16 February 2011 External T.I. 2010-0389561E5 - Transfer of farm property to "ex" daughter-in-law

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: Whether, for the farm rollovers to child, the "in-law" relationship between parents and the deceased child's spouse continues after the death of the child.

Position: No.

Reasons: CRA positions, Canadian case law and foreign case law/legislation.

XXXXXXXXXX
									2010-038956
									André Gallant
									(613) 957-8961

February 16, 2011

Dear XXXXXXXXXX :

Re: Meaning of "Child" for Transfers of Farm Property

This is in response to your letter of December 1, 2010, regarding the extended meaning of "child" in paragraph 252(1)(e) of the Income Tax Act (Canada) (the "Act") with respect to the transfers of a farm property to a taxpayer's child under subsections 70(9) and (9.01), as a consequence of the taxpayer's death, and under subsections 73(3) and (3.1), as a result of an inter vivos transfer to a child (both types of transfers hereinafter referred to as "farm rollovers to child").

Pursuant to paragraph 252(1)(e) of the Act, a child includes a spouse or common-law partner of a child of the taxpayer. That is, a taxpayer's child includes a person that has an "in-law" relationship with the taxpayer because of a connection by marriage (e.g., son-in-law or daughter-in-law). You asked whether, for purposes of the farm rollovers to child, the spouse or common-law partner of a taxpayer's child continues to be a child of the taxpayer after the death of the taxpayer's child (i.e., whether the in-law relationship continues after the death of the taxpayer's child).

Your Position

On a strict technical interpretation of paragraph 252(1)(e), it would appear that the in-law relationship survives the death of the taxpayers' child. Based on the definition of child, from the point of view of the deceased child, the spouse or common-law partner will continue to be such even if that spouse or common-law partner subsequently remarries. In your initial legal research, you indicate that you encountered the concept of surviving spouse in approximately 115 federal statutes.

From a tax policy point of view, you see no reason not to treat the spouse or common-law partner of a taxpayer's child as a child of the taxpayer after the death of the taxpayer's child for purposes of the farm rollovers to child. To support this view, you refer to Appendix A of Interpretation Bulletin IT-513R, Personal Tax Credits, February 24, 1998, which states in part as follows with respect to the word "spouse":

"For the purposes of the equivalent-to-spouse tax credit and the dependant tax credit, when a marriage has been dissolved by death, the family relationships created by the marriage continue to exist. For example, a man or woman is considered to remain a child of his or her deceased spouse's mother or father."

We would add that, in IT Rulings' document 2004-0063331E5, the position expressed in the passage above was also made applicable to an individual claiming a medical expenses tax credit in a situation where the patient was the mother of the taxpayer's deceased spouse.

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 submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following general comments, which may be of assistance.

For the reasons set out below, we are of the view that for purposes of the farm rollovers to child, a spouse or common-law partner of a taxpayer's child ceases to be a child of the taxpayer after the death of the taxpayer's child. That is, the "in-law" relationship ceases to exist at the time of death of the taxpayer's child.

As explained below, the position set out in IT-513R, Appendix A, is an administrative relief that applies only for purposes of the personal tax credits mentioned therein.

In fact, in paragraph 31(a) of Interpretation Bulletin IT-349R3, Intergenerational Transfers of Farm Property on Death, November 7, 1996, the Canada Revenue Agency (CRA) takes the position that, "[f]or the purposes of the rollover provisions described in section 70, ... the child relationship must exist at the time of death". The CRA's position with respect to section 73 is outlined using similar wording in Interpretation Bulletin IT-268R3, Inter Vivos Transfer of Farm Property to Child, February 13, 1987, at paragraph 2, which reads in part as follows: "For purposes of the transfer rules of section 73, the child relationship must exist at the time of the transfer..."

In IT Rulings' documents 9426215, 2002-0176465 and 2008-0285271C6, the position taken is that the in-law relationship ceased upon the death of the child for purposes of the capital gains exemption for qualified farm property in section 110.6 of the Act.

The CRA takes a similar position with respect to the arm's length rules, as reflected in Interpretation Bulletin IT-419R2, Meaning of Arm's Length, June 8, 2004, paragraphs 4 and 6, which read in part as follows:

"4 ...On the divorce of an individual's child (whether a natural child, an adopted child, a stepchild, or an individual considered to be a child by reason of paragraph (a) above), the child's former spouse ceases to be the child's spouse and is no longer a child of the individual.

...

6. ... However, where an individual's marriage is dissolved by either divorce or the death of the individual's spouse, the individual will cease to be "connected by marriage" or to be "connected by blood relationship" to the parents and any siblings of the individual's former spouse." (footnote 1)

The end of the in-law relationship upon death has been the subject of some debate in the Canadian courts. In the case of Pembroke Ferry Ltd. (1952 CarswellNat 121), the judge of the Tax Appeal Board (TAB) found that Irene McCool could not be said to be connected by marriage with the father of her late husband after her husband's death when the marriage no longer existed. In the case of Estate of Karna May (88 DTC 1189), the Tax Court of Canada (TCC) quoted the Pembroke Ferry case and found that the husband of the late Karna May was not related by marriage to the father of Karna May after the death of Karna May.

However, in the case of Re Crowthers ((1978) 1 W.W.R. 262 (BCSC)), the judge of the British Columbia Supreme Court found that the wife of a deceased son who remarried continued to be the "daughter-in-law" of the deceased son's parent. Also, in The Estate of Mary Jane Gale (85 DTC 28), the TCC cited the Re Crowthers case to support the conclusion that the wife of a deceased son of a person, though remarried, could be considered a child of that person for purposes of the Act.

In our view, the legal rationale used by the three members of the TAB in Pembroke Ferry is to be preferred to the rationale used by the BCSC in Re Crowthers. In Re Crowthers, the BCSC relied on six reasons in support of the continuation of the in-law relationship. The first two reasons referred to the Bible and canon law, respectively; the third reason, to the fact that a daughter-in-law cannot legally marry her father-in-law; the fourth reason, to the fact that a woman should be able to be both a widow and a daughter-in-law; the fifth reason, to the fact that most parents-in-law recognize their deceased son's widow as their daughter-in-law; and the sixth reason referred to the fact that grandchildren keep their status upon the death of their father. In our view, the BCSC's references to the Bible and canon law are not very helpful in determining whether an "in-law" relationship continues to be present. Also, we find the other reasons relied upon by the BSCS as not very supportive of the continuation of the in-law relationship. For instance, we would point out that, for the purpose of the meaning of child, there is a distinction between a taxpayer's natural grandchild, who has a blood relationship with the taxpayer, and an ex-daughter-in-law, who does not have such blood relationship. In other words, treating a taxpayer's grandchild and an ex-in-law differently, one as the taxpayer's child and the other not as the taxpayer's child for tax purposes, does not result in inconsistent treatment or an absurdity.

On the other hand, in Pembroke Ferry, the TAB essentially relied on the ordinary meaning in order to conclude that the taxpayer's daughter in-law relationship ceased at the time of death of the taxpayer's child. The TAB went on to point out (at paragraph 13) the potential absurdities if one were to conclude that the in-law relationship continued after death:

"... If she [the former wife] were held to be still connected by marriage with her father-in-law and she married again, her second husband would be "connected by marriage" with his wife's former father-in-law through his wife's former marriage; it can therefore be seen that the expression "connected by marriage" could be extended to almost absurd lengths in further examples."

There is a similarity between what happens to a taxpayer's step-child relationship in a situation where the taxpayer's spouse or common-law partner dies and what happens to a taxpayer's relationship with the spouse or common-law partner of the taxpayer's child in a situation where that child dies. In fact, both deal with an in-law (or connected by marriage) relationship. Thus case law dealing with either situation may be of assistance to both situations. While we are not aware of Canadian tax cases dealing with a taxpayer's step-child relationship when the taxpayer's spouse or common-law partner dies, there are other Canadian and foreign cases addressing the matter. While Canadian courts are not bound by foreign case law, they may find foreign case law persuasive in disposing of a particular case under review.

The legal rationale in support of the end of the in-law relationship (or connected by marriage relationship) has been applied in a few Canadian court cases that concluded that a taxpayer's step-parent relationship with an individual ceased on the death of the taxpayer's spouse (unless the taxpayer has adopted the individual as his or her child): see e.g. L. (J.P.), [1981] 2 W.W.R. 603 (Alta. C.A.), relying partly on R. (K.G.), Re, 42 N.S.R. (2d) 382 (N.S. Fam. Ct.).

Support for the end of a taxpayer's step-parent relationship with an individual on the death of the taxpayer's spouse can also be found in court cases from other common law countries such as for example, New Zealand and Australia: Finlay J. Mander, [1948] NZLR 909 (Auckland Supreme Court); and Re Burt, [1988] 1 Qd R 23 (Full Court of The Supreme Court of Queensland), respectively. It is to be noted that the Re Burt decision, which did not follow prior case law on the issue, was subsequently approved by the Supreme Court of Queensland - Court of Appeal in the cases Panochini, [1999] QCA 444 and Re Monkton, [1995] QCA 321, and by the Supreme Court of Tasmania in the cases Vicki Jan Basterfield, [1994] TASSC 120 and Sheila Connors, [1996] TASSC 126.

It is also to be noted that the majority of the High Court of Australia also refused special leave in Zeith (1996) 4 Leg Rep SL 3, where at issue was whether a taxpayer's step-parent relationship with an individual had ended at the death of the taxpayer's spouse, by stating as follows:

"The decision of the Court of Appeal is that on the death of the natural parent the relationship no longer exists, accords with recent decisions of that Court and, furthermore, as a matter of construction is a conclusion which is reasonably open."

The Australian Taxation Office ("ATO") relied on the above cases and more specifically on Re Burt to conclude that an individual that was a taxpayer's step-child ceases to be a step-child after the death of the taxpayer's spouse: see ATO Interpretative Decision 2005/173. However, this ATO decision was withdrawn on October 12, 2007 by the ATO in response to an amendment to the Australia's income tax statute that provided that after July 1, 2007, "a person does not cease to be a family member merely because of the death of any other family member" (withdrawal note for ATO ID 2005/173). Similarly, in 1997, the Succession Act 1981 was amended by the Justice and Other Legislation (Miscellaneous Provisions) Act 1997 to counter the definition of step-child in Re Burt and cases that followed that decision. (footnote 2) This 1997 amendment was later found to be prospective, and not retrospective: see e.g. Panochini.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained
in the original document are shown below instead:

1 However, although the relationship might legally ceased upon death or divorce of the taxpayer's child, the taxpayer and the ex-child-in-law or ex-step-child might still be considered to not be dealing at arm's length "in fact" under paragraph 251(1)(c) of the Act.
2 See also e.g. "Issues Paper 11 (1996) - Uniform Succession Laws: Family Provision" by the Law Reform Commission of New South Wales, under the heading entitled "2. Persons Entitled to Make Application for a Family Provision Order"; Explanatory Notes to the Justice and Other Legislation (Miscellaneous Provisions) Bill 1997; and Alun A Preece [Lecturer in Law, University of Queensland], "The Impact of the Law of Inheritance on the Family", A Paper delivered at the 7th Australian Institute of Family Studies Conference Sydney Convention and Exhibition Centre, Darling Harbour Sydney, July 24-26, 2000.