Section 46

f an individual at death held various personal-use properties (“PUP”), each with a cost and an FMV of under $1,000, and there was not personal use of those items following death (e.g., they were put in storage), could the estate claim capital losses when they were sold?

CRA noted that pursuant to s. 46(1) each such property would be deemed to be disposed of by the deceased for proceeds of disposition of $1,000 and to have a deemed ACB of $1,000 (and also noted that any capital loss of the deceased from the disposition of PUP would be deemed to be nil by s. 40(2)(g)(iii).)

However, as the estate was a distinct taxpayer from the deceased, a factual determination would need to be made as to whether it was PUP to the estate. The estate’s ACB pursuant to s. 70(5)(b) would be the FMV of the property immediately before death and, if the property was not PUP to the estate, its subsequent sale could give rise to a capital loss.

The CRA considers that a set for these purposes is a number of properties belonging together and relating to each other. For example, in the case of the hobby of philately, in the past, the CRA considered that a set is a number of stamps which were produced and issued by one country simultaneously or over a short period of time. The fact that the value of a number of properties, if sold together, exceeds the aggregate of their values, if sold individually, may indicate the existence of a set. However, this is not in itself a decisive factor.

CRA indicated that paintings might be a set if they "were painted as a set and would ordinarily be disposed of as a set," such as a set of portraits of former premiers or of members of a family tree, but that being painted by the same artist does not itself indicate that there is a set.

The taxpayer (Mr. X) accumulated over 35 years a collection of objects from an era out of a passion for objects from that era. Over the years, he exchanged and sold certain objects with the aim of obtaining new items for his collection. He then made a decision to dispose of the items in his collection, and sold the items one by one to different buyers on an auction website.

After indicating that the objects likely were acquired as capital property, and that they likely were personal-use property given that “where a taxpayer holds property because of the taxpayer’s passion for a particular epoch, the taxpayer holds it for personal enjoyment,” CRA went on to state:

[W]e do not have enough information to determine whether some or all of the items in Mr. X's collection are property that would normally be disposed of as a set. As noted in paragraph 14 of Interpretation Bulletin IT-332R, a set is a number of properties belonging together and relating to each other. Furthermore, for subsection 46(3) to apply, it is necessary, inter alia, that where a number of personal-use properties which would ordinarily be disposed of in one disposition as a set are disposed of in more than one disposition, they be acquired by one person or a group of persons not dealing with each other at arm's length. In this situation, if the property was sold to different purchasers who dealt with each other at arm's length, subsection 46(3) would not apply.

The corporation built a luxury house on land belonging to its shareholder for his exclusive benefit and use and to his specifications, with its cost exceeding its FMV at completion. After the construction, the corporation allowed its shareholder and his family to use the house exclusively for personal purposes. Subsequently, it transferred the house to its shareholder in a sale made at FMV.

After finding that there was a taxable benefit equaling the loss realized on such sale, the Directorate went on to state:

Our conclusion can also be supported by the tax policy underlying subsection 46(4). Subsection 46(4) provides inter alia that where it is reasonable to consider that the shareholder's eventual gain from the disposition of the corporation's shares is less than it would have been but for the decrease in value of the personal-use property, the amount of the gain on the share is increased by the decrease in value of the personal use property. For example, if XXXXXXXXXX had sold the shares of XXXXXXXXXX before the house was transferred to him, subsection 46(4) would have increased the capital gain (or reduced the capital loss) realized by XXXXXXXXXX on the disposition of his shares by an amount equal to the decline in value of the house. In the end, the decrease in value of the house would be taxed, one way or another, in the hands of XXXXXXXXXX.