15 July 1997 External T.I. 9715895 - EPSP DISTRIBUTION IN KIND

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 form T5008 or T4PS must be used to report distribution of vested assets from EPSP trust to beneficiary.

Position:

1)Form T4PS must be used if EPSP trust realizes a gain or loss on the sale of a property and then gives proceeds to beneficiary;
2) No T4PS where property is distributed in-kind;

3) Form T5008 is not required when trader or agent sells securities on behalf of a tax-exempt entity such as an EPSP trust.

Reasons:

1)Capital gain or loss from sale inside EPSP trust must be allocated to beneficiary pursuant to 144(1)(b)(iii) and 144(4);
2) 144(7.1) defers recognition of any gain or loss until disposed of by beneficiary;

3)Reg. 230(7) exempts from security reporting sales on behalf of Part I tax-exempt entities; sale of vested assets is not, as suggested by enquirer, on behalf of beneficiary.

XXXXXXXXXX			                                     971589

Attention: XXXXXXXXXX

July 15, 1997

Dear Sirs:

Re: Distribution in Kind from Employees Profit Sharing Plan ("EPSP")

This is in reply to your facsimile transmission of June 13, 1997, in which you ask whether the trustee of an EPSP must report the distribution of property other than money from the EPSP to a beneficiary on a form T5008 (Statement of Securities Disposition). You indicate that it is your practice not to use this form nor to report any capital gains or losses on a T4PS where the EPSP delivers fully vested assets to the beneficiary.

It is our understanding that the amount used by the EPSP trust to acquire the assets has been allocated to the beneficiary in accordance with paragraph 144(1)(b) of the Act and brought into the beneficiary's income in the year of allocation by virtue of subsection 144(3) and paragraph 6(1)(d) of the Act. Furthermore, no election has been made by the EPSP trust in respect of the assets in accordance with subsection 144(4.2) of the Act and the assets are not subject to forfeiture when the beneficiary ceases to be a beneficiary of the EPSP.

Subsection 147(7.1) of the Income Tax Act (the "Act") governs the distribution from an EPSP of property other than money to a beneficiary. By virtue of this provision the EPSP trust's proceeds of disposition are deemed to be the cost amount of the property to the trust immediately before the distribution.

The beneficiary's cost amount of the property received and the amount received for purposes of subsection 144(7) is (excluding the application of paragraph 144(7.1)(c) of the Act which is irrelevant to this discussion) calculated as follows:

such portion of the amount received by the beneficiary as can be established to be attributable to the payments or other things described in paragraphs (7)(a) to (g) less capital losses allocated in the year and not already used to reduce amounts described in paragraphs (7)(a) to (g)

multiplied by

the cost amount to the trust of the property immediately before the particular time

the cost amount to the trust of all properties, other than money, so received by the beneficiary at the particular time.

Where there are no allocated capital losses in the year and the only property received by the beneficiary is the vested assets previously brought into income, the result is that the beneficiary's cost amount of the assets received and the amount received for purposes of subsection 144(7) is the amount previously brought into the beneficiary's income in respect of those assets.

Therefore, neither the EPSP trust nor the beneficiary is required to recognize a capital gain or loss at the time the assets are transferred and a form T4PS is not required to be filled out by the EPSP trustee in respect of the distribution.

Where, on the other hand, the beneficiary instructs the EPSP trust to sell the vested assets and to pay the proceeds to the beneficiary, the beneficiary will be deemed to have a capital gain in accordance with subparagraph 144(1)(b)(iii) and subsection 144(4) equal to the amount, if any, by which the amount realized by the EPSP trust on the sale exceeds the cost amount to the trust. In most cases this cost amount is the amount used by the EPSP trust to purchase the assets for the beneficiary which was previously brought into the beneficiary's income. If there is a capital loss on the sale, this loss must be allocated in accordance with subparagraph 144(1)(b)(iii) and is deemed to be a capital loss of the beneficiary in accordance with subsection 144(4) of the Act. In either case the EPSP trustee is required to report this amount on a T4PS.

With respect to the form T5008, subsection 230(2) of the Income Tax Regulations (the "Regulations") requires that every trader or dealer in securities who sells a "security" (defined in subsection 230(1) of the Regulations) as agent for any vendor shall make an information return in prescribed form in respect of the sale. The vendor referred to in subsection 230(2) of the Regulations is the owner of the security and in our view securities held in an EPSP trust, whether vested or not, are owned by the EPSP trust and not by the beneficiary in whom they have been vested. Paragraph 230(7)(d) of the Regulations exempts a trader or dealer from reporting the sale where it is made on behalf of a person exempt from tax under section 149 of the Act. An EPSP trust is exempt from tax pursuant to subsection 144(2) and paragraph 149(1)(p) of the Act. As you point out, however, when the beneficiary instructs a trader or dealer to sell the security previously distributed to the beneficiary to which distribution subsection 144(7.1) of the Act applied, the sale will be required to be reported on a form T5008.

For further information on allocations and distributions to EPSP beneficiaries, please refer to Interpretation Bulletin IT-379. (Copies of Interpretation Bulletins are available from your local tax services office or on the Internet at the following site - http://www.rc.gc.ca). We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch