Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Follow-up to our letter in file 2000-004416 and revisiting our position explained in that letter.
Position: The cost of a property acquired by a non-resident estate, as a consequence of the death of a non-resident individual would be determined in accordance with paragraph 70(5)(b) of the Act, absent an election under 107(2.002) of the Act.
Reasons: To determine the cost of a property acquired by a beneficiary that is subject to taxation in Canada, the deceased would be considered to be a taxpayer.
XXXXXXXXXX 2002-013341 Fouad Daaboul January 23, 2003
Dear XXXXXXXXXX:
Re: Paragraphs 69(1)(c), 70(5)(b) and 107(2)(b) of the Income Tax Act
This is further to our telephone conversation of April 17, 2002, in which we advised that we were reviewing the position in our document 2000-004416 of February 11, 2002.
Our review is now completed and brings a change in our interpretation. To reflect this change, please substitute the responses to "Question 2" and "Questions 3, 4 & 6", respectively, of our February 11, 2002 letter with the following.
Question 2
Under paragraph 70(5)(a), a deceased taxpayer is deemed to have disposed of any capital property owned by the taxpayer immediately before her or his death at fair market value. Under paragraph 70(5)(b), any person who acquires such property as a consequence of the taxpayer's death is deemed to have acquired the property at the time of death at a cost equal to fair market value. As the deceased non-resident's property is acquired by the estate of that individual, in our view the provisions of paragraph 70(5)(b) would apply to the estate that acquired the property as a consequence of the non-resident person's death. In effect, the estate would be deemed to have acquired the property at an amount equal to its fair market value immediately before the death.
Questions 3, 4 & 6
Subsection 107(2) provides rules that apply when a "personal trust" distributes its properties, including capital properties, in complete or partial satisfaction of a capital beneficiary's interest. Subsection 107(2) will apply in circumstances where there is a distribution that constitutes a disposition of a capital interest in a trust and subsections 107(2.001), 107(2.002), and 107(4) to 107(5) do not otherwise apply.
In a particular situation where a non-resident trust that is a personal trust, distributes property to a beneficiary resident in Canada in satisfaction of the beneficiary's capital interest in the trust, we have previously opined that paragraph 107(2)(b) would apply in determining the cost of the distributed property to the Canadian beneficiary notwithstanding that the non-resident trust may not be subject to tax in Canada. We have also opined that the length of time it takes for a distribution to occur is not relevant in determining whether paragraph 107(2)(b) would apply to a particular situation.
If the shares in your example are distributed to the Canadian resident by a "personal trust" within the meaning of subsection 248(1), it is our view that the cost of the shares to the Canadian resident would be computed in accordance with paragraph 107(2)(b), using their cost amount to the trust immediately before the distribution time. Since the cost of the shares to the trust would be computed by virtue of paragraph 70(5)(b), as discussed in Question 2 above, such a cost for the shares would generally be flowed to the Canadian resident beneficiary.
Subsection 107(2.001) allows a trust resident in Canada that distributes property after October 1, 1996, in satisfaction of all or part of a beneficiary's capital interest in the trust to opt out of the application of subsection 107(2) in respect of that distribution. Subsection 107(2.001) also applies to a non-resident trust that distributes either taxable Canadian property or property used in a business carried on by the trust through a permanent establishment in Canada in satisfaction of all or part of a beneficiary's capital interest in the trust.
Subsection 107(2.002) allows a beneficiary of a non-resident trust to opt out of the application of subsection 107(2) in respect of a post-1999 distribution of property that is not eligible for the election described in subsection 107(2.001). In either case, the election must be filed in prescribed form on or before the relevant filing date.
When a beneficiary makes an election under subsection 107(2.002), the rules in subsection 107(2) do not apply to the distribution of property by a personal trust to a beneficiary in satisfaction of the beneficiary's capital interest in the trust. Instead, the rules in paragraph 107(2.1)(d) generally apply where the trust is non-resident and the conditions stated therein are satisfied. As a result of the application of subparagraph 107(2.1)(d)(iii), the beneficiary is deemed to have disposed of his or her capital interest in the trust for an amount equal to the fair market value of the property so distributed less any eligible offset as defined in subsection 108(1). Moreover, the cost of the property to the beneficiary will be the fair market value of the property, at the time of its acquisition by the beneficiary, as computed in accordance with subparagraph 107(2.1)(d)(ii). The cost of the beneficiary's capital interest in a personal trust is deemed to be nil under subsection 107(1.1) unless paragraph 107(1.1)(a) or subparagraph 107(1.1)(b)(i) or (ii) applies.
We trust these clarifications will be of assistance.
Yours truly,
Alain Godin
Manager
International and Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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