2017-0693331C6 2017 STEP - Q11- Substituted property of estate

Principal Issues: Where property held by an estate is converted or substituted while the estate is being administered, does subsection 70(6) apply to the property held by the deceased at death?

Position: Question of fact.

Reasons: For subsection 70(6) to apply, the particular property held by the deceased must be transferred or distributed, and vest indefeasibly in the spousal trust within 36 months of the taxpayer’s death. It is a question of fact when the property is transferred or distributed to and vests indefeasibly in a testamentary spousal trust.

Author: Mathanda, Tara
Section: 70(6)

2017 STEP CRA Roundtable – June 13, 2017

QUESTION 11. Spousal Rollover and Substituted Property 

As a consequence of the death of a taxpayer, and where certain conditions are met, subsection 70(6) allows property held by the deceased immediately before the death, to be transferred to a trust described in paragraph 70(6)(b) on a tax-deferred "rollover" basis. This provision requires, inter alia, that the property has vested indefeasibly with the spousal trust within 36 months of the taxpayer’s death.

Suppose the will of a deceased taxpayer provides that certain assets are to be transferred to a spousal or common law partner trust. Before doing so, and while property of the estate is being administered, certain property might change or be substituted by the Estate.  For example, shares might be converted from one class to another. If so, is the spousal rollover still available? If not, does the gain recognized on the tax return of the deceased have to be amended? 

CRA Response

At the 2015 Conference of the “Association de planification fiscale et financière” (APFF), the CRA commented on whether the rollover under subsection 70(6) would apply if the executor of an estate disposed of property of the estate and transferred the proceeds, or property substituted for those proceeds, to a spousal trust created by the will of the deceased (Question 9 – CRA Document 2015-0596611C6).

In its response, the CRA noted that the spousal rollover applies on a property-by-property basis, and the spousal trust must receive the same property that has been deemed to have been disposed by the deceased immediately prior to his or her death.  Substituted property transferred to the spousal trust would not qualify for the spousal rollover as the language of subsection 70(6) does not refer to substituted property.

The CRA also noted that it is a question of fact and law whether a particular property has been transferred or distributed to and vested indefeasibly in a spousal trust within the required time frame in order for the conditions outlined under subsection 70(6) to be met.  Such a determination can only be made following a review of the applicable law, jurisprudence, the will and all other relevant documents and circumstances in respect of that particular property.

In the context of the conversion of shares from one class to another, the determination of whether subsection 70(6) could apply is dependent on whether the shares held by the deceased taxpayer at his or her death were considered to have been transferred or distributed to and vested indefeasibly in the spousal trust prior to the share conversion. As noted above, this is a question of fact and law and would require further information in order to make a determination.

If it is determined that the shares were not transferred or distributed to and did not vest indefeasibly in the spousal trust prior to the conversion, the new class of shares would not be eligible for the spousal rollover. Therefore, the deceased taxpayer would be deemed to have disposed of the original shares at their fair market value pursuant to subsection 70(5) immediately before death and would realize a capital gain or loss in his or her terminal T1 return. If the terminal T1 return was previously filed on the basis that the spousal rollover was applicable to the specific property, the terminal T1 return of the deceased should be amended to include any applicable capital gain or loss as determined with respect to the particular property.

2017-069333
Tara Mathanda

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