| 19(1) | File No. 5-8573 |
| J.D. Jones | |
| (613) 957-2104 |
October 20, 1989
Dear Sirs:
Re: Subsection 118.1(6) and Paragraph 104(4)(a) of the Income Tax Act (the "Act")
This is in reply to your letter of August 24, 1989 wherein you requested our opinion as to the applicability of subsection 118.1(6) of the Act in relation to paragraph 104(4)(a) of the Act in the following situation.
A taxpayer owns a capital property in which the fair market value exceeds the adjusted cost base. Should the taxpayer predecease his wife, his will provides that the capital property shall be transferred to a qualifying spouse trust. The trustees of the spousal trust are allowed to use their discretion in encroaching upon the capital of the trust for the benefit of the wife. On the wife's death, the residue of the husband's estate is to be transferred to a donee described in the definition of "total charitable gifts" as defined in subsection 118.1(1) of the Act.
Based upon the above, you have asked whether the capital property held in the spousal trust would be deemed to be disposed of at fair market value on the day on which the spouse dies, pursuant to paragraph 104(4)(a) of the Act, or if the spousal trust would be allowed to designate an amount, not greater than the fair market value and not less than the adjusted cost base of the capital property, as both the proceeds of disposition and the amount of the gift pursuant to subsection 118.1(6) of the Act. You have also asked if the Department's opinion would be different if the trustees were not allowed to encroach upon the capital of the trust.
In our view, the capital property held in the spousal trust would be deemed to have been disposed of and immediately reacquired thereafter for an amount equal to the fair market value of the capital property on the day on which the spouse dies pursuant to paragraph 104(4)(a) of the Act and the provisions of subsection 118.1(6) of the Act would not apply as it is not the spousal trust which makes a gift of capital property to a donee described in the definition of "total charitable gifts" as defined in subsection 118.1(1) of the Act but the deceased taxpayer by his will. In addition, as the trustees have the power to encroach on the capital of the trust, no amount may be deducted from the tax payable in the deceased taxpayer's terminal return calculated pursuant to subsection 118.1(3) of the Act by virtue of the provisions of subsection 118.1(5) of the Act. This position is set out in the Department's Interpretation Bulletin IT-226.
In the above situation, where the trustees do not have the authority to encroach upon the capital of the trust, it is our view that the executors of the deceased taxpayer's estate may be able to make use of the provisions of subsection 118.1(6) of the Act on behalf of the deceased taxpayer. The executor would do so at the time of the taxpayer's death and not at the time of the deceased taxpayer's wife's death and only provided the fair market value of the gift is readily ascertainable.
We trust our comments are of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings Directorate Legislative and Intergovernmental Affairs Branch