13 April 2010 Internal T.I. 2009-0349411I7 - 164(6) election

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) In the given situation, is the estate eligible to make the subsection 164(6) election?
2) (a) Is the estate eligible to make the subsection 107(2.001) election when it distributes the residence to the residual beneficiary? (b) Do subsections 40(3.3) and 40(3.4) apply to the capital loss?

Position:
1) No.
2) (a) The estate can submit an application to the Minister pursuant to subsection 220(3.2) of the Act requesting an extension of time to make an election or to obtain permission to amend or revoke an election already made. 2(b) Yes

Reasons:
1) As the transfer of the residence was part of the distribution by the estate to the residual beneficiary and was not a sale to the beneficiary, no capital loss should result for the estate from the deemed disposition and, accordingly, a subsection 164(6) election cannot be made.
2)(a) Under Regulation 600, subsection 107(2.001) and subsection 164(6) are prescribed provisions as referred to in subsection 220(3.2). 2(b) The residual beneficiary is a person affiliated to the estate and the other conditions of subsection 40(3.3) are met.

								April 13, 2010

	Darlene Hildebrand				Income TaxRulings
	Victoria Tax Services Office			Directorate
	Estates and Trusts				Danielle Bouffard
	1415 Vancouver Street				(613) 590-2155
	Victoria BC  V8V 3W4
								2009-034941

Distribution of property by an estate

This is in reply to your email of November 26, 2009, regarding the above noted subject. We acknowledge the information provided in your emails of January 20 and February 5, 2010 and in subsequent telephone conversations.

Facts & Submission

A taxpayer passed away on XXXXXXXXXX . The value of the taxpayer's estate was $XXXXXXXXXX and included money ($XXXXXXXXXX of which was distributed to a nephew and a niece of the deceased) and a personal-use property which was the principal residence of the deceased taxpayer (the inherited residence). The taxpayer's will provides that the residue of her estate is left to a friend (the "residual beneficiary"). The legal title of the inherited residence was transferred to the deceased taxpayer's estate in XXXXXXXXXX . The inherited residence was vacant from the date of the taxpayer's death to the date it was transferred in XXXXXXXXXX by the estate to the residual beneficiary (the "estate holding period").

The estate did not sell the inherited residence to the residual beneficiary. The estate transferred the property directly to the beneficiary to satisfy her interest in the trust. However, as the value of the inherited residence declined during the estate holding period, the estate computed a capital loss of $XXXXXXXXXX , resulting from the transfer of the property to the residual beneficiary. The executor elected under subsection 164(6) of the Income Tax Act (the "Act") to transfer the loss from the deceased person's estate to the deceased person's final T1 return. The estate's first fiscal year ended on XXXXXXXXXX . The estate was wound up on XXXXXXXXXX .

Finally, it appears that the residual beneficiary owns XXXXXXXXXX other properties and one of them is her principal residence. The use of the inherited residence by the residual beneficiary after her acquisition in XXXXXXXXXX is unknown. However, regarding the inherited residence, no rental income and no disposition were reported in the residual beneficiary's XXXXXXXXXX income tax return.

Question

1) In the given situation, is the estate entitled to make the subsection 164(6) election and claim a loss in the deceased taxpayer's final taxation return?

2) Is the estate eligible to make the subsection 107(2.001) election when it distributes the inherited residence to the residual beneficiary? Do subsections 40(3.3) and 40(3.4) apply to deny the capital loss?

Our comments

As mentioned above, at the time of the taxpayer's death, the taxpayer owned a principal residence. The capital gain on the residence realized as a result of the operation of subsection 70(5) of the Act on the taxpayer's death is reduced or eliminated from income by reason of the principal residence exemption provided under paragraph 40(2)(b) of the Act.

1) Subsection 107(2) and subsection 164(6) election

When an estate distributes capital property to a beneficiary in settlement of all or part of the beneficiary's capital interest in the estate (and the estate does not elect under subsection 107(2.001) of the Act to be deemed to have received proceeds of disposition equal to the FMV of the property at the time of disposition), the estate is deemed by paragraph 107(2)(a) of the Act to have disposed of the property for proceeds of disposition equal to the cost amount of the property to the estate immediately before that time. In particular, in order for there to have been a "distribution by the trust" as required in subsection 107(2) of the Act, the trustee (or the executor) has to take a positive action to effect the transfer and give to the beneficiary the legal title to the property.

Based upon our understanding of the facts described above, the legal title of the inherited residence was transferred by the estate to the residual beneficiary in XXXXXXXXXX in settlement of all or part of her beneficiary's capital interest in the estate. Accordingly, the estate is deemed by paragraph 107(2)(a) of the Act to have disposed of the inherited residence for proceeds of disposition equal to the cost amount of the residence to the estate immediately before that time. As the estate held the inherited residence as a capital property, the cost amount of the property is the adjusted cost base ("ACB") of the inherited residence at that time (as per paragraph (b) of the definition of "cost amount" in subsection 248(1) of the Act). Pursuant to paragraph 70(5)(b) of the Act, the estate is deemed to have acquired the inherited residence at a cost equal to its fair market value ("FMV") immediately before the death of the taxpayer. The FMV of the inherited residence (immediately before death) is the initial ACB of the property for the estate, subject to subsequent adjustments, if any, under subsections 53(1) and 53(2) of the Act.

Consequently, as the transfer of the inherited residence was part of the distribution by the estate to the residual beneficiary and was not a sale to the beneficiary, no capital loss should have resulted for the estate from the deemed disposition and, accordingly, no capital loss would be included in a subsection 164(6) election.

2(a) Subsection 107(2.001) election

An election under subsection 107(2.001) of the Act allows a trust resident of Canada at the time of the distribution to opt out of the application of subsection 107(2) of the Act in respect of a particular distribution of capital. Such a distribution is then subject to the rules in subsection 107(2.1) of the Act and, therefore, the trust is deemed to have disposed of the property for proceeds equal to its FMV at that time. The election under subsection 107(2.001) of the Act must be filed in prescribed form (not issued yet) on or before the relevant filing date of the trust for the taxation year in which the distribution occurred.

In the given situation, as the estate did not elect under subsection 107(2.001), the estate can request relief in accordance with the provisions of subsection 220(3.2) of the Act (i.e. requesting an extension of time to file an election). Under section 600 of the Income Tax Regulations, subsections 107(2.001) and 164(6) of the Act are prescribed provisions as referred to in subsection 220(3.2). As mentioned in IC07-1 Taxpayer Relief Provisions, the estate's request will be the subject of an examination and a decision based on the particular facts under review. We believe that your office is responsible to ascertain the facts and advise the executor as to whether you are prepared to accept a late-filed subsection 107(2.001) election.

Assuming that a subsection 107(2.001) election is made by the estate and accepted by CRA, the estate would be deemed to have disposed of the inherited residence for proceeds equal to FMV at that time (time of the distribution). Based on our understanding of the facts described above, a capital loss would result for the estate from the deemed disposition. However the loss would be subject to the application of the stop-loss rules described below.

2(b) Stop-loss rules

Subsection 40(3.3) of the Act generally denies or suspends a loss if a person affiliated with a trust acquires the applicable type of property at any time within 30 days before or after the trust's disposition of the property and, at the end of the period, the trust or a person affiliated with the trust owns the property. Pursuant to subparagraph 251.1(1)(g)(i), a person and a trust are affiliated with each other if the person is a majority-interest beneficiary of the trust. In the case you described where two beneficiaries were entitled to a specific amount and another beneficiary was entitled to the residue, in the absence of any wording in the will to the contrary, the residual beneficiary would presumably be entitled to all of the income of the estate and would be a majority interest beneficiary of the estate. Therefore, in the given situation, all the conditions of subsection 40(3.3) are met and the capital loss arising from the application of paragraph 107(2.1)(a) would be deemed to be nil pursuant to subsection 40(3.4) of the Act and would be suspended until the property in question would be no longer the property of the residual beneficiary.

We trust that our comments will be of assistance. Please contact Danielle Bouffard at (613) 590-2155 if you have any additional questions.

Yours truly

Alain Godin
Section Manager
For Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch