Principal Issues: Whether an outlay or expense made or incurred by a deceased taxpayer's estate in respect of a deemed disposition under subsection 70(5) may be recognized in computing under subsection 40(1) the deceased taxpayer's gain or loss arising from that disposition.
Position: No.
Reasons: The deceased taxpayer and the estate are separate taxpayers. Therefore, expenses or outlays made or incurred by the estate cannot be claimed in computing the deceased taxpayer's gain or loss. More generally, expenses or outlays with respect to deemed dispositions are considered to be made for the purposes of computing the proceeds of disposition for tax purposes, not for the purposes of making the disposition. Therefore, provisions such as subsection 40(1) that require that an outlay or expense be made or incurred for the purposes of making a disposition will not apply in respect of deemed dispositions.
2006 STEP Round Table
Q5. Outlays and Expenses related to a Deemed Disposition
In computing a taxpayer's gain or loss from a disposition of property, subsection 40(1) of the Act allows the taxpayer a claim for outlays and expenses made or incurred by the taxpayer for the purpose of making the disposition. On the death of an individual taxpayer, subsection 70(5) of the Act deems the taxpayer to have, at the time immediately before the death, disposed of certain of the taxpayer's properties for proceeds equal to the fair market value of the property at that time. What is CRA's position on outlays and expenses in the context of computing a gain or loss arising from deemed dispositions under subsection 70(5) of the Act?
Response
Given the context of the disposition under paragraph 70(5)(a) of the Act (i.e., as a deemed disposition) and given that the Act treats a deceased taxpayer's estate as a taxpayer distinct from the deceased taxpayer, in our view outlays or expenses made or incurred by the taxpayer's estate cannot be claimed under subsection 40(1) of the Act in computing the deceased taxpayer's gain or loss arising from that disposition.
Moreover, in the context of deemed dispositions generally, we are of the view that it is unlikely that any outlays or expenses can be said to be directed to the action of making such dispositions, which are legal fictions created by statute. To the extent that items such as valuation expenses and legal or accounting fees are made or incurred in the context of deemed dispositions, our position continues to be that these will be considered to be made or incurred for the purposes of computing the amount of the proceeds of disposition for income tax purposes, not for the purposes of making the disposition. Therefore, provisions that require that an outlay or expense - in order for it to be claimed - be incurred for the purpose of making a disposition will not apply in the context of deemed dispositions. See, for example, CRA document 9503120. In this regard, we understand that some taxpayers have interpreted our comments in CRA document 9312410 as supporting the proposition that outlays and expenses can be made for the purposes of a deemed disposition. However, the reference in that document to a government-imposed disposition should not be read as a reference to a deemed disposition imposed under the Act. That reference is to be read as a reference to an actual event or transaction that is recognized as a disposition under the Act, where the event or transaction results from a government imposed divestment of property (such as an expropriation of land).
Whether an outlay or expense, incurred by an estate in respect of property actually (as opposed to on a deemed event) acquired or disposed of by the estate, can be recognized for tax purposes will depend upon the facts and the relevant statutory provisions.