| 19(1) | File No. 5-9507 |
| W.C. Harding | |
| (613) 957-8953 |
February 16, 1990
Dear Sirs:
This is in reply to your letter of January 30, 1990 wherein you requested confirmation of the tax consequences of the following hypothetical situation:
A taxpayer dies, leaving shares which he owns in a Canadian-controlled private corporation ("CCPC") to a spouse trust ("the trust"). Any income earned by the trust from the shares during his spouse's lifetime is to be allocated to the spouse. Upon the death of the spouse, the shares are to be distributed equally to the taxpayer's children. The shares left to the trust are preferred shares that have a redemption value in excess of their paid up capital ("PUC") and adjusted cost base ("ACB").
Subsequent to the death of the spouse and prior to the end of the trust's taxation year, the executors of the trust redeem some of the shares held by the trust in order to pay the income tax liability resulting from the deemed disposition of the shares when the spouse died.
1. Assuming that the trust is a spouse trust to which paragraph 104(4)(a) of the Income Tax Act (the "Act") applies, we agree that at the date of death of the spouse, there is a deemed disposition of the shares at fair market value ("FMV") which may result in a capital gain in the trust to the extent that the FMV of the shares exceeds their ACB. The trust is deemed to reacquire the shares at that FMV immediately thereafter and the ACB of the shares will be the FMV thereof.
2. We agree that there is no deemed trust year end as a consequence solely of the spouse's death and that the above capital gain will be included in the trust's income for the taxation year which includes the date of death of the spouse.
3. We agree that the share redemption will result in a deemed dividend to the trust to the extent that the redemption value of the shares exceeds their PUC. The redemption may also result in a capital loss to the extent that the revised ACB of the shares exceeds the redemption value minus the deemed dividend.
4. It is our view that the capital losses incurred subsequent to the death of the spouse but prior to the trust's year-end must be applied to the capital gains of the trust for the year, including those gains referred to in paragraph 1 above.
5. Where deemed dividends are included in the trust income and it may reasonably be considered that the dividends are part of the beneficiaries' income which has been paid or is payable to them we agree that a designation under subsection 104(19) of the Act may be made by the trust. Similarly where the deemed dividends are not included in trust income, and hence forms a part of the trust capital, and an amount of trust capital has been paid or is payable to the children we also agree that a designation under subsection 104(19) of the Act will be available to the extent that the dividends are included in their income.
6. We cannot confirm that, once any income tax liability is paid and the estate executors have received a clearance certificate, any remaining cash and shares may be distributed as this is not a matter subject to the provisions of the Act. The purpose of a clearance certificate is to provide executors with assurance that they will not be personally liable for any unpaid taxes, interest and penalties. They do not, however, provide any additional assurances or directions as to the propriety of a distribution of the property of an estate.
We trust that these comments will be satisfactory to your needs.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate