26 July 2011 External T.I. 2010-0390911E5 - Interaction of ss 104(4) and 70(5.3) of the Act

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: Do the provisions of 70(5.3) apply to a hypothetical set of facts in which subsection 104(4) applies?

Position: Yes

Reasons: Legislative provisions

XXXXXXXXXX
									2010-039091
									Katharine Skulski

July 26, 2011

Dear XXXXXXXXXX :

Re: Interaction of Subsections 104(4) and 70(5.3) of the Income Tax Act (the "Act")

This is in response to your submission of December 16, 2010 in which you inquired about the interaction of subsections 104(4) and 70(5.3) of the Act in connection with the following hypothetical set of facts:

• Mr. A has attained the age of 65 years of age and has settled a trust (the "Trust") under which he is the income and capital beneficiary while he is alive;
• The Trust holds shares in a holding company ("Holdco");
• Holdco acquires and is the beneficiary of an insurance policy with a $1million death benefit on the life of Mr. A; and
• Mr. A dies at which time the insurance policy has a $100,000 cash surrender value.

Unless otherwise stated in this letter, all references in this letter to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Suppl.), as amended to the date of this letter.

Subparagraph 104(4)(a)(iv) provides, inter alia, that where a trust described in subparagraph (ii.1) thereof is created by a taxpayer who has attained the age of 65 years at the date of creation, and such taxpayer was entitled to receive all of the income of the trust that arose before the taxpayer's death and no person except the taxpayer could, before the taxpayer's death, receive or otherwise obtain the use of any of the income or capital of the trust, there will be a deemed disposition of the trust's property at the end of the day on which the taxpayer's death occurs. However, subsection 70(5.3) specifically provides that for the purpose of subsection 104(4), the fair market value at any time of property that is disposed of as a consequence of an individual's death is determined as though the fair market value of any life insurance policy of the said individual's life were the cash surrender value as defined in subsection 148(9), of the policy immediately before the said person's death.

We trust that these comments will be of assistance.

Yours truly,

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