26 August 2011 External T.I. 2010-0371031E5 - Deemed Disposition of Trust Property on Death

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.

Principal Issues:
1. Whether 104(4)(a.4) applies to a trust if the will of sole beneficiary stipulates that the trust property will form part of his/her estate
2. Whether gains realized as a consequence of 104(4)(a.4) may be deducted by the trust under 104(6)

Position:
1. Yes
2. No

Reasons:
1. 104(4)(a.4) applies to trust to deem the disposition at the end of the day of death
2. Reading of 104(6)(b)(iii)

XXXXXXXXXX
									2010-037103
									Dominic Tiu
									(416) 973-8002

August 26, 2011

Dear XXXXXXXXXX :

Re: Deemed Disposition of Trust Property on Death

This is in reply to your email communication dated June 14th, 2010 requesting our comments on the application of paragraph 104(4)(a.4) of the Income Tax Act (the "Act") to a hypothetical trust described in that paragraph if the will of a deceased taxpayer who was the sole beneficiary of the trust stipulates that the trust property will form part of taxpayer's estate upon his/her death for the sole benefit of the taxpayer's spouse or common-law partner.

You have also asked whether the gains that are realized by a trust as a consequence of the application of paragraph 104(4)(a.4) of the Act may be deducted by the trust pursuant to subsection 104(6) of the Act if payable to a beneficiary in the year.

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we can provide you with the following general comments, which we trust will be helpful.

Pursuant to subsection 104(4), a trust is deemed at the end of certain days to have disposed of each its properties (other than an exempt property) that was a capital property (other than excluded property or depreciable property) for proceeds equal to the property's fair market value and to have reacquired that property immediately after that day for an amount equal to that fair market value. Pursuant to paragraph (a.4) of that subsection, where the trust is a trust to which property was transferred by a taxpayer who is an individual (other than a trust) in circumstances to which section 73 applied, the transfer did not result in a change of beneficial ownership of that property and no person (other than the taxpayer) or partnership has any absolute or contingent right as a beneficiary under the trust (determined with reference to subsection (1.1)), there is a deemed disposition at the end of the day on which the taxpayer dies.

Subsection 70(5) of the Act provides that, immediately before a taxpayer's death, the taxpayer is deemed to have disposed of each capital property that was owned at that moment for proceeds equal to the property's fair market value. Subsection 70(6) of the Act provides an exception where, among other conditions, a property is transferred or distributed to the taxpayer's spouse or common-law partner as a consequence of the taxpayer's death.

Although you have provided us with few details about the relevant terms and conditions of the hypothetical trust, we would note that subsection 70(6) of the Act applies only in respect of properties to which subsection 70(5) would otherwise apply. As subsection 70(5) of the Act applies only to capital property held by a taxpayer immediately prior to the taxpayer's death, it is not evident to us how this would include property held by a trust described in paragraph 104(4)(a.4) of the Act at the time of death.

In response therefore to your first question, it is our opinion that paragraph 104(4)(a.4) of the Act would likely apply to the hypothetical trust at the end of the day of the taxpayer's death.

In response to your second question, it is our opinion that, pursuant to subparagraph 104(6)(b)(iii), the amount of a trust's income that is attributable to the gains realized by the trust as a consequence of the application of paragraph 104(4)(a.4) of the Act may not be deducted by the trust pursuant to subsection 104(6) of the Act if payable to a beneficiary in the year.

Yours truly,

Phil Kohnen
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch