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:
What are the tax consequences flowing from an out-of-Court settlement negotiated between an estate and a claimant.
Position:
Cannot determine.
Reasons:
Lack of information. Not clear whether claimant has been the owner of the property from the outset.
5-960480
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
February 23, 1996
Dear XXXXXXXXXX:
Re: Disposition of Property by Estate
We are writing in reply to your letter of February 2, 1996, wherein you requested our comments regarding the tax consequences of an out-of-Court settlement between an estate and an individual.
In the situation you describe, a taxpayer died holding title to a quarter section of land, shares in a private corporation and a condominium. Following the taxpayer's death, an individual produced unregistered transfers of these assets and claimed to own all of them. Litigation ensued and an out-of-Court settlement was arrived at whereby the taxpayer's estate would transfer the condominium and shares to the individual and pay the individual's, as well as their own, legal fees arising from the litigation. You inquire whether the value of the shares and the condominium and the amount of the legal fees should be added to the adjusted cost base of the quarter section of land or whether they would be considered to be costs incurred in respect of the disposition of the quarter section of land.
It is not clear from your letter whether the deceased taxpayer or the individual owned the properties in question at the time of the taxpayer's death or on what basis the individual claims to be the owner of the properties. Therefore, we are unable to provide an opinion in respect of the situation outlined in your letter. However, we are prepared to offer the following general comments.
For income tax purposes, paragraph 70(5)(a) of the Income Tax Act (the "Act") deems a deceased person to have disposed of their capital properties immediately before death and to have received proceeds of disposition therefor equal to the fair market value of the properties at that time. Paragraph 70(5)(b) of the Act deems any person, including the estate of a deceased person, who, as a consequence of a taxpayer's death, acquires property that is deemed by paragraph 70(5)(a) of the Act to have been disposed of, to have acquired the property at the time of the death at a cost equal to its fair market value immediately before death. The capital gains or losses arising from the deemed disposition upon death must be reported in the taxpayer's T1 income tax return for the year of death.
As regards legal fees, the Department's general views concerning the treatment of legal fees for tax purposes are stated in Interpretation Bulletin IT-99R4, a copy of which is enclosed. As indicated in paragraph 1 of IT-99R4, in the absence of a specific provision in the Act dealing with legal fees, such fees are only deductible if they were incurred for the purpose of gaining or producing income from a business or property and are not outlays of a capital nature. Generally, legal fees are deductible where they are incurred in connection with normal activities, transactions or contracts incidental or necessary to the earning of income from a business or property. In addition, as indicated in paragraph 13 of IT-99R4, legal fees incurred for the purpose of making the disposition of a property may be added to the adjusted cost base of the property in calculating the capital gain or capital loss, as the case may be. In our view, legal fees incurred for the purpose of settling an estate would neither be deductible nor considered to have been incurred for the purpose of disposing of a capital property.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Encl.
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