5-0939
Dear Sirs:
Re: Subparagraphs 98(3)(b)(ii)and 98(5)(b)(ii) of the Income Tax Act (the"Act")
We are writing in reply to your letter of May 22, 1990 wherein you requested a technical interpretation of the coming-into-force provisions in respect of the above-noted subparagraphs.
As you indicated, the above-noted subparagraphs were amended to delete references to paragraphs 98(3)(d)and 98(5)(d) of the act, respectively, for certain transactions occurring after December 4, 1985. The coming-into-force provisions provide an exception in respect of property received in satisfaction of an interest in a partnership acquired by a member after December 4, 1985 from a person with whom the member was not dealing at arm's length, subject to no intervening arm's length acquisitions of the interest except as otherwise grandfathered. In your opinion, a partnership interest which is transferred by virtue of an individual's will to his child would be considered to have been acquired by the child from a person with whom the child was not dealing at arm's length for purposes of subparagraphs 98(3)(b)(ii) and 98(5)(b)(ii) of the Act. You cite the case of Estate of Karma (sic) May v MNR 88 DTC 1189 in support of your position.
Our comments
While we are unable to provide confirmation of the income tax effects of the hypothetical situation outlined above, we can offer the following general comments related to the application of subsection 251(1) of the
Act. In an inheritance, all assets technically pass through an estate before distribution to beneficiaries. By virtue of subsection 104(1), "in this Act, a reference to a trust or estate shall be read as a reference to the trustee or the executor, administrator, heir or other legal representative having ownership or control of the trust property." Where the deceased and the trustee are not related, based on the Karma (sic) May reasoning as it applies to the determination under paragraph 251(1)(b), we would agree that the assets passing from the deceased to the estate would be a non-arm's length transaction. Whether the beneficiary also receives the assets from the estate in a non-arm's length transaction would be based on the relationship, if any, between the trustee and the beneficiary and resolution of the question of fact under paragraph 251(1)(b). Where the trustee and beneficiary are not related, the extent to which the terms of the will dictate the actions of the trustee would be an important factor in determining whether the trustee and beneficiary deal at non-arm's length.
We trust that these comments will be of assistance.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch