17 September 2004 External T.I. 2004-0083161E5 - ACB of shares under administration of an estate

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: Is the ACB of shares redeemed by an estate subject to 47(1) when the deceased taxpayer's proceeds of disposition of some of the shares were determined under 70(5) and the proceeds for other identical shares determined under 70(9.2) -(because some shares are to be distributed to a qualifying child as described in 70(9.2) and some are to be distributed to the taxpayer's other child who is not resident in Canada)?

Position: No.

Reasons: Section 47(1) doesn't apply to the shares transmitted to the estate on death because, despite the difference in ACB and identical nature of the shares, because the shares were acquired at the same moment in time such that the estate does not have an "previously-acquired property" that is identical to the shares acquired as a consequence of the death of the taxpayer which is required in order for 47(1) to apply. It is clear from the scheme of the Act that the shares that are acquired at a cost amount equal to the FMV are the shares to be distributed to the non-resident child and that the shares that are subject to subsection 70(9.2) are the shares to be distributed to the child resident in Canada who meets the conditions set out in that subsection.

XXXXXXXXXX 	2004-008316
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

September 17, 2004

Dear XXXXXXXXXX:

Re: Identical shares of a family farm corporation

This is in reply to your e-mail of June 28, 2004 in which you ask for clarification on the interaction of subsections 47(1), 70(5), 70(9.2), 107(2) and 107(2.1) in the situation where shares of a family farm corporation, as defined in subsection 70(10) are distributed equally between two heirs, one of whom is resident in Canada and one of whom is not.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

You describe a situation in which a taxpayer owns 100 common shares of a family farm corporation as defined in subsection 70(10). The taxpayer dies and, under his will, the shares are to be divided evenly between his two children. One child is resident in Canada and meets the conditions set out in subsection 70(9.2) and one is not resident in Canada. The shares are not distributed to the children until two years following the death of the taxpayer. You ask whether subsection 47(1) would apply to average the cost of the shares. If so, the cost of the shares that are to be distributed to the child resident in Canada will dilute the cost of the shares to be distributed to the non-resident child such that the estate will realize a capital gain on the distribution of the shares to the non-resident child, even if the shares have not increased in value since the death of the taxpayer.

The situation outlined in your letter appears to relate to an actual transaction. Note that written confirmation of the tax implications arising from 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 are prepared to provide you with some general comments which may be of assistance.

As noted by you, subsection 70(9.2) applies to deem a deceased taxpayer to have disposed of the taxpayer's family farm corporation shares that are distributed to a child of the taxpayer in the circumstances set out in that subsection for an amount equal to the adjusted cost base of the shares to the deceased taxpayer and deems the child to have acquired the shares at a cost equal to that amount. When either subsection 70(6) or 70(9.2) applies to shares owned by a deceased taxpayer, subsection 70(5) does not apply to deem the estate to have acquired the shares at any particular cost.

When neither of the conditions set out in subsection 70(9.2) or 70(6) are met, such as when the shares are distributed to a person who is not resident in Canada, subsection 70(5) applies to deem the deceased taxpayer to have received proceeds of disposition for the shares equal to their fair market value immediately before the taxpayer's death and deems the estate to have acquired the shares at a cost equal to that amount. The adjusted cost base of the shares to the estate is relevant for the purpose of determining the capital gain or loss to the estate on the shares to be distributed to the non-resident child.

Although subsection 107(2) applies to ensure that no gain or loss is realized by the estate on the distribution of shares to the child who is resident in Canada, subsection 107(2.1) applies to the shares to be distributed to the non-resident child because of the application of subsection 107(5). As a result, if subsection 47(1) applies to average the cost of the shares acquired by the estate on the death of the taxpayer, the estate will realize a gain on the distribution of the shares to the non-resident child even if the fair market value of the shares at the time of distribution is the same as it was immediately before the taxpayer's death.

Subsection 47(1) applies to average the cost of property held by a taxpayer when the taxpayer acquires property that is identical to property already owned by the taxpayer. In the case of shares transmitted to an estate upon the death of a taxpayer, the estate has no "previously-acquired property" within the meaning assigned by subsection 47(1) at the time it acquires the shares on the death of the taxpayer. Thus, while the shares to be distributed to the non-resident child may be identical in all respects to the shares to be distributed to the child who meets the conditions set out in subsection 70(9.2), subsection 47(1) does not apply to average the cost of the shares to the estate.

Thus, an estate would not normally realize any gain or loss on the distribution of the shares to the children as the beneficiaries of the estate if the fair market value of those shares at the time of distribution was the same as it was immediately before the death of the taxpayer. However, if transactions or events that increase or decrease the ACB of the shares were to occur before the distribution of the shares to the children, (for example, any government assistance received in respect of the shares or FAPI income or loss earned in respect of the shares during the period of administration of the estate), such adjustments to the ACB of the shares held by the estate would affect the amount of gain or loss realized by the estate on the distribution of the shares to the heirs.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch