Principal Issues: [TaxInterpretations translation]
1. In the definition of "excluded amount" in subsection 120.4(1), does the phrase "income from a property acquired by or for the benefit of the individual as a consequence of the death ...." also include income from a property that is a substitute or replacement for the property acquired as a consequence of the death?
Position:
1. No
Reasons:
1. Application of subsection 120.4(1) of the Act.
2005-012683 XXXXXXXXXX A. Dagenais, Advocate, M. Fisc. (613) 957-2121 February 15, 2006
Dear Sir,
Subject Subsection 120.4(1) of the Income Tax Act
Request for technical interpretation
This is in response to your letter of April 12, 2005, in which you asked whether the phrase "income from a property acquired by or by or for the benefit of the individual as a consequence of the death ...." in the definition of "excluded amount" in subsection 120.4(1), also includes income from a property that is a substitute or replacement for property acquired as a consequence of death.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Your Analysis:
Your presumption is that it seems clear that the legislator wanted to exclude income generated by a property acquired following the death of a father or mother from the split income rules (e.g., SBC shares received by a child following the death of his father).
On the other hand, should the understanding of the phrase "...income from a property acquired..." include the principle of substitution or replacement of the first property acquired as a consequence of death? That is, does income from shares acquired by a minor child from money received as a consequence of the death of the child's parent, for example, fall within the split income rules?
In your view, it would seem logical that property substituted for a property acquired as a consequence of death would also fall within the definition of "excluded amount". Otherwise, the exception to the split income rule will be very uncertain since it is rare that a property received as a consequence of death will retain its original form (e.g., cash received will be quickly invested).
Our Comments:
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue written opinions on proposed transactions other than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a consequence of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Subsection 120.4(1) applies based on two concepts, "specified individual" and "split income". However, the legislator provides for situations where this measure does not apply. The definition of "excluded amount" in this subsection is:
“in respect of an individual for a taxation year, means an amount that is the income from a property acquired by or for the benefit of the individual as a consequence of the death of …”
A reading of the definition in subsection 120.4(1) indicates that the legislator refers to two specific conditions for exempting such income from the attribution rules: "income from a property acquired by … the individual" and "as a consequence of the death".
With respect to the first condition, that of "income from a property acquired by … the individual", we believe that if Parliament wished to exempt from the attribution rules substitute or replacement property when applying subsection 120.4(1), it would have done so expressly. For example, in subsection 74.1(1), Parliament wrote "...the income or loss … of that person for a taxation year from the property or from property substituted therefor .....". In subsection 74.2(1), a specific reference was also made to "...property … that is lent or transferred or property substituted therefor .....".
Furthermore, in view of the foregoing, we do not believe that the definition of substituted property in subsection 248(5) applies for the purposes of subsection 120.4(1). That is consistent with Interpretation F2004-0101701E5 which concluded that the definition of substituted property in subsection 248(5) applies to provisions of the Act that contain the words "substituted property".
With respect to the second condition, "as a consequence of the death", the measures in subsection 120.4(1) would not apply in respect of income from property acquired by the minor child as a consequence of the death of the parent. Thus, a child who acquires such property is deemed to have acquired that right at the time of the parent's death. In the situation of substitute or replacement property, we cannot consider the application of subsection 120.4(1) since the substitute or replacement property is not property acquired as a consequence of the death. It is only at the time of death that property is transferred to the minor child as a consequence of the death. We cannot conceive of a situation where a replacement or substitute property would meet that condition listed in subsection 120.4(1).
Thus to answer your question specifically, for the reasons mentioned above, we do not believe that income from shares acquired by a minor child from money received as a consequence of the death of a parent is excluded from the split income rules.
We hope that these comments are of assistance. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Finally, we regret the delay in responding to your request. Please accept our apologies.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate