Principal Issues: 1. In a situation where an individual dies and the executor disposes some of the assets of the estate in order to give either the proceeds or a substituted property to a spousal trust created by will, does subsection 70(6) apply?
Position: No. The property transferred must be the same property that was deemed disposed by the deceased.
Reasons: Subsection 70(6) applies on a property-by-property basis and makes no reference to a substituted property.
Financial Strategies and Financial Instruments Roundtable, October 9, 2015
2015 APFF Conference
Question 9
Subsection 70(6) rollover and clearance certificates
After 2016, an individual ("Mr.") died and bequeathed the residue of his property to a trust for the exclusive benefit of his spouse. There was sufficient cash in the estate to pay off debts without having to sell property or investments. The executor elected to apply the rollover provided for in subsection 70(6) to all assets. After obtaining partial authorization from Revenu Québec to distribute the property, the executor transferred 75% of the assets to a trust for the exclusive benefit of the spouse. The remainder of the assets remained in the estate in reserve awaiting the final federal authorization and clearance certificate. Among the properties that made up the reserve were properties that benefited from the subsection 70(6) rollover, in particular, shares of a private corporation and some vacant land. The estate was a graduated rate estate and the trust for the exclusive benefit of the spouse was subject to the top marginal tax rate.
Question to CRA
If the executor elects to sell or otherwise dispose of any of the assets in the estate not yet transferred to the spousal trust (e.,g., selling land, or retracting preferred shares of the private corporation) in order to take advantage of the progressive tax rate and then turns over the proceeds of the sale of the property or any property acquired in substitution therefor to the spousal trust, would the benefit of the tax rollover under subsection 70(6) still apply despite the fact that the original property held by the deceased will never have been transferred to the spousal trust?
In other words, does the notion of indefeasible vesting imply that the property belonging to the deceased must be transferred to the spousal trust or is this concept sufficiently flexible to permit the transfer of replacement property of equivalent value to the trust?
NB: For the sake of clarity, we know that the CRA has already answered a similar question at the 2010 Taxation of Financial Strategies and Financial Instruments Roundtable (Question 8), but the question posed there implied that the property sold by the executor would be used to repay the debts of the deceased. In this question, we emphasize that the proceeds of the sale of the property would accrue entirely to the spousal trust for the benefit of the spouse, with the purpose of the sale by the executor being to benefit from the progressive tax rates of the estate at the time of the sale before remitting the proceeds of the sale to the spousal trust.
CRA response
Subsection 70(6) applies to among other things capital property to which subsection 70(5) applies which, as a consequence of the death of a taxpayer, is transferred or distributed to a trust, created by the taxpayer’s wil,l which complies with the conditions in subparagraphs 70(6)(b)(i) and (ii) (a “Spousal Trust”). Furthermore, it must be shown that the capital property was transferred or distributed so as to be vested indefeasibly in the Spousal Trust within the period ending 36 months after the death.
We are of the view that subsection 70(6) applies respecting each property of the deceased individually and could apply to a specific property in the residue of the estate. However, subsection 70(6) applies only if the property that the Spousal Trust receives is the same as the property which was deemed to be disposed of by the deceased immediately before death.
The question whether a property is transferred or distributed and whether it has indefeasibly vested in a Spousal Trust in the period provided in subsection 70(6) is a question of fact which must be determined on an examination of the will, the applicable private law, the jurisprudence, as well as all relevant documents and all the circumstances, including the commitments of the deceased made before death.
If an executor, in performing the estate administration, is under an obligation to dispose of property or he exercises his power to dispose of the property, we are of the view that subsection 70(6) is not complied with since the property has not vested indefeasibly in the trust. We consider that a Spousal Trust must ultimately receive the property in order to find indefeasible vesting.
Lucie Allaire
October 9, 2015
2015-059661