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.
Principales Questions:
Tax implications resulting from the disposition of a property held since 1957 by an estate.
Position Adoptée:
Deemed capital gain pursuant to subsection 104(4) is table in the estate and the real capital gain resulting from the sale of the property can be designated in favour of the charitable organization as the proceeds from the sale is payable to the charitable organization
Raisons POUR POSITION ADOPTÉE:
ccm 942913, 952811, 931544 and 8167-1
February 22, 1996
XXXXXXXXXX Tax Services Office Headquarters
Business Enquiries Income Tax Rulings and
Interpretations
Directorate
Attention: XXXXXXXXXX J. Desparois
(613) 957-8953
7-960356
XXXXXXXXXX
We are replying to your memorandum of November 30, 1995 in which you requested our opinion on the taxation of a capital gain realized by the Estate of XXXXXXXXXX We apologize for the delay in our written response.
FACTS
The relevant facts as we understand them are as follows:
XXXXXXXXXX
THE QUESTION
Who is liable for the tax resulting from the sale of the cottage?
OUR OPINION
Existence of a trust
XXXXXXXXXX
The Income Tax Act (the "Act") does not provide any definition of a trust. Subsection 104(1) provides that for the purposes of the Act, "a trust shall be read as a reference to the trustee or the executor, administrator, heir or other legal representative having ownership or control of the trust property."
XXXXXXXXXX
Accrued value on the cottage for the period between 1957 and 1972
Since the Act only taxes capital gains accrued after January 1, 1972, needless to say that the accrued value on the cottage before that time is not taxable.
Accrued value on the cottage from 1972 to the date of the deemed disposition
In general, paragraph 104(4)(b) of the Act provides that a trust shall, on each 21st anniversary date beginning after 1991, be deemed to have disposed of each property for proceeds equal to its fair market value and to have reacquired the property immediately thereafter for an amount equal to the deemed proceeds of disposition. Therefore, income tax is payable on any capital gains accrued on properties held in the trust on each 21st anniversary date. In the case under study, the first anniversary date was January 1, 1993.
However, subsection 104(5.3) of the Act provides an exception to this 21-year deemed realization rule. Where a trust files an election under subsection 104(5.3) of the Act in prescribed form with the Minister within six months after the end of the taxation year of the trust, the deemed realization rule is generally postponed to the first taxation year following the death of the last-surviving "exempt beneficiary". In the case under study, if this election has been filed, then the deemed disposition date should be the first day of the first taxation year of the trust beginning after the taxation year which includes August 1994 (the death of the last surviving son).
Consequently, the Estate is deemed to have disposed on January 1, 1993 (or in August 1994 if an election under 104(5.3) of the Act had been filed) of the cottage for its fair market value at that time and to have realized a capital gain on the accrued value from 1972 to the date of the deemed disposition.
Subsection 104(21) of the Act allows a trust to designate a portion of its net taxable capital gains as a taxable capital gain of a beneficiary provided that the amount is included in the beneficiary's income under subsections 104(13) or 104(14) or section 105 of the Act as a distribution of net taxable capital gains of the trust. Generally speaking, this means that the taxable capital gain must be paid or payable to the beneficiary or must be subject to a preferred beneficiary election.
Considering that the cottage was the only asset of the Estate which was not distributed and considering that the four sons had no other rights in the Estate other than the right to use this cottage, we are of the opinion that the four sons had no right to receive any income or capital of the Estate. Therefore, the Estate could not designate any portion of its deemed capital gain as a taxable capital gain of any of the four sons by virtue of subsection 104(21) as no amount could be included in the income of any of the four sons under subsections 104(13) and 104(14) of the Act. Alternatively, the deemed capital gain could only be flowed through to the Charity if a capital encroachment or distribution had actually been made to the Charity prior to the year-end of the trust which includes the deemed disposition date. As the foregoing does not appear to be applicable, in our opinion the deemed capital gain must be taxed in the Estate. Accordingly, the deemed capital gain should be declared in a T3 return for the taxation year including the deemed disposition date.
Accrued value on the cottage from the date of the deemed disposition to the date of the sale
We understand that the cottage was sold in September 1995 by the solicitor and that the proceeds of the sale will be paid to the Charity in accordance with the terms of the will. Therefore, the capital gain accrued from January 1, 1993 (or August 1994 if an election under paragraph 104(5.3) of the Act had been filed) to September 1995, if any, is realized by the Estate and a T3 return has to be filed for the period which includes September 1995. We are of the opinion that the Estate can designate this entire capital gain to the Charity pursuant to subsection 104(21) as the proceeds of the sale are payable to the Charity.
If you have further questions or wish to discuss any of the above, please contact the writer.
Michel Lambert
Acting Section Chief
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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