3 September 1997 External T.I. 9708655 - PRE-1972 SPOUSAL TRUST - DEEMED DISPOSITION - 104(13.2)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principales Questions:

1-Does status of a pre-1972 spousal trust change upon the death of the spousal beneficiary? 2- 104(13.2)

Position Adoptée:

1- no 2- explain mechanism

Raisons POUR POSITION ADOPTÉE:

1- ccm 970847 and XXXXXXXXXX 2- The wording of 104(13.2) and comments on deemed capital gains (ccm # 7-2755, 9508671, 9428005 and E9505075)

XXXXXXXXXX				5-970865

Attention: XXXXXXXXXX

September 3, 1997

Dear Sirs/Madams:

Re: Pre-1972 Spousal Trust and Subsection 104(13.2) of the Income Tax Act

We are replying to your facsimile of March 27, 1997 wherein you requested a technical interpretation on a pre-1972 spousal trust and subsection 104(13.2) of the Income Tax Act (the "Act").

As explained in Information Circular 70-6R3, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate tax services office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

Regarding your question on the status of a pre-1972 spousal trust, it is our opinion that where a new trust is not created for successive interests, the status of a pre-1972 spousal trust does not change upon the death of the spousal beneficiary.

Moreover, we confirm your views that where a pre-1972 spousal trust has elected under the former version of subsection 104(5.3) of the Act to postpone the 21-year deemed realization rule, such a trust is deemed under paragraph 104(5.3)(a) of the Act to dispose of its assets at fair market value by the earlier of January 1, 1999 and the first day of the first taxation year following the death of the last surviving exempt beneficiary.

In addition, the designation in subsection 104(13.2) of the Act generally allows a Canadian resident trust to make a designation to its beneficiaries in respect of the amount of taxable capital gains paid or payable to the beneficiaries which the trust has not deducted from its income under subsection 104(6) of the Act. The effect of the designation is that the amount designated under subsection 104(13.2) will be deemed not to have been paid or to have become payable to a beneficiary and will therefore reduce the amount of taxable capital gains otherwise included in the beneficiary's income pursuant to subsections 104(13) and (21) of the Act. The designated amount for a particular beneficiary under subsection 104(13.2) can be any amount not exceeding the amount determined by the following formula:

(A\B)xC

where:

Ais the amount of taxable capital gains that has been designated under subsection 104(21) of the Act to be taxable capital gains of the particular beneficiary;

Bis the aggregate of the amount in A for all beneficiaries of the trust; and

Cis the amount determined by the trust and used in computing all amounts which are designated under subsection 104(13.2) of the Act not exceeding (i) minus (ii)

(i)the aggregate of all amounts that would be included in computing the income of all beneficiaries without considering designations under subsections 104(13.1) and (13.2) of the Act

(ii)the amount deducted under subsection 104(6) in computing the income of the trust for the year.

Consequently, the first step for a designation under subsection 104(13.2) of the Act consists of determining the amount that has been designated under subsection 104(21) of the Act to be taxable capital gains of a particular beneficiary (element A in the above formula). The second step consists of adding element A for all beneficiaries (element B in the above formula). Finally, element C generally consists of the amount of taxable capital gains that the trust wants to have taxed at the trust level.

Furthermore, where the trust is not a mutual fund trust, a designation under subsection 104(21) of the Act may be made only if the beneficiary is resident in Canada. Therefore, a designation under subsection 104(13.2) cannot be made for a non-resident beneficiary as element A in the above-cited formula would be zero.

Also, in order to make a designation under subsection 104(21) of the Act, the net taxable capital gains have to be included under subsection 104(13), 104(14) or section 105 of the Act in computing the income of the beneficiary. Thus, where subsection 104(14) and section 105 do not apply, the capital gain has to be paid or payable to the beneficiary pursuant to subsections 104(13) and 104(24) of the Act. Otherwise subsection 104(21) could not apply. It is our understanding that a deemed capital gain is neither income nor capital for trust law: it is a "nothing" for trust law purposes. Consequently, in order to have an amount payable for purposes of subsection 104(24) of the Act, the terms of the trust must specifically permit an amount equivalent to the deemed gain to be paid or payable or the trustees must have discretionary power to pay out amounts that are defined as income under the Act.

In conclusion, we agree with the tax results shown on page 2 of your letter for the two first scenarios (one Canadian beneficiary and three Canadian beneficiaries) provided that the trust was resident in Canada throughout the taxation year and was not exempt from tax under Part I by reason of subsection 149(1) of the Act and, provided that the beneficiaries were resident in Canada and were legally entitled to the capital gains. On page 3 of your letter, it is our opinion that the Canadian resident trust cannot designate, under subsection 104(13.2) of the Act, more than $22,222((33,333/100,000)x66,666) to each of the three Canadian beneficiaries assuming that each of them are legally entitled to $33,333.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.

Yours truly,

Marc Vanasse
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch