2014-0542551E5 Taxable Canadian Property

Principal Issues: Whether an interest in an estate would be considered taxable Canadian property in the situation described.

Position: No.

Reasons: The estate itself never held, directly or indirectly, any real property or other property described in the definition of taxable Canadian property.

Author: Hikspoors, Maryann
Section: 104(1); 108(1); 248(1)

XXXXXXXXXX                                                                                                                                        2014-054255
                                                                                                                                                                M. Hikspoors
                                                                                                                                                                (613) 670-9003
December 6, 2016

Dear XXXXXXXXXX:

Re:  Taxable Canadian Property

We are writing in response to your email wherein you requested our view as to whether an interest in an estate in the situation described below would be considered taxable Canadian property (“TCP”). We apologize for the delay in responding to your request.

Facts

You provided us with the following hypothetical facts:

1.    A Canadian resident individual (“Taxpayer”) sold real property (the Taxpayer’s principal residence) in XXXXXXXXXX and invested the proceeds from the sale in a non-registered investment account.

2.    At no relevant time, were any of the investments in the non-registered account TCP (the investments were shares of publicly traded corporations of which the Taxpayer and all non arm’s-length persons owned less than 25% of the shares of any class).

3.    The Taxpayer died in XXXXXXXXXX and all of the investments in the non-registered investment account were transferred to the Taxpayer’s estate (“Estate”). The Estate has not held any real or immoveable property or any other property described in the definition of TCP since the death of the Taxpayer.

The executor of the Estate makes a capital distribution to one of the beneficiaries who is a non-resident of Canada. The distribution results in such non-resident beneficiary being considered to have disposed of all or a portion of the beneficiary’s capital interest in the Estate.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

The term TCP is defined in subsection 248(1) of the Act. According to paragraph (d) of the definition, TCP includes an interest in a trust (other than a unit of a mutual fund trust or an income interest in a trust resident in Canada), if, at any particular time during the 60-month period that ends at that time, more than 50% of the fair market value (“FMV”) of the interest was derived directly or indirectly (otherwise than through a corporation, partnership or trust the shares or interests in which were not themselves taxable Canadian property at the particular time) from one or any combination of:

i.    real or immovable property situated in Canada,

ii.   Canadian resource properties,

iii.  timber resource properties, and

iv.   options in respect of, or interests in, or for civil law rights in, property described in any of subparagraphs (i) to (iii), whether or not the property exists.

Pursuant to subsection 248(1) of the Act, the term “trust”, unless the context otherwise requires, includes an estate.

The phrase “the FMV… was derived directly or indirectly from” allows one to look through a particular property (in this situation, the interest in the Estate) to the properties held either by the Estate directly or, where the Estate holds interests in other entities, to any properties held by those entities and any entities further below in the chain (i.e., indirectly held by the Estate).

As stated in the facts, from the time of the creation of the Estate, it has not held directly any real property or any other properties described above (hereinafter referred to as “real property”). Even if the publicly traded corporation shares, the shares of which are held by the Estate, themselves hold any real property, this does not make the interest in the Estate TCP due to the carve-out in the definition of TCP for any real property held through a corporation where its shares are not themselves TCP (i.e., “otherwise than through a corporation… the shares… in which were not themselves taxable Canadian property at the particular time”).

Even though the investments in the Estate were originally acquired by the Taxpayer using proceeds from the sale of real property, the phrase “the value is derived from” for the purposes of the definition of TCP only allows one to look at the underlying assets of the Estate at any time during the 60-month period that ends at the particular time.

However, since the Estate itself did not hold real property (either directly or indirectly, subject to the carve-out) at any time during the 60 months preceding the disposition of the interest in the Estate, such 60-month look-back period in the definition of TCP would not extend beyond the creation of the Estate, and there is no other rule, as applicable to the situation described, to trace the value of the Estate to the original real property held by the Taxpayer.

As such, the interest in the Estate cannot be said to have derived its FMV for the relevant period from real property; and therefore, such interest cannot be considered TCP.

We trust that these comments will be of assistance.

Yours truly,

Vitaliy Anissimov
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch

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