2015-0606511I7 104(4) and improvements made to a capital property

Principal Issues: Whether the cost of capital improvements made to a real property that is held by an inter vivos trust is included in the ACB of the property and in the ACB of the capital interest of the beneficiaries that have borne the cost of the improvements.

Position: The ACB of the property should include the cost of the improvements made to the property that are capital expenditures. The cost of improvements is also generally included in the ACB of the capital interest of the beneficiaries, pursuant to subsection 107(1), at the time of the disposition of their interest in the trust.

Reasons: Based on our interpretation of the pertinent sections of the Act and consistent with previous positions.

Author: Routhier, Marie-Claude
Section: 54 "adjusted cost base", 104(4), 107(1), 107(2), 108(1), 108(1.1), 108(7), 248(1) "personal trust".

                                                                          November 3, 2015

      Technical Support Section                          Headquarters
      Telephone Programs Division                     Income Tax Rulings
                                                                          Directorate
      Attention : Mr. Yves Thivierge                     Marie-Claude Routhier
                                                                          LL.B., D.D.N., M. Fisc.

                                                                         2015-060651

      Paragraph 104(4)(b) of the Income Tax Act and improvements made to a capital property

We are writing in reply to your email of August 28, 2015 wherein you requested our views on whether, for the purpose of computing the capital gain from a deemed disposition under paragraph 104(4)(b) of the Income Tax Act (“Act”), the cost of capital improvements made to a property held by a trust is included in the adjusted cost base (“ACB”) of the property and in the ACB of the capital interest of the beneficiaries that have borne the cost of the improvements.

Unless otherwise stated, all statutory references in this memorandum are to the Act.

Relevant facts submitted

In XXXXXXXXXX, a taxpayer created an inter vivos trust (“Trust”) to which the taxpayer and his wife transferred a recreational real property (“Property”). The Property never generated any income and has been subject to major improvements throughout the existence of the Trust. The cost of the improvements has been borne by the capital beneficiaries of the Trust, which are the taxpayer, his wife, his daughter and his grandchildren. The disbursements related to the cost of the improvements do not constitute loans to the Trust and are not refundable by the Trust to the beneficiaries.

The taxpayer, his wife and his daughter were appointed as trustees of the Trust. A few years ago, the taxpayer and his wife passed away and have been replaced by new trustees. The Trust, the settlor, as well as the current and former trustees and beneficiaries of the Trust are all Canadian residents and have never been residents of another country. Considering the deeming provisions provided in subsection 108(7), we understand that the Trust is a “personal trust”, as it is defined in subsection 248(1).

Our comments

When the cost of improvements made to a real property held by an inter vivos trust is directly or indirectly borne by a beneficiary of the trust, it is our view that the payment of the cost of the improvements or the assumption of the related debt, as the case may be, is generally made on behalf of the trust and constitutes a contribution to the trust.

Pursuant to the definition provided in section 54, the ACB of a capital property means the cost of the property adjusted in accordance with section 53, except as otherwise provided in the Act. The cost of a capital property includes any related capital expenditures, such as the cost of any additions and improvements made to the property. In the current situation, for the purpose of computing the capital gain resulting from the deemed disposition of the Property pursuant to paragraph 104(4)(b), we are of the view that the cost of the Property should include the cost of the improvements made to the Property that are capital expenditures.

A capital gain may occur when a trust beneficiary disposes of all or any part of his or her capital interest in a trust. This could happen when a property of the trust is distributed to the beneficiary or when a beneficiary disposes of his or her capital interest in the trust to a third party.

As a capital interest in a trust is not deemed to have been disposed by the beneficiaries of the trust when the provisions of paragraph 104(4)(b) apply, the inclusion of the cost of any capital improvements made to a property of the trust will not have to be considered at that time. However, the cost of such capital expenditures is generally included in the ACB of the capital interest of the beneficiaries of the trust, pursuant to subsection 107(1), when computing the capital gain from a disposition of the capital interest, as mentioned above.

Please note that the attribution rules provided, among others, in section 74.3 and subsection 75(2) have not been discussed in the current letter, but could apply to the given situation. 

We trust that we have been of some assistance.

Louise J. Roy, CPA-CGA
Manager
For Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate

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