2018-0742431E5 Election under 104(13.4)

Principal Issues: Can a joint election be made such that 104(13.4)(b) is applicable in respect of only part of the deemed income arising from the application of 104(4) in a testamentary post-1971 spousal or common law partner trust?

Position: No, the election can only be made with respect to all of the trust's income. However, if the election is made, a designation under subsections 104(13.1) or (13.2) may be available.

Reasons: Wording of the provision.

Author: Holloway, Lena
Section: 104(13.4); 104(6); 104(13.1); 104(13.2); 111

XXXXXXXXXX                                              2018-074243
                                                                      L. Holloway CPA, CA
August 16, 2019

Dear XXXXXXXXXX,

Re: Subsection 104(13.4) Election

We are replying to your email of January 19, 2018 in which you asked whether an election could be made such that paragraph 104(13.4)(b) (footnote 1) would only be applicable in respect of a portion of the income deemed to be realized as a consequence of the application of paragraph 104(4)(a) on the death of the surviving spouse beneficiary of a testamentary post-1971 spousal trust (the “trust”).

In particular, the scenario you outlined is as follows:

*    The surviving spouse beneficiary of the trust died in 2017;

*    All of the conditions outlined in paragraph 104(13.4)(b.1) have been met such that the trust and the estate of the deceased spouse are eligible to make a joint election such that paragraph 104(13.4)(b) would be applicable;

*    On the death of the surviving spouse in 2017, the trust was deemed to dispose of its marketable securities which resulted in capital gains of approximately $XXXXXXXXXX; and

*    The trust has approximately $XXXXXXXXXX of unused capital losses carried forward from prior years.

You asked if it would be possible to make the joint election such that paragraph 104(13.4)(b) would be applicable with respect to only $XXXXXXXXXX of the capital gains deemed to be realized on the death of the surviving spouse.  Accordingly, only this amount would be deemed to have been payable in the year and included in the final return of the surviving spouse where it would be subject to graduated rates, while the remaining $XXXXXXXXXX of deemed capital gains would be retained at the trust level in order to use up the capital losses carried forward from prior years.

Our comments:

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  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 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

For the 2016 and subsequent taxation years, paragraph 104(13.4)(a) provides that the taxation year of certain trusts is deemed to end at the end of the day of death of an individual whose day of death is a day referred to in paragraphs 104(4)(a), (a.1) or (a.4) of the Act.

As noted in the response to Question 11 of the 2018 STEP CRA Roundtable, any income received by a testamentary post-1971 spousal or common law partner trust prior to the death of the surviving spouse beneficiary in a particular taxation year and paid or made payable to that beneficiary prior to the date of death would generally be included in that beneficiary’s income under subsection 104(13).  The trust would also be entitled to a deduction pursuant to paragraph 104(6)(b) in respect of that amount. However, any income arising from the application of the deemed disposition rules in subsections 104(4) to 104(5.2), on the death of the relevant beneficiary, would be subject to taxation in the trust unless a joint election to have paragraph 104(13.4)(b) is available and filed in accordance with paragraph 104(13.4)(b.1).  As stated in the Department of Finance Technical Notes to paragraph 104(13.4)(b), where the election is made, “Paragraph 104(13.4)(b) deems the trust's income for the particular year to have become payable to the particular beneficiary in the particular year, with the result that all of the trust's income for the particular year is required by subsection 104(13) to be included in computing the particular beneficiary's income for the beneficiary's taxation year (i.e., the beneficiary's final taxation year) in which the particular year ends.”  [Emphasis added].  It is our view that where a joint election is made, paragraph 104(13.4)(b) would be applicable in respect of all of the income of the trust.

Nonetheless, an amount may be designated by the trust under subsections 104(13.1) or (13.2), subject to the limitations outlined in those provisions and in subsection 104(13.3), in respect of amounts deemed to have become payable to the deceased beneficiary in the year.

We hope this information is of assistance to you.

Yours truly,

Marina Panourgias, CPA, CA
A/Manager, Trust Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act (the “Act”), R.S.C. 1985 (5th Suppl.) c.1, as amended.

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