposition under UK tax law is not relevant in determining the amounts under paragraphs 107(1)(a) or 107(2)(b) of the Act since such amounts would not form part of the cost amount of the property to the Trust for purposes of the Act.

These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch