Principal Issues: [TaxInterpretations translation] Can the amount received in consideration of the disposition of the capital interest of a beneficiary of an estate in favour of another beneficiary have tax consequences?
Position: As we do not have information on the cost amount of the capital interest, we cannot determine whether there is a capital gain and therefore tax consequences. General comments on the calculation of the gain and the calculation of the adjusted cost base for the purpose of determining a capital gain.
Reasons: The gain will be based on the adjusted cost base under the rules in paragraph 107(1)(a) of the Act. That adjusted cost base will be a function of the cost amount of the capital interest which is a function of the cost amount of the property of the estate. We do not have the information necessary to determine the adjusted cost base.
XXXXXXXXXX 2005-015527 Sylvie Labarre, CA March 6, 2006
Dear Sir,
Subject: Disposition of a capital interest in an estate
This is in response to your letter of October 15, 2005, in which you asked for our opinion on the tax treatment of an amount you received in settlement of your rights to the estate of XXXXXXXXXX.
Following the death of XXXXXXXXXX, you were entitled to certain assets from the estate. A dispute arose with another beneficiary of XXXXXXXXXX's estate. To settle the dispute, you agreed, in return for and in consideration of the payment by XXXXXXXXXX of the sum of $XXXXXXXXXXX, to assign to XXXXXXXXXX all your rights, title and benefits existing in your favour and arising out of XXXXXXXXXX's will, subject to certain property you wished to receive.
You asked us whether the $XXXXXXXXXX is a gain that is taxable to you or to the estate.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by 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 result 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.
Assuming that the only rights, titles and benefits you had in the estate of XXXXXXXXXX were rights in respect of property forming part of the capital of the estate, it is our opinion that the $XXXXXXXXXX received from another beneficiary to acquire your rights would represent proceeds of disposition of a capital interest in the estate. For the purposes of the Income Tax Act (the "Act"), an estate is a trust.
Since the transaction is between two beneficiaries of the estate, the payment of $XXXXXXXXXX would have no tax consequences to the estate.
However, you should report that disposition on your tax return and compute the amount of your taxable capital gain from that disposition. The taxable capital gain is half of the capital gain. To compute your capital gain, you must subtract from the proceeds of disposition the adjusted cost base of your capital interest and any outlays and expenses incurred or made to effect the disposition (outlays and expenses that have not been reimbursed). Paragraph 107(1)(a) provides special rules for determining the adjusted cost base of a capital interest when calculating a capital gain.
Paragraph 107(1)(a) deems the adjusted cost base to be the greater of two amounts. Subject to further information, it would appear that the first of those two amounts would be zero because of the deeming provision in subsection 107(1.1). Consequently, based on the information we have, it would appear that the adjusted cost base amount would be equal to the second amount, the cost amount of the equity interest. The cost amount of the interest is defined in subsection 108(1). In your situation, there was no distribution of money or property by the trust to you. In this case, the cost amount of your capital interest would be based on the amount by which the amount of money held by the estate and the cost amount of the other property held by the estate exceeds the amount of the debts and obligations to pay an amount outstanding immediately before the time that is immediately before the time of disposition. To arrive at the cost amount of your capital interest, that excess should be multiplied by the fraction whose numerator equals the fair market value of your capital interest and whose denominator is the fair market value of all the capital interests in the estate. The cost amount for property is a concept that is defined in subsection 248(1) for each type of property.
Since we do not have the information necessary to calculate the cost amount of your capital interest in the estate (we do not have access to the estate data held by the CRA), we cannot tell you whether you have a capital gain. Furthermore, the rules in paragraph 107(1)(a) apply only when computing a capital gain. Those rules do not apply to a capital loss. In your situation, you would not have a capital loss because the cost of your capital interest is deemed to be nil.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch