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TAX OF WEALTH TRANSFERS ...............................................................................................................................4
  Wealth Taxes .............................................................................................................................................................4
PART 1: TAXATION OF THE TERMINAL YEAR ...................................................................................................6
THE TERMINAL YEAR RETURN .............................................................................................................................6
  70(1)(a) ACCRUED PERIODIC AMOUNTS ..........................................................................................................6
  70(2) – “RIGHTS & THINGS” .................................................................................................................................7
TAXATION OF CAPITAL GAINS AND LOSSES UPON DEATH - s 70(5) ............................................................9
  Dispositions of capital property, not income .............................................................................................................9
  Deemed disposition upon death – s 70(5) ..................................................................................................................9
  Utilization of capital losses in terminal year and preceding year ..............................................................................9
  Determining FMV immediately before death; ......................................................................................................... 10
  Effect of buy-sell agreements (BSA) on fmv at death ............................................................................................. 10
THE SPOUSAL / COMMON-LAW PARTNER ROLLOVER – s 70(6) .................................................................. 12
  General requirements and effects of rollover ........................................................................................................... 12
  Meaning of spouse, common-law partner ................................................................................................................ 12
  Property “vesting indefeasibly” in spouse or spousal trust ..................................................................................... 12
  Effect of buy-sell agreements on the “vesting” requirement ................................................................................... 13
  Additional requirements re: spousal trusts (still require to satisfy sp r/o requirements) .......................................... 13
  Effect of disclaimers, releases and surrenders by beneficiaries; s. 248(8) and (9) .................................................. 13
TAINTED SPOUSAL TRUSTS – s 70(7) & (8)......................................................................................................... 14
  When is a spousal (common-law partner) trust “tainted”? ...................................................................................... 14
  How to “untaint” a tainted spousal trust .................................................................................................................. 14
  Alternatives where sp T formed out of residue of estate: ........................................................................................ 14
ROLLOVER FOR FARM PROPERTY – s 70(9) ...................................................................................................... 16
  General requirements for rollover: s. 70(9) ............................................................................................................. 16
  Effect of rollover; .................................................................................................................................................... 16
  R/o for shares in family farm corporations, 70(9.3) or interests in family farm partnerships: 70(9.2) .................... 16
  Rollover for QFP transferred from sp/clp T to child of D: s. 70(9.1) ...................................................................... 16
DECEASED’S PRINCIPAL RESIDENCE – s 40 ...................................................................................................... 17
  Definition of “principal residence” for any taxation year: s. 54 .............................................................................. 17
  Principal residence exemption: s. 40(2)(b) .............................................................................................................. 17
  Disposition at death ................................................................................................................................................. 17
  Distributions of PR out of spousal T: 40(4) or 40(7) application?........................................................................... 17
REMAINDER INTERESTS IN LAND – s 43.1 ......................................................................................................... 18
DEATH OF A PARTNER – s 96(1) & s 53 ................................................................................................................ 19
THE CAPITAL GAINS EXEMPTION – s 110.6 ....................................................................................................... 21
  Background and history of the exemption ............................................................................................................... 21
Requirements for qualified farm property - defined in s. 110.6(1) .............................................................................. 21
  Requirements for QBSC shares as defined in s. 110.6(1) ........................................................................................ 22
EMPLOYEE STOCK OPTIONS – s 7........................................................................................................................ 24
  Overview of taxation of employee stock options..................................................................................................... 24
  Employee dies owning shares acquired under a “regular option” .......................................................................... 24
  Employee dies owning shares acquired under a “deferral option” ......................................................................... 24
  Employee dies with “unexercised stock option” ..................................................................................................... 24
REGISTERED RETIREMENT SAVINGS PLANS (RRSPs) – s 146 ....................................................................... 25
  RRSP contributions ................................................................................................................................................. 25
  Taxation of RRSP withdrawals / receipts ................................................................................................................ 25
  Maturity of RRSP .................................................................................................................................................... 25
  Death of RRSP annuitant before maturity of RRSP ................................................................................................ 26
  Death of RRSP annuitant after maturity of RRSP ................................................................................................... 26
CHARITABLE GIFTS UPON DEATH – s 118.1 ...................................................................................................... 27
  Overview of credit for gifts to registered charities .................................................................................................. 27
  Gifts made in terminal year ..................................................................................................................................... 27
  Gifts of property and the deemed disposition rule ................................................................................................... 27
  Gifts of Canadian cultural property ......................................................................................................................... 28
  Gift of residual interest in trust ................................................................................................................................ 28
                                                                                                                                                                             2


PART 2: TAXATION OF TRUSTS AND BENEFICIARIES.................................................................................... 29
TAXATION OF TRUSTS AND BENEFICIARIES – s 104 ...................................................................................... 29
  Basic concepts ......................................................................................................................................................... 29
  Deemed dispositions of trust capital: “21-year rule” ............................................................................................... 29
  Computation of trust income ................................................................................................................................... 30
TAXATION OF BENEFICIARIES ............................................................................................................................ 32
  Flow-through of trust’s taxable capital gains – 104(21) .......................................................................................... 33
  Flow-through of the capital gains exemption for QSBC shares – 104(21.2) ........................................................... 33
  Flow-through of dividend income – 104(9) ............................................................................................................. 34
  Disclaimers, releases and surrender of income interests in trusts ............................................................................ 34
  Direction under will for a beneficiary to pay income to non-beneficiary ................................................................ 34
  Non-taxable portion of capital gains earned by a trust ............................................................................................ 34
  Amount deemed to be payable in year to minor beneficiary; 104(18) ..................................................................... 34
  Preferred beneficiary election: s 104(14) ................................................................................................................. 35
  Section 105 benefits under a T ................................................................................................................................ 35
DISPOSITIONS OF INTERESTS IN TRUSTS – s106 & 107 ................................................................................... 37
  Definitions of income interest and capital interest: 108(1) & 108(3) ...................................................................... 37
  Disposition of income interest to third party: 106(1) & (2) ..................................................................................... 37
  Distribution of property by trust in satisfaction of income interest: 106(2)&(3) ..................................................... 37
  Disposition of capital interest: 107 .......................................................................................................................... 37
  Distribution of property by trust in satisfaction of capital interest under the 107(2) rollover ................................. 38
  Distribution of property by trust in satisfaction of capital interest under 107(2.1): no rollover .............................. 39
  When does 107(2.1) apply (and 107(2) not apply)? No rollover ............................................................................. 39
  Distribution of principle residence by T in satisfaction of capital interest .............................................................. 39
  Problems illustrating the 107(2) rollover ................................................................................................................. 40
INTER-VIVOS GIFTS AND NON-ARM’S LENGTH TRANSFERS ...................................................................... 42
  Meaning of non-arm’s length; s. 251(1), 251(2)(a) and 251(6) ............................................................................... 42
  Effects of subsection 69(1) on transfers to NAL persons: ....................................................................................... 42
  Transfers to trusts .................................................................................................................................................... 42
  Section 73 inter-vivos rollovers for transfers to sp, qualifying sp T, etc ................................................................. 43
  election out of 73(1) rollover ................................................................................................................................... 43
  deemed disposition dates applicable to transferee trusts.......................................................................................... 43
  Section 73 inter-vivos rollovers for farm property................................................................................................... 44
  Gifts / transfers of interests in trusts to 3rd parties (not satisfaction of T int) ........................................................... 44
  Disclaimers, releases and surrenders of income interests in trusts .......................................................................... 44
PART 3: INCOME SPLITTING AND THE ATTRIBUTION RULES...................................................................... 46
INCOME ATTRIBUTION RULES ............................................................................................................................ 46
  Policy underlying the rules: ..................................................................................................................................... 46
  Overview of the attribution rules ............................................................................................................................. 46
  74.1 and 74.2 - Transfers or loans to or for the benefit of sp, clp, and minor ch ..................................................... 46
  Exceptions where 74.1 and 74.2 do not apply ......................................................................................................... 47
  Miscellaneous application rules and deeming rules ................................................................................................. 48
ATTRIBUTION RE TRANSFERS TO TRUSTS AND CORPORATIONS .............................................................. 49
  Transfers or loans to trusts with designated person as beneficiary: 74.3 ................................................................. 49
  Transfers and loans to corporations: 74.4(2) ........................................................................................................... 49
  Back-to-back loans and transfers to corp: 74.5(6) ................................................................................................... 50
  Guarantees of loans to corp.: 74.5(7) ....................................................................................................................... 50
  Transfers of “equity ownership” in corporation: Kieboom case .............................................................................. 50
SUBSECTION 75(2) AND “REVERSIONARY” TRUSTS ...................................................................................... 52
  Requirements of 75(2): ............................................................................................................................................ 52
  Application of 75(2) ................................................................................................................................................ 52
  Exceptions ............................................................................................................................................................... 52
  Distribution of ppt by a 75(2) reversionary trust ..................................................................................................... 52
OTHER ATTRIBUTION RULES: 56(4) (4.1) and (2), and 120.4 ............................................................................ 54
  56(4): Transfers of rights to income to non-arm’s length person ............................................................................ 54
  56(4.1): Low-interest loans to non-arm’s length persons ........................................................................................ 54
                                                                                                                                                                         3


 56(2): Indirect payments .......................................................................................................................................... 54
 120.4 “kiddie tax”: ................................................................................................................................................... 55
CHARITABLE DONATIONS .................................................................................................................................... 57
 Tax credit for donations: .......................................................................................................................................... 57
 Inter-vivos gifts of capital property ......................................................................................................................... 57
 Gift of residual / remainder interest in trust ............................................................................................................. 58
 Purchase of annuity from charity coupled with gift ................................................................................................. 58
 Inter-vivos gifts of insurance policies ...................................................................................................................... 59
                                                                                                                    4


                                    TAX OF WEALTH TRANSFERS

The course divided into 3 broad sections:
    1) taxation of the terminal year and succession planning
    2) taxation of estates and other trusts and their B’ens (personal rather than commercial T’s: inter vivos and
        customary) taxation rules differ depending on the type of T, eg: testamentary at graduated rates, while inter
        vivos Ts taxed at top marginal rate, T treated as separate entity for purposes of income tax (deemed a
        separate entity b/c not an entity at c/l), as such is taxed as an individual however pay outs taxable to Bens
        rather than at the T level
    3) income splitting, income attribution rules and estate freezes – b/c of graduated income tax structure in
        Canada, these devises become important tools, esp if lots of money and lots of family members

Wealth Taxes

         -   currently no wealth taxes in Can, although existed previously in various forms (succession tax)
         -   recurring issue nevertheless, although on the back burner for the last 5 or 6 years
         -   currently topical in the US, Bush campaigned on the abolishment of gift and inheritance taxes

    1) Wealth tax vs income tax
          a. Wealth tax is tax on net wealth, assets minus liabilities while tax on income is tax on additions to
               wealth
          b. Tax on capital vs tax on the net flow from that capital
          c. Eg 100K prop with 0 return in yr 1, while in yr 2 same prop had 10K return would equal 0 taxable
               income in yr 1, and in yr 2 10K taxable income and 110K (less taxes) taxable wealth
          d. Both reflect the taxpayer’s “ability to pay”

    2) Wealth tax at death vs cg tax at death
       - cg represents increase in wealth, not whole value of wealth
       - cg = p of d – acb

    3) Types of wealth taxes
       - annual wealth tax
               o typically graduated rates
               o usually an exemption, minimum threshold
       - transfer taxes
               o estate/ gift taxes – imposed on donors
               o succession/ inheritance taxes – imposed on recipients
               o Can had combination of both when we did have wealth taxes
               o Both taxes that are imposed at death must be accompanied by lifetime tax to back or could
                   simply give away during lifetime to avoid taxes at death
               o Can tax on gift by gift basis, or on an aggregate basis (eg accumulated during one’s lifetime,
                   and tax imposed at the time of one’s death)
               o Eg 3 gifts rec’d over years of 10K, 100K, 150K, and was a 10K exemption – on gift by gift
                   basis = 0 + 90 + 140, whereas if taxed on aggregate basis with lifetime exemption of 50K,
                   would ne taxed on 0 + 60 + 150
               o If taxes paid on donor may be less willing to part with assets, and also if divide among various
                   donees then wealth spread around with less graduated rate of tax as a result thus the donor tax
                   may be more effective
               o Transfer taxes discourage wealth transfers whereas annual wealth taxes encourage transfers

    4) Wealth taxes in Can and around the world
       - 1930s first wealth tax in C changed from succession to estate tax in 1950s
       - most prov got out of wealth taxes after this
       - 1971 Carter Commission – which recommended the taxation of CGs for the first time, and since 1972
          have been taxable (although at a preferred rate)
                                                                                                                   5


    -    huge public outcry in response to this, as felt it was a double tax so estate tax abolished (even tho
         commission did not recommend this, and in fatc recommended full taxation of CG)
    -    US will prob phase out of gift taxes in the next 10 years
    -    Estate tax in US only applies to multi millionaires and billionaires

5) taxes similar to wealth taxes currently employed in Canada
   - probate taxes – but a lot of assets exempt from probate tax so not a true wealth tax, also said to be a
       sort of “user fee” (Eurig case before SCC, held that probate fees were taxes b/c not set fees but related
       to assets, and unconstitutional, but gave ON 6 mo to fix legislation, so now called “taxes” so OK; not
       backed up by lifetime tax
   - “property taxes” – related to the value of property so a form of wealth tax, but linked as a sort of user
       fee to the provision of services; can have a lot of assets held elsewhere, but prop taxes imposed
       regardless of liability, eg mortgages held, thus almost a regressive tax b/c those with mortgages pay
       full tax while those with no mortgage pay the same
   - capital tax – based on share and debt equity in corps, but not levied on net wealth, and not levied on
       individuals
   - given current economic and political climate not likely to be introduced in the near future by any govt

6) fairness arguments in favour of a wealth tax
   - ability to pay principle
   - redistributive function – attempt to breach dichotomy of wealthy and poor
   - more progressive tax than other regressive taxes like sales and property taxes
   - wealth unlike income requires little or no effort, no sacrifice of leisure time, thus arguably ought to be
        taxed at least at the same level of income
   - also, income dependent on other factors like health, age etc whereas wealth is not
   - recipients of wealth often luck or matter of circumstance rather than contribution to society

7) fairness arguments against a wealth tax
   - double taxation – wealth must have been earned and thus taxed at some point
   - discriminates against people who save vs people that consume their wealth
   - response is that this is a different tax base than income, not really double tax just happens to be a
        different tax base
   - if already tax CG, why need to also have wealth tax
   - to factor in for inflation, then if wealth is increasing only by the rate of inflation, and costs are
        increasing as well, no real increase in net wealth, and yet taxed incrementally
   - liquidity argument: some forms of wealth do not generate enough cash to pay tax, and may necessitate
        selling asset in order to pay taxes (eg inheriting family farm) note: as long as banks around, can borrow
        against the value of the asset, or defer the tax payments until asset disposed of
   - also, some assets do not realize any value until disposed of (similar argument made in with respect to
        CGs)
   - valuation issue: requires constant valuation of assets

8) summary
   - largely depends on one’s view of appropriate role of the state
   - depends on one’s opinion re the desirability of the redistribution of wealth
                                                                                                                      6


                        PART 1: TAXATION OF THE TERMINAL YEAR

                                  THE TERMINAL YEAR RETURN

        -   Not entirely clear whether taxation year ends upon death or extends to end of year, however, not a lot
            turns on this anyway
        -   Income earned by the estate after one’s death is not included in terminal year income

Tax filing and tax payments for deceased

        -   Filing date: if die after Oct and before regular filing date (Apr 30 or Jun 15) then the filing date is the
            later of the filing date or 6 months after the death
                 o eg if died Feb 1, 2002, then return for 2001 year is due Aug 1, 2002 and return for 2002 is due
                      Apr 30, 2003
                 o note: any taxes owing are due Apr 30 of following year regardless of filing date
                 o spouse of D is allowed same extension in filing returns
        -   right to file separate returns
                 o 3 types of separate returns (significant savings in tax to the estate b/c subject to graduated
                      rates):
                             s70(2) - “rights & things”: later of 1 yr after death or 90 days after mailing as
                                assessment fot regular terminal yr return
                             s150(4) – certain sole proprietors: same filing date as terminal return
                             s104(23)(d) – D was Ben under a testamentary T: same as terminal return
        -   s 150(3) requires legal rep to file any outstanding returns from previous years of the deceased (note:
            appears to be no filing deadline, RC allows 6 months after the death, but any interest owing continues
            to accrue)
                 o The same general rules in computing income apply in the terminal year, as in ordinary years
                 o There are some specific provisions that apply only to terminal year

Tax filing dates for estates and Bens

                 o   E’s taxation year begins upon the death of the deceased
                 o   the taxation year can end on any date chosen by the E, as long as does not exceed 12 months
                 o   off-calendar year often beneficial for many reasons b/c can defer
                 o   filing date within 90 days of the taxation year – s104(23)
                 o   taxation yr of Ben not affected by the death of the D remains the same, thus has the same Apr
                     30 filing date


70(1)(a) ACCRUED PERIODIC AMOUNTS

        -   periodic payments that were owing but not paid at the time of death b/c the amounts not yet payable
            (eg royalties, annuities, wages etc)
        -   calculated by taking total amount payable and dividing this by the number of days up to the day of
            death (eg $100 interest per month, if dies on 10th, then 10/30 of 100 = $30 under 70(1) and $70 to the
            estate of D)
        -   where D incurred expenses in respect of these amounts, these are deductible, in the same pro rata way
            as calculated above
        -   key: amounts not yet payable to the deceased
        -   if confusion arises in making a determination of where an amount falls, RC usually lenient if genuine
            doubt exists as to whether 70(1) or (2), and lets taxpayer benefit from which ever the most favourable
        -   if payable at the time of death, then cannot be included in this section and must be included
            under regular income or under 70(2)
                                                                                                                       7


        -   if taxpayer taxed on an amount under these sections, and then the amount is never paid to the D’s
            estate, then no provisions in the ITA to correct this
                 o could make a doubtful debt application, but seems like technically one is stuck
                 o if taxed in unjust or unfair manner, and if no technical relief available, can apply to RC for a
                      “remission order”

70(2) – “RIGHTS & THINGS”

        -   amounts earned by the D, or amounts receivable, or amounts to which the D was entitled at the time
            of death
        -   not amounts included under 70(1)
        -   not capital property, land inventory or eligible capital property (intangibles not dealt with under acc)
        -   not amounts earned during life but not declared before death (this included in estate)
        -   not otherwise included as income

        Examples:
        - business income: if report on a receipt basis rather than amounts receivable
                o those allowed to report on cash basis include farmers and fisherpersons
        - employment income:
                o wages in respect of prior pay periods, that is “wages receivable yet not yet received”
                o could also include unused vacation credits,
                o bonuses if receivable at time of death but not actually received,
                o includes retiring allowances (which includes damages and settlements paid to employees)
                o retroactive wage adjustments which had not yet been paid, however if the wage adjustment is
                    ordered after the death of the deceased – will need to look at ct order to determine if right in
                    existence at the time of death (probably not unless order reads as such) RC has determined
                    that if right not determinable at the time of death, then does not fall under 70(2)
                o Note: pay equity case – retro wage adjustments rec’d virtually tax free by estates of deceased
                    persons
        - Dividend income: declared but unpaid dividends
        - Interest income:
                o Interest payments receivable at the time of death, but 12(1)(c) includes interest that is rec’d or
                    receivable in a taxation year, depending on the method (receipt or receivable basis) that
                    taxpayer chooses
                o Thus, only time included under 70(2) is when receipt method chosen
                o Concern that interest payments could be manipulated, so that interest
                o 12(4) requires that any interest accrued up to the anniversary date of the debt instrument, must
                    be included in the income in the year in which the anniversary date occurs
                o anniversary date is the annual date of issue of debt instrument, minus one day
                o thus, if amount is receivable and not yet rec’d, and is not captured by 12(4), then the amount
                    falls under 70(2)
        - work in progress of a professional: unfinished services performed by professional which have not yet
           been billed. If treated as inventory, then expenses can only be deducted when billed. Certain
           professionals, lawyers, doctors, dentists, chiros, can elect not to treat work in progress as inventory,
           thus, expenses can be deducted although income not declared until billed, thus can fall in 70(2)
        - partnership income can fall under 70(2)

3 options for reporting “rights & things”:

        1. regular terminal year return – the value is included in the terminal year return

        2. file a separate return – treats as separate entity, and can again claim all applicable personal tax credits as
        per 118(1) and (2), but 118(3) onwards cannot be doubled up but credits can be divided b/n returns (include
        charitable donations, disability and education credits)
                   o Cannot split 70(2) b/n terminal and separate return
                                                                                                                         8


                  o    Filing date = later of 1 yr from date of death or 90 days from the mailing of a notice of
                       assessment of return
         3. transfer to bens of estate under 70(3) within the time period allowed for the filing of a separate return,
         then 70(2) does not apply. Amount is included in ben’s income when actually rec’d, this rule outside
         general rule that inheritances not taxed, b/c this income has not yet been taxed
                  o can be beneficial if Ben lower income, thus lower marginal tax rate
                  o also, tax can be deferred, b/c not payable until received by ben

Note: normally would chose separate return unless significant losses to offset

Deferral of payment of taxes

         -   D can chose, either under terminal return or separate return, chose to defer payment of taxes under
             159(5) in 10 equal instalments over 10 years,
         -   interest, at the prescribed rate is payable if this option is chosen

Taxation of recipient of rights & things – ie beneficiary

         -   if 70(2) distributed after time period under 70(3), then 70(2) included in D’s income
                  o under 69(1)(c) ben deemed to have acquired at fmv
                  o any shortcoming or excess in the actual value of the right or thing upon transfer is treated by
                       CCRA as loss or income for ben
                  o if ben sells right or thing, gain or loss is treated as cg or cl by CCRA
         -   if 70(2) transferred within time period established, then 70(3) applies
                  o ben deemed to have acquired at D’s acb (usually nil) plus any expenditures made or incurred
                       by ben to acquire (again usually nil) under 69(1.1)
                  o if Ben sells right or thing under 70(3), then RC treats as ordinary income

rationale: preferential treatment justified b/c this income would not be included as income for the deceased, this
bunching up of amounts warrants preferential treatment (significant savings can be realized through the filing of a
separate return for r&t


“Rights & Things” problems

Problem 3. similar to Tory’s Estate case in course materials
        - she paid $380,000 and gave up her right to 100,000 bequest so gave full and valuable consideration for
             the R&T, thus should not be liable for tax
        - estate would have been taxed, on basis of CG (since b/f ‘72 & no tax on CG)
        - 100,000 distributed under 70(3) and is included in daughter’s income, but other 380,000 a sale for
             consideration thus not a transfer within this provision, and included as income of the deceased in
             terminal year return under 70(2)
        - amendment since this case (s248(8) and (9) provides that if will provides for this kind of transfer, then
             can transfer as per 70(3)
        - thus, if 248(8) applies then no income to deceased, and all 480,000, upon receipt of this $, to the
             daughter, under 69(1.1) is deemed to acquire at D’s cost (nil) with a cost of $480,000, thus resulting in
             no tax payable by the daughter
        - since R&T went to E, then sold to daughter, presumably the E would have a CG of $480,000 thus from
             a tax planning perspective significant savings arise from arranging things in this manner (note: might
             be attacked by RC under GAAR)
                                                                                                                    9


          TAXATION OF CAPITAL GAINS AND LOSSES UPON DEATH - s 70(5)


Dispositions of capital property, not income

    a)   Non-depreciable capital property
                pod – acb = cg or cl
                acl applied against cg = ncg
                Net cl can be carried back 3 yrs or forward indefinitely

    b) Depreciable capital property
               acb (cc) – cca = ucc
               recapture treated as ordinary income, terminal loss fully deductible (no cl)
               deal with “classes of ppt”

                  s 70(5)(c) – when fmv at death is less than cc to D, Ben is deemed to acquire at cc to the D and
                  any difference is deemed to have been deducted cca in previous yrs (thus ucc may be adjusted by
                  this rule to ensure than recapture is not converted into cg)

Deemed disposition upon death – s 70(5)

         applies both to taxpayer and anyone acquiring ppt as a consequence of death

    a)   Why do we have this rule?
                cg is recognized form of income and needs to be taxed – liquidity and valuation (admin nightmare)
                concerns prevent taxation on an annual basis, so decided to tax upon disposition, this rule ensures
                that cg are taxed at least once in one’s lifetime

    b) Mechanics of s. 70(5)
              D deemed to dispose of P at fmv immediately b/f death and person acquiring is deemed to
              acquire at the instant of death at the same fmv
              s 159(5) allows tax owing under s 70(5) to be paid over 10 yrs in 10 equal installments

    c)   Acquisition of property as a consequence of death; s. 248(8)
                  Includes ppt acquired thru wills, intestacy laws, and disclaimer, release or surrender

    d) Spouse / spousal trust rollover; s 70(6) and 70(6.2)
                - if sp/clp transfer or trust 70(5) does not apply
                - under 70(6) acb to sp deemed to be acb or cc of D sp
                - 70(6.2) can elect out of r/o, then acb = fmv
                        o might want if acl from previous yrs or to utilize any unused cgx

    e)   Similar rules for land inventory; s. 70(5.2)(c) - (d)
                  - complete R/O
                  - automatic R/O, cannot elect out of this
                  - land tends to appreciate greatly, more potential to defer by holding onto

Utilization of capital losses in terminal year and preceding year

    a)   s 111(2): Exception to regular rule re: capital losses
                  - if D has any net cl’s in the yr, or the preceding yr, those ncl’s can be deducted against all
                      other income, but only to the extent that cl’s exceeded any previous cgx claimed by the D
                  - if D had any ncl’s from previous yrs, those ncl carryforwards can be used and deducted from
                      all sources of income to the extent that those losses do not exceed cgx previously claimed
                                                                                                                        10



    b) s 164(6): Carryback of losses from estate’s first taxation year
                - if E has any NCLs in its 1st (only) yr, can carried back to offset cg in terminal (only, cannot
                    carryback further) yr of D
                - elective, X’or must elect this by tax filing date of the E (90 days after taxation yr end)
                - can carry part or all loss back, similar rule for depreciable ppt

         Problems:
         1. T has 90,000 CG and N has 5,000 CL
         2. (a) deemed to acquire at 100,000, and since this exceeds ucc of 70,000, she is deemed to have paid
         20,000 cca in past, thus excess above the deemed ucc of 80,000 or 15,000 is recapture for daughter, and
         10,000 is recaptured from T
         anything up to 100,000 is recapture, and anything above that is cg
         3. 20,000 ncl’s in terminal yr, and 100,000 income, with 100,000 inc in prior yr and 180,000 ncl from prev
         yrs, and 40,000 previously claimed cgx
                            thus, 180,000 + 20,000 – 40,000 = 160,000 allowable cl’s which can be claimed against
                   income, either all from either yr or 80,000 from each of terminal and preceding yr


Determining FMV immediately before death;

    a)   Effect of Mastronardi Estate case –
                  - ct held value of shares at death determined without regard to imminence of death, therefore
                      shares valued without regard to reference of insurance payout (note: does not seem a sensible
                      decision)
                  - effect of imminence of death on fmv suggested by this case as not a factor
                  - the effect on fmv on D’s ppt (e.g. shares in a corporation) – any difference b/n fmv at time of
                      death and subsequent value to E or ben can be acl claimed against any cg’s
    a)   amendments to life insurance rules
                  - value of any life ins to NAL person is deemed to be its cash “surrender” value at s 70(5.3) –
                      savings portion of ins policy rather than proceeds payable on death
                  - usual kind of ins carried by corps is “term” ins which has a cash surrender value of nil

Effect of buy-sell agreements (BSA) on fmv at death

                 -    typically triggered upon the death on one of the parties to the agreement
                 -    E of D is either required or has the option to sell/buy specified P at specified terms (pricing
                      arranged)
                 -    Terms usually restrict the selling of shares during the lifetime of the shareholder
                 -    Since quite common, key concern is the effect on the fmv of those specified shares

    a) common law position; Mastronardi etc.

         -   what a willing buyer would pay and a willing seller would accept without regard to imminence of
             death
         -   how does buy-sell agreement affect fmv? – no 3rd party is going to pay anything different than price set
             by BSA, so BSA should be determinative

    b) Revenue Canada’s position; IT-140R3, IC-89-3

         -   see especially IC-89-3, paragraphs 28-31
                  o the BSA must oblige the E to sell, and must restrict disposal during the lifetime of the D, and
                      must be bone fide business arrangement which is legally binding k
                  o cannot be device to transfer shares to heirs, merely donative intent
                  o must enter into agreement as though strangers
                  o Rev Can requirements more stringent for non-arm’s length agreements
                                                                                                              11


     -   if fmv determined exceeds price agreed upon in BSA, then cg to D, but cl to E that can be carried back
         to the term yr under s 164(6)
              o Some relief under s 164(6) to carry loss back to terminal yr, if estate and purchaser (surviving
                   s/h) deal at arm’s length and shares sold in estate’s first taxation year
              o If estate and surviving s/h are non-arm’s length, potential double taxation because D will pay
                   tax b/c of deeming rule and ben will pay when sell asset: s 69(1)(b)
              Note: Bens, and any one related to Bens are Non-Arm’s Length to an E!

c)   “non-arm’s length persons”: defined by ss 251(1), 251(2)(a) and 251(6)

     -   D and surviving s/h – will be NAL if related by blood, marriage or common-law partnership, or by
         adoption
     -   related by blood: lineal descendants and ascendants, and siblings
     -   related by marriage or common-law partnership: two persons so related if one person is married to the
         other or common law partner of the other, or if one person is married or common law partner to
         someone related to the other person by blood as above;
     -   related by adoption: if adopted by the person or by a lineal descendant or ascendant of that person
     -   does not include aunt, uncle, niece or nephew or persons adopted by siblings
     -   estate and surviving s/h – estate is NAL with anyone who is a ben, plus anyone who is NAL with a
         ben; therefore, very broad
     -   also, if not caught under this rule, whether non-arm’s length is question of fact

Is Revenue Canada right?

     -   in particular, their position that a legally binding BSA not always determinative of fmv
     -   may have intent of preventing schemes to transfer CGs, but b/c a legally binding k, does in fact have
         effect on fmv of shares, and no one would ever pay more than price set
     -   if this the case, then fmv should be determined at the time the deed executed rather than upon death –
         that is, it is equivalent to a gift being made at the time
     -   neither view has been tested in the cts
                                                                                                                       12


             THE SPOUSAL / COMMON-LAW PARTNER ROLLOVER – s 70(6)


General requirements and effects of rollover

    a) D and sp/clp resident in Canada immediately before death
    b) property transferred or distributed as a consequence of death and vests indefeasibly and shown to vest
       indefeasibly within 36 months after death, or if apply to RC for extension within that time, within longer
       period as Minister considers reasonable
                 - additional requirements for sp Ts (below) re distributions of income and capital of T
    c) effect of rollover is tax deferral: ppt transfers at acb of transferor, no dd, no cg, thus no tcg, thus tax on gain
       deferred
    d) can elect out of rollover s70(6.2): may be preferable if sp in lower tax bracket, or has net losses to deduct;
       or remaining cgx for QSBC shares
       Note: either in or out of r/o – no partial r/o as in farming r/o, although if tainted, will allow sp T to be
       untainted by designating some ppt out of r/o under 70(7)

Meaning of spouse, common-law partner

    a) s 248(1) defines “clp”: either 1 yr conjugal relationship, or have a child together and are living together,
       until such time as 90 days living apart due to break up in relationship, if resume relationship, automatically
       goes back to C/L status
       - includes same sex relationships since 2000
    b) s 252(3) extended meaning of “spouse” – married person, includes persons where marriage is void or
       voidable

Property “vesting indefeasibly” in spouse or spousal trust

    a)   General rule:
         - “vesting” generally occurs when the gift and the recipient are ascertained and recipient able to take
            possession, no conditions precedent to be fulfilled before the gift can take effect, and no prior
            interests in the property in existence
         - formal or legal conveyance not required for vesting
         - vesting “indefeasibly” – when the vesting is not subject to a condition subsequent and no prior
            interest can serve to divest interest;
         - Boger Estate case says such a condition subsequent must be in will

    b) Effects of family law / dependant’s relief legislation

         -   e.g. Family Law Act, Succession Law Reform Act in Ontario – can choose to apply if dependents do
             not get adequate support from will of D
         -   Note: CCRA will allow an extension beyond 36 months as long as application made under relief
             legislation within that time

                  o   Hillis Estate case – ct held date of court order determinative
                  o   Boger Estate case – pending application or court order does not, in itself, affect vesting of
                      property otherwise vested indefeasibly

         -   s 248(23.1) – text says this solves vesting issues, at least under family law / division of marital
             property statutes? Not true b/c doesn’t address issue of vesting
                 o only deals with ppt as result of marriage, thus does not deal with succession legislation,
                      maybe didn’t turn mind to r/o for children (farm P)
                 o same effect under c/l – this provision may not add anything, may be there for greater certainty
                 o new provision thus no case law yet
                                                                                                                  13


    c)   Vesting in spouse must occur before spouse’s death; s. 248(9.2)

Effect of buy-sell agreements on the “vesting” requirement

         BSA may affect vesting requirement
               Parkes and Greenwood – BSA’s required that shares be sold, thus shares did not vest in sp, so no
               r/o:
                         - Greenwood Estate - shares never vested in the spouse in the first place
                         - Parkes Estate – buy-sell binding on estate and heirs, therefore did not vest in spouse
               Van Son – no obligation to sell in BSA therefore vested in spouse before sale and r/o allowed
               Boger – CS must be in granting instrument (ie will) thus if in BSA which is outside the will could
               argue interest vested in sp

         CCRA position = if BSA requires shares to be sold, then shares do not vest indefeasibly in sp thus no
    sp’l r/o (doesn’t matter that BSA outside the will as suggested by Boger)

         Planning for rollover - r/o desired if sp in lower tax bracket, or has losses to offset, or cgx left
         - buy-sell separate from will
         - no explicit obligation on estate to sell
         - consider put-call arrangement (option to sell/ option to buy) instead of mandatory buy-sell b/c CCRA
             accepts that if no obligation to sell, rollover will not be denied
         - put obligation on spouse instead of estate

Additional requirements re: spousal trusts (still require to satisfy sp r/o requirements)

    a) spouse entitled to all income of trust before spouse’s death (note: accretions in gains not considered
       income in T law thus can retain CGs in T, but sp must get all income ex CGs which stay in T) “constructive
       receipt” doctrine – payments out of T for expenses OK
    b) no other person may receive or obtain capital of trust before spouse’s death (transfers out of T ought to be
       subject to tax)
    c) s. 248(9.1) – T can be made out of sp’s will or ct order pursuant to prov dependent’s relief or family law
       legislation

Effect of disclaimers, releases and surrenders by beneficiaries; s. 248(8) and (9)

         other ben(s) deemed to acquire as a consequence of D’s death, and can be included in r/o
         - s248(9) defines d, r & s – 36 month period or application for extension to RC within that time
         - DR&S cannot be in favour of some other named ben (practically, RC overlooks if named ben would
             have rec’d int had no person been named in d, r, or s)
         - s248(8)(c) – avoids any gains accruing to ben for int that ben releases or surrenders, thus ben not taxed
             for release or surrender of an interest (no need to include disclaim in this provision as gift void in
             abitio thus gift never vested if disclaimed)
         - Hillis case – 2 brothers disclaimed gift under will; gifts under intestacy come into being by statutory
             authority thus disclaimer valid when made rather than upon death, seems not captured by 248(8)(c)
         - CCRA has not clarified its position so this area still unresolved – but Hillis does not seem correct so be
             wary of follow up
                                                                                                                      14


                             TAINTED SPOUSAL TRUSTS – s 70(7) & (8)


When is a spousal (common-law partner) trust “tainted”?

     s. 70(7): trust that would otherwise qualify but for fact that it provides for payment of “testamentary debts”
    (note: all other requirements of sp T fulfilled)

    a)   “testamentary debts” defined in s. 70(8) – any debt owing or other obligation outstanding by the D at the
         time of death

    b) s. 108(4): trust not tainted if only provides for payment of estate, succession taxes, or income taxes payable
       by trust

    c)   tax filing date of D extended to 18 months after death

How to “untaint” a tainted spousal trust

    a)   identify “non-qualifying debts”; defined in s. 70(8) – all debts except inheritance, estate and succession
         taxes to foreign countries and any mortgages or other secured debts

    b) “list properties” whose fmv equals or exceeds non-qd (these will be used to pay off non-qd are will be
       subject to dd whereas all other P will be included in r/o under s70(6)

    c)   if fmv of listed properties exceeds non-qd = “listed value excess”

    d) “designate one property” and cg or cl of designated ppt will be pro-rated as follows:

                  cg or cl x fmv - lve
                   s70(5)    fmv

         other “listed properties” subject to s70(5); non-listed properties subject to s70(6) r/o

    e)   example: Problem 1
                 QST provides for the payment of testamentary debts of the D
                 Total non-qd = $100K
                 Ppt 1 acb = nil and fmv = 80K
                 Ppt 2 acb = 40K and fmv = 80K

                  If designate ppt 1          80 x (80 – 60) / 80 = 20K cg
                  plus cg of ppt 2            40K cg
                  total cg =                  60, or 30 tcg under 70(5) and the rest under 70(6) r/o

                  If designate ppt 2 40K x (80-60) / 80 = 10K cg
                  Plus cg of ppt 1           80K
                  Total cg =                 90K, or 45K tcg under 70(5) and rest under r/o

         Note:    ppt designated under 70(7) is acquired by the T at acb of D + cg that arises (or acb – cl)
                  Under 70(5) acquired at fmv
                  Under 70(6) acquired at acb

Alternatives where sp T formed out of residue of estate:

    CCRA’s position in para. 26, IT-305R4
    a) all properties subject to 70(5) (i.e. trust remains tainted)
                                                                                                             15


b) untaint the trust and use 70(7)
c) 70(7) not applicable; use combination of 70(5) and 70(6) – could view E as paying off debts and then
   corpus of T from whatever left – thus sp T separate from E paying test debts, thus not tainted  but no
   designated ppt that is pro-rated and no extended 18 month filing date
d) no case law on which view is correct

*Benefit of 70(7) is flexibility in designating certain ppt which is pro-rated, plus extended filing date
                                                                                                                      16


                           ROLLOVER FOR FARM PROPERTY – s 70(9)
General requirements for rollover: s. 70(9)

        includes timber, vineyards, horse breeding with general requirements that are the same for sp T
        r/o, but apply to children

        a)   child R in Canada immediately before death of taxpayer; extended meaning of child in s70(10)
             includes grand-children and great gr-children

        b) applies to land in Can or depreciable farming property in Can

        c)   property transferred or distributed as a consequence of death and vests indefeasibly and shown to vest
             indefeasibly within 36 months after death, or if apply for extension within that time, within longer
             period as Minister considers reasonable

        d) used principally (more than 50% of the time) in the business of farming before death in which
           taxpayer, spouse, or child engaged on a regular and continuous basis (bit of a grey area here, note
           that “immediately before death” removed from provision)

Effect of rollover;

        -    can elect full or partial r/o (spousal is either fully in 70(6) or out 70(6.2))

        -    can choose any amount b/n cost amt and fmv as acb to child, dd to D

        -    if D has lifetime cgx remaining may want to trigger cg for D’s terminal yr, then E is deemed to acquire
             at amt chosen

R/o for shares in family farm corporations, 70(9.3) or interests in family farm partnerships: 70(9.2)

        a)   essentially same requirements and effects as above, except

        b) the “ppt” is shares or partnership interest; therefore, all or substantially all (90%) of fmv of
           corporation’s (partnership’s) property must be attributable to ppt that was used principally (>50%) by
           corporation in the business of farming before death in which taxpayer, spouse, or child engaged on a
           regular and continuous basis

Rollover for QFP transferred from sp/clp T to child of D: s. 70(9.1)

        -    when sp dies, is dd at fmv of ppt in sp T but another r/o is possible if qualified farm ppt distributed to
             children of D, under 70(9.1)
        -    can elect a full or partial r/o (can potentially pass down family farms through generations and keep
             deferring payment of tax on any gains indefinitely)

        Requirements 70(9.1):
        a) child R in Can immediately before death of spouse
        b) property vests indefeasibly in child; no time limit
        c) property used in the business of farming immediately before death of spouse (but not necessarily
           by spouse or child)
        d) full or partial rollover
        e) s. 70(9.3): similar rollover for shares in family farm corporation

        Note: both farm and spousal r/o’s available inter vivos
                                                                                                                     17


                           DECEASED’S PRINCIPAL RESIDENCE – s 40
Definition of “principal residence” for any taxation year: s. 54

    a)   owned by individual, solely, or jointly with another person or otherwise

    b) ordinarily inhabited by individual, sp or former sp/clp or by child in year (can be seasonal or P/T if have
       several homes but can only designate 1)

    c)   only one property designated per year per family (pre-1982 could designate more than one per family);
         designation made in year of disposition (form goes with income tax that yr, practically forms not usually
         filed and RC ok with that)

    d) if T owns property, ordinarily inhabited by ben, spouse or former spouse (or c/l partner) of ben, or child of
       ben; same limit re: one per family per year and Bens cannot also claim exemption

Principal residence exemption: s. 40(2)(b)

         cg exempt, based on number of yrs as pr while owner R in Canada, plus one

                  “exempt portion” = cg x 1 + yrs as PR
                                         # of yrs owned

                  (+1 covers possibility of purchase and sale occurring in same yr)

Disposition at death

    e)   If 70(5) applies, then dd at fmv, could be tcg but likely wholly or in part exempt from tax

    f)   If 70(6); recipient steps into D’s shoes re: prior ownership of PR (deeming rule):
         i) under 40(4) sp deemed to own PR for the yrs the D owned the P, and to have lived in the PR for as
              many yrs as the D did AND
         ii) under 40(4)(c) a T is deemed R in Can during each taxation yr which the taxpayer was R

    g) joint ownership before death; again, either 70(5) fmv or 70(6) D’s acb

Distributions of PR out of spousal T: 40(4) or 40(7) application?

    40(4) = deemed ownership and residency of D and 40(7) = deemed ownership and residency of T

    h) r/o available under 107(2) if ppt distributed from sp T to sp before death of spouse( ie power to encroach
       on capital of T); then sp deemed to acquire at acb to the T, and to own PR while T owned PR
       - if sp or children lived in residence then can qualify as PRX, and claim PRX for yrs P owned by T
            under s40(7); however, sp not deemed to own PR while D owned P

    i)   electing out of r/o s107(2.01)
         - dd by T at fmv and T liable for tax, but if T acquired PR under sp r/o 70(6) then under s40(4) T
              deemed to own PR while owned as such by D;

    j)   spouse dies = dd by sp T at fmv upon sp’s death (assuming P not distributed to sp before death); again dd
         and da at fmv, (acb to T bumped up);
                  PRX determined by s 40(4) if s70(6) thus T deemed ownership and residency as by D

    k) distribution of P from spousal T to other ben after death of spouse; s. 107(2) r/o available
            acb stepped up to fmv on death of spouse; 40(7) again applies to ben – ben deemed to acquire when T
       last acquired, dd and da upon death of spouse
                                                                                                                        18


                             REMAINDER INTERESTS IN LAND – s 43.1
                                                                                                       Not examinable

1) Former law – gift of remainder interest in land during one’s lifetime was a disposition at fmv, but no
   simultaneous disposition of life interest (compare to gift to trust) – one could avoid the full impact of dd at
   death by transferring real ppt to child before death but retain a life int in the ppt
   a) Deferral of gain on remainder interest beyond donor’s death
   b) Deemed disposition of life interest at death, presumably at nominal fmv

         Eg:      acb               nil                         At Death:
                  fmv               $100K                       fmv                $200K
                  fmv rem           $20K                        fmv LI             nominal
                  fmv life int      $80K                        fmv rem            $200K

thus, cg of $20K upon disposition, and all accrued gain is deferred beyond death, and LI is never taxed
BUT, if set up T, would be dd at fmv on entire value of T property

2) Current law – s 43.1 – does not apply to donations to charities or the Crown or farm r/o’s
   a) Disposition of remainder int gives rise to dd and reacquisition of life int at fmv for the donor (thus acb
      stepped up to fmv) – eg above donor dd, and new acb = 80K
   b) Upon death of life est holder, life estate ends and dd at acb for the D, r/o for life int (no tax); (eg above =
      $80K) – no cg or cl
   c) remainder interest holder – if non-arm’s length immediately before death, acb of remainder increased by
      the lesser of
      i) acb of life estate to deceased immed before death ($80K)
      ii) amount by which the fmv of land immed after death exceeds acb of remainder interest at that time
           ($180K) – thus, lesser of 2 = 80K
      so, 80K bump + acb of LI (dd @ fmv) 20K = remainder acb of 100K to NAL remainder holder
      (net effect – step up in acb to lesser of fmv of land at time of division of interests and fmv of land immed
      after death) thus, in eg above, 100K, which is amt determined in formula above
                                                                                                                    19


                                DEATH OF A PARTNER – s 96(1) & s 53
Key issues:       amount included in D’s terminal yr return
                  As P, will be subject to dd at either 70(5) or 70(6)
                  Effect on estate or ben when interest acquired

1) Overview of the taxation of partners and partnerships
   a) Partnership not a separate taxpayer (notional concept for computation only); full conduit for tax purposes
   b) However, income or loss computed at partnership level as if the partnership were a person and its fiscal
      period were the taxation year; income or loss then allocated to partners at fiscal year end and included in
      partner’s taxation year in which the fiscal period ends: s. 96(1)
   c) Income or cg so allocated increases acb of partnership interest: 53(1)(e); loss or cl decreases acb: s.
      53(2)(c); this ensures income or cg not taxed twice (or loss / cl not counted twice)
   d) Capital contributions add to acb; capital / profit cash withdrawals (partner’s “draw”) decrease acb
   e) Negative acb in partnership interest does not result in immediate cg (unlike other capital properties);
      negative acb results in cg only upon disposition of interest

2) Income or loss of deceased partner up to date of death (stub period)
   a) Death causes a fiscal year-end
       i) Fiscal year will end upon death if the death causes the partnership to terminate; this issue depends on
            the provincial partnership laws and the terms of partnership agreement
       ii) Net income or loss of stub period included under general rules of s. 96(1); amount added / deducted
            from acb of interest
       iii) This will serve to increase or reduce the capital gain (or the capital loss) on the deemed disposition at
            death under 70(5) or subsequent disposition by spouse if 70(6); ensures no double counting of the
            income or loss
       iv) Partner’s income or loss for any other fiscal period (if any) ending in terminal year and cash
            withdrawals will also increase or reduce acb of partnership interest
       v) Off-calendar fiscal periods – if stub fiscal period is second fiscal period ending in the calendar year,
            separate return can be filed under 150(4) for stub period income; owing to changes introduced in 1995,
            this option now of limited benefit; s. 150(4) separate return can be used for “1995 10-year reserve”
            deducted in terminal year income
   b) Death does not cause a fiscal year-end
       i) Stub period income is a right or thing; s. 70(2)
            Options
                           1. Include in terminal return under 70(2)
                           2. Include in separate return under 70(2)
                           3. Transfer to beneficiary under 70(3)
                           - If option 1 or 2, beneficiary acquires right or thing at fmv (69(1)(b))
                           - If option 3, beneficiary acquires right or thing at deceased’s remaining cost of right
                                or thing (typically nil) plus expenditures made or incurred by beneficiary (69(1.1));
                                beneficiary includes amount in income in year received
       ii) Value of right or thing added to acb of partnership interest immediately before death
       iii) If loss in stub period, can claim loss in terminal year as long as also reduce acb of partnership interest;
            otherwise, loss not allowed (Rev. Can position)
       iv) Partner’s income or loss for any fiscal period (if any) ending in terminal year and cash withdrawals
            will also increase or reduce acb of partnership interest.

3) Deemed disposition of partnership interest by deceased upon death
   a) Partnership interest is a capital property, therefore subject to rules of 70(5), 70(6); however, no deemed
      disposition under 70(6) if spouse becomes partner (see below)
   b) acb of interest will reflect income / loss of stub period up to death, plus income / loss of any other fiscal
      period ending in the terminal year, and any withdrawals of capital or profits in the year
   c) Partnership agreement will typically contain buy-sell provisions, restrictions on selling the interest during
      partner’s lifetime, buy-out price after death; if 70(5) applies, fmv of interest should be limited to this
                                                                                                                  20


        amount; (same issues as with shares in private corporation re: affect on fmv, IT-140R3, question of fact if
        parties non-arm’s length, etc.)

4) Continuing partnership interest – beneficiary acquiring the interest is an existing partner or becomes a
   partner
   a) If s. 70(5) applies, beneficiary acquires partnership interest with acb equal to fmv immediately before death
   b) If 70(6) applies, spouse / common- law partner acquires at deceased’s acb
   c) If 70(6) applies, 70(6)(d.1) says deceased deemed not to have disposed of partnership interest immediately
       before death; relevant if acb of interest was negative

5) Beneficiary does not become partner
   a) Estate or beneficiary deemed to have acquired a “right to receive partnership property”, which is a capital
      property but not a partnership interest
   b) Right acquired at fmv of partnership interest immed before death under 70(5) or deceased’s acb under
      70(6)
   c) If spouse or common-law partner and 70(6) applies, 70(6)(d.1) does not apply; therefore deceased deemed
      to have disposed of interest immed before death; relevant if acb was negative (if negative acb, capital gain
      to deceased but acb then increased to nil for spouse)
   d) Amounts received by estate or beneficiary in full or partial satisfaction of “right to receive partnership
      property” reduces acb of right; once right fully satisfied, capital gain if acb negative, capital loss if acb
      positive;
   e) if capital loss incurred by estate in first taxation year, 164(6) carry-back of capital loss allowed to
      deceased’s terminal year
                                                                                                                      21


                            THE CAPITAL GAINS EXEMPTION – s 110.6

Background and history of the exemption

    a) Introduced in 1984 as lifetime $500,000 cg exemption (cgx); applied to all capital property
    b) In 1987, $500,000 exemption amended to apply only to qualified farm property and qualified small
       business corporation shares (“QSBC shares”); $100,000 exemption for other capital properties (but subject
       to overall limit of $500,000 for all capital properties)
    c) 1992 – exemption eliminated for land
    d) 1994 – exemption eliminated for all properties except qualified farm property and QSBC shares

    e)   currently, what remains is a $500,000 cgx, or more precisely a $250,000 deduction against tcg’s arising on
         dispositions of qualified farm property: s 110.6(2) and QSBS shares: s 110.6(1) (note: CB text refers to
         $375,000 deduction, which reflects the previous capital gains inclusion rate of ¾)

    f)   exemption applies only to Canadian resident individuals other than trusts, although sp/clp T can claim
         cgx on death of sp; also, personal Ts that dispose of farm property or QSBC shares can flow out the cg’s to
         their individual bens, who can then claim the cgx

    g) Rationale
                           -    original rationale to stimulate economy and investment but not very effective at this
                                b/c very broad, applied to everything, no benefit to economy shown
                           -    cgx is regressive, claimed disproportionately by wealthiest
                           -    some retirement income for farmers and small business owners argued


Requirements for qualified farm property - defined in s. 110.6(1)

    similar to farm r/o requirements with 2 major differences: parent can be user of farm P, and 24 month hold
    period

    farm land, shares in family farm corporations and interests in family farm partnerships qualify

    land: general requirements

         i) land in Canada
         ii) 24 month period hold (ownership) period – throughout the period of at least 24 months immediately
              before death (or before a disposition during life), the individual, sp/clp, parent or child of individual
              owned the land, and
         iii) in any 2 years (primacy of farming revenue) while land owned by any such person, it was used by
              that person in carrying on the farming business on a regular and continuous basis and that person’s
              gross revenue from the farming business exceeded the person’s income from all other sources

    shares in family farm corporations: general requirements:

         i)  at time of death (or other disposition), all or substantially all (90% or more) of fmv of corporation’s
             property was attributable to property that was used principally in the farming business in Canada by
             the corporation or by the individual, spouse, parent or child
         ii) 24 month requirement – throughout any 24 month period before that time, more than 50% of fmv of
             corporation’s property so used, and individual, spouse, parent or child engaged on a regular and
             continuous basis
                                                                                                                    22



Requirements for QBSC shares as defined in s. 110.6(1)

    At time of disposition, must be share of “small business corporation”: defined in s.248(1);
    “SBC” requirements:

         must be CCPC, defined in s 125(7); generally means a private corporation resident in Canada not
         controlled by non-residents, or public corporations; control generally means owning shares directly or
         indirectly with more than 50% of votes

         90% test - all or substantially all of assets must be attributable to assets used principally (more than 50%)
         in active business carried on primarily in Canada, or shares or debt invested in other small business
         corporations – may have to “purify” or liquefy non-qualifying assets

         if disposition upon death, can qualify as SBC as long as above 90% requirement was met at any time in
         12 months prior to death; s. 110.6(14)(g) - allows some flexibility b/c death gives no opportunity to purify

    24 month holding period re ownership
               - aims at making firm investment commitment rather than flipping shares to gain exemption:
               throughout 24 month period before death or other disposition, not owned by anyone else other
               than the individual or person related to the individual;
               s 110.6(14)(c) says ben’s of a T are related to T for these purposes, and T related to person from
               whom shares acquired (e.g. deceased) as long as that person related to all bens of T, thus ben’s can
               claim T & D’s holding period if ben and D related

    24 month asset requirement – 50% abi test
                throughout the 24 month period before death or other disposition, corporation must be a CCPC
                and more than 50% of assets attributable to assets used principally in active business carried on
                primarily in Canada, or shares/debt invested in other CCPCs that meet 50% test; however, if less
                than 90% of assets of corporation so attributable at any time (i.e. between 50% and 90%) and
                assets include shares/debt in other small business corporations, those other corporations must meet
                all or substantially all (90% or more) asset test during that time

    Note: s 110.6(15):
              - if corp owns life ins on s/h, fmv for purposes of asset tests is limited to cash surrender value of
                  policy;
              - after death, if corp receives ins proceeds, fmv of proceeds also limited to cash surrender value of
                  policy if corp uses proceeds to redeem, cancel or repurchase shares of deceased within 24 months
                  (ensures than corp not fail to meet QSBC requirements
(The capital gains deduction for QSBC shares is determined under s. 110.6(2.1); see also “annual gains limit” and
“cumulative gains limit” in s. 110.6(1))

2) General limit: deduction in any one year is limited to the lesser of (a) or (b):

    a)   $250,000 minus deduction claimed in previous years (adjustments required for previous years where
         capital gain inclusion rate was 2/3 or 3/4); OR

    b) net tcg’s in year from disposition of QSBC shares (tcg’s from QSBC shares minus acl’s from QSBC
       shares in year);
       note: that non-QSBC acl’s first applied against non-QSBC tcg’s in year, and if any excess non-QSBC
       losses in year, must then be applied against QSBC tcg’s

                  minus the total of

         i)   ncl carryovers deducted against QSBC net tcg’s in the year;
                                                                                                                    23


         ii) allowable business investment losses (ABILs) after 1984 (to extent that the ABILs did not reduce a
              previously claimed capital gains deduction), and
         iii) cumulative net investment losses (CNILs) after 1987 (to extent that the CNILs did not reduce a
              previously claimed capital gains deduction)

3) Generally speaking (and without accounting for ABIL or CNIL), in the terminal year and immediately
   preceding year, the following procedure is followed:

    a)   determine QSBC net tcg’s in each year (net of any QSBC acl’s in the yr); non-QSBC acl’s in yr are first
         applied against non-QSBC tcg’s, and any excess non-QSBC losses are then applied against QSBC tcg’s in
         the yr;

    b) ncl carryovers are 1st applied to non-QSBC net tcg’s in each yr; any excess can be applied against QSBC
       net tcg’s in each year;

    c)   if remaining QSBC net tcg in year, eligible for the cg deduction (subject to ABIL and CNIL adjustments);

    d) if remaining ncl’s, including ncl carryovers (after deducting against any remaining non-QSBC or QSBC
       tcg in either year), can be deducted against all other sources of inc in either yr to extent such losses
       exceed cgx claimed in any yr.

4) ABILs – generally, acl’s on certain dispositions of shares or debt in small business corp’s; can be deducted
   against all sources of inc and not just tcg’s

5) CNILs – generally, net losses from property from 1988 onwards (i.e. aggregate losses from property in excess
   of aggregate income from property)

6) Rationale for ABIL, CNIL limitations

7) Example – question 2 of Feb 5 problems

8) The cgx and the sp r/o; electing out of the r/o in order to utilize D’s exemption – if D has cgx available could
   opt out of r/o to step up acb for spouse – can elect out of part to use available cgx left (eg if D owned 100 shares
   with fmv of $100K and only had $50K cgx left)
                                                                                                                     24


                                  EMPLOYEE STOCK OPTIONS – s 7
Overview of taxation of employee stock options

    a) General rule under s 7(1)(a): employee benefit equal to value of shares at time option exercised (i.e. when
       shares acquired) minus the amount paid for shares (option exercise price) - not taxed when option given,
       but when option exercised
    b) Benefit is included as income from employment
    c) Benefit is either included in income in year shares are acquired (“regular option”); or is deferred and
       included in the year the shares are disposed of (“deferral option”), CCPC shares 7(1.1) or certain publicly-
       listed shares 7(8)
    d) Amount of benefit is added to acb of shares when acquired s 53(1)(j), whether regular or deferral option;
       and even if one-half deduction is allowed (see below); avoids double taxation when shares sold
    e) One-half of benefit may be deducted if criteria in s. 110(1)(d) or s 110 (d.1) met; Generally speaking,
       deduction allowed if
       i) shares are common shares
       ii) employee arm’s length with employer
       iii) exercise price not less than fmv of shares at time option was granted
       iv) CCPC shares must be held minimum of 2 yrs or until death

Employee dies owning shares acquired under a “regular option”

    a) s 7 benefit already realized (i.e. when shares acquired); therefore no further benefit at death
    b) amount of s 7 benefit already added to acb of shares; will be relevant for purposes of deemed disposition
       of shares under 70(5) or (6)

Employee dies owning shares acquired under a “deferral option”

    a) dd of shares under 70(5): s 7 benefit will be realized upon the dd at death; amount of benefit already added
       to acb of shares; dd of shares at fmv will lead to cg or cl if fmv differs from acb
    b) dd under 70(6): s 7 benefit will be realized upon the dd at death; amount of benefit already added to acb of
       shares; dd at acb therefore no cg or cl upon death; sp or T acquires at acb of D

Employee dies with “unexercised stock option”

    a) s. 7(1)(e): value of option at death included as benefit in terminal year; one-half deduction under s.
       110(1)(d) can apply
    b) option not subject to s. 70(5), (6) dd b/c option is not a capital P in hands of e’ee so no dd
    c) estate / beneficiary acquires option at cost equal to fmv at death 69(1)(c)
    d) when option exercised by estate / beneficiary, cost of option plus exercise price added to acb of shares; s 7
       rules n/a to estate or beneficiary b/c not an e’ee, when E sells will realize a cg or cl
    e) s. 164(6.1): if fmv of option decreases in value after death and E exercises option in its 1 st taxation yr and
       makes election, the decrease in value deemed to be loss of D in terminal year; cost of option to estate
       reduced accordingly (don’t worry about mechanics of s. 164(6.1))
                                                                                                                 25


               REGISTERED RETIREMENT SAVINGS PLANS (RRSPs) – s 146
“Registered” for purposes of ITA
2 main advantages (to encourage and assist in retirement planning):
                          - contributions are tax deductible
                          - all income earned while inside RRSP is not taxed

RRSP contributions

    a)   Contribution limit: Lesser of $13,500 and 18% of prior yr’s “earned income”, minus “pension
         adjustment” for prior yr;
                 “earned income” defined at s146(1) includes rent and royalties, but not div’s & cg’s
                 “pension adjustment” reflects amts of benefits accruing in other pension plans (are normally told
                 this amt and do not have to calculate)

    b) RRSP carryforwards: Unused contribution room can be carried forward indefinitely (until have finds
       available or are in higher tax bracket)

    c)   Contribution deadline: Within 60 days after end of the year
                 Must roll out of RRSP at 70 yrs of age

    d) Sp (c/l p) RRSPs: (allowed income splitting) T/p’s can contribute to sp’s RRSP, reduces their RRSP
       contribution limit accordingly; D’s pers rep can contribute to sp RRSP to reduce term yr income
                 Can continue to contribute to sp’s RRSP as long as they under 70
                 If D has unused contribution limit, leg rep of D can contribute to RRSP to reduce term yr income
                 (almost like a sp r/o)

    e)   RRSP over-contributions - $2000 cushion: $2000 (lifetime cushion) not deducted but penalty of 1% per
         month for amts above $2000
                 PLANNING: in Dec of yr turning 69 yrs, deposit (another) 13,500 in RRSP and next yr can
                 deduct amt (do not have to deduct that yr, can deduct following yr) which more than offsets 1%
                 penalty b/c can only contribute up to 69 but do not have to deduct that yr. Can dump in even more
                 but only makes sense for 1 or 2 yrs, after that penalty will outweigh benefit

Taxation of RRSP withdrawals / receipts

    a) Fully included as income in yr rec’d, regardless of whether attributable to cg’s, div’s, etc; s 146(8)
                As general rule still makes mathematical sense to include cg’s and div’s inside RRSP and write off
                but if have enough ordinary inc to use all contib limit then should choose to leave out cg’s

    b) If spousal RRSP contribution, income attribution to the contributor if the contribution is withdrawn in
       year of contribution or within next two years; s 146(8.3)
                Exceptions:
                    (i) “home buyer’s plan” – when purchase 1st home, both txpyr and sp can withdraw 20,000
                         each (total 40,000 to be repaid to RRSP within 15 yrs)
                    (ii) “lifelong learning plan” “LLP” – can withdraw 20,000 for your or sp’s education (to be
                         paid back within 10 yrs)

Maturity of RRSP

    a) RRSP must mature by end of year in which annuitant turns 69 (may still be able to contribute to sp
       RRSP)
    b) RRSP options:
                  (i) withdraw funds – not good b/c of tax consequences
                  (ii) convert to or purchase annuity (“matured RRSP”) – purchase then paid monthly amt for
                       guaranteed term
                                                                                                                      26


                        (iii) transfer to RRIF
    c)   “matured RRSP” provides an annuity payable to annuitant, either for a set term, or to annuitant’s death or
         to later of annuitant’s death and spouse’s death, with or without a guaranteed minimum term

Death of RRSP annuitant before maturity of RRSP

                  Value of RRSP at death – refund of premiums = amt included in terminal yr

    a) Value of RRSP at death included in terminal year; s 146(8.8)

    b) “Refund of premiums” included in recipient’s income; ss 146(8) and (8.9);
                refund of premiums can be any amt, limit does not apply to these funds
       means:
       i)       amount payable to sp/clp as ben under RRSP, or
       ii)      amount payable to financially dependant child or grandchild as ben
       Note: s 146(1) if inc exceeds personal credits then assumed not financially dependent

    c)   R/o for recipient sp if transferred to RRSP, RRIF or to purchase life or term annuity

    d) R/o for child or grandchild if under 18 to purchase annuity payable to age 18; or if financially dependant
       by reason of infirmity, rollover applies for any age if transfer to RRSP, RRIF or to purchase term or life
       annuity

    e)   If RRSP proceeds received by “estate” (or no beneficiary designated under RRSP), can elect that proceeds
         are refund of premiums for ben; s 146(8.1) allows a r/o at death when no ben named

Death of RRSP annuitant after maturity of RRSP

    a) Value of RRSP included in term yr unless sp becomes annuitant; s 146(8.8)

    b) If sp becomes annuitant, sp includes amts as received

    c)   If E is recipient and only if amts are “for the benefit of the sp”, can elect that sp is deemed to become
         annuitant of RRSP; s 146(8.91) – if sp can take under will or on intestacy, this sufficient

    d) If E is recipient and not for benefit of sp, can elect that amts are refund of premiums for financially dep.
       child or grandchild; s 146(8.1); r/o’s above available (sp, minor ch, dep ch)

    e)   If RRSP annuity ends on D’s death, no value and therefore no tax payable

1) Not examinable Registered retirement income funds (RRIFs): contain similar rules upon death; value fully
   included in D’s income unless sP becomes annuitant, or if amts designated by E to financially dep ch or gr ch as
   refund of premiums
        More flexibility but more risk in RRIF, more control as you dictate how to invest
        No specified amt – tho usually certain amt has to be withdrawn as minimum each yr, can take want ant
        above that amt
                                                                                                                    27


                            CHARITABLE GIFTS UPON DEATH – s 118.1
Overview of credit for gifts to registered charities

    a)   16% of the first $200 of donations made in a taxation year (CB text says 17%, rate was changed last year),
         and 29% on the amount of donations in the year in excess of $200; s 118.1(2) = about 46% when fed and
         prov credits combined

    b) Donations of up to 75% of income in year can qualify, plus 25% of any tcg or recapture on donation of
       property (otherwise could end up paying tax if no income, but incurring cg upon donation of cap P)

    c)   Five-year carryforward period for unused credits

    d) 75% limit n/a in terminal year and immediately preceding year – thus can wipe out income entirely in
       these 2 yrs

Gifts made in terminal year

    a) Includes gifts made in the year before death and gifts “made by the will”

    b) Gifts made by the will deemed to be made immediately before death; s 118.1(5)

    c)   Credit for terminal year gifts can be claimed either in terminal year or immediately preceding year; s
         118.1(4)

    d) CCRA takes strict view of meaning of “made by the will”:
                        - charity and amt of donation must be specified in the will,
                        - if gifting residue must specify both charity and amt or percentage of donation and
                            T’ees must have no power to encroach on residue
                        - if set amt and t’ees have power to choose b/n named ch’s, does not satisfy - but RC
                            currently reviewing it position on this

    e)   If gift is not made by the will, = credit available to estate in year of actual donation

Gifts of property and the deemed disposition rule

    a) Gifts made by the will deemed made at fmv immediately before death; such gifts will also be subject to dd
       rule under s 70(5)

    b) Election available under s 118.1(6) re: dd at any amt b/n acb and fmv of P; election will reduce cg and amt
       of gift eligible for the credit and credit virtually always better – see eg on p 3 of reading (this rule used to
       make more sense when limited to gifts of 20% of total income)

    c)   Almost always makes sense to have donation and dd take place at fmv

    d) Cg’s on gifts of publicly-traded securities (shares, debt options, mutual finds): only ¼ of cg (rather than
       ½) included as tcg and stil get full credit;
                 note: Why this rule? Besides encouraging ch don, maybe b/c more liquid and easier to value these
       kind of shares but arguably a regressive form of tax as usually the wealthy making these kind of donations,
       but lots of pressure on gov’t to fully exempt, as in US - but they don’t get full credit so we may be better
       off
                                                                                                                        28


Gifts of Canadian cultural property

         certified as such by Cdn Cultural Review Bd

    a)   Eligible for same credit if donated to charity certified by Bd, usually a museum; 75% income limit never
         applies

    b) Cg on donation of ppt exempt from tax; if made by the will, cg exempt only if disposition made within 36
       months after death or longer period as Minister considers reasonable

Gift of residual interest in trust

          life int with remainder to a charity can get current credit on present value of interest – note: will deal
with this later in course during inter vivos T’s

    a)   Gift of residual (capital) interest in T (remainder) can qualify for current credit; value is present value of
         the residual interest

    b) can be residual interest in inter-vivos T, or TT made by will, but cannot be a contingent int, thus no CSs so
       that ch’s int is absolute

    c)   Trustee cannot have power to encroach on T capital

    d) CCRA says cultural property gifts not eligible for residual gift treatment b/c of definition of “cultural
       gift” in s 118.1(1) which specifies that cult gift must be an object, not a residual int in that object
                                                                                                                            29


                    PART 2: TAXATION OF TRUSTS AND BENEFICIARIES

                     TAXATION OF TRUSTS AND BENEFICIARIES – s 104

Basic concepts

    a)   s 104(1): Reference to trust or estate includes reference to trustee, executor, administrator, etc; b/c trust is
         legal relationship not a legal entity;

    b) s104(2) trust taxed as individual but not eligible for pers tax credits (but can claim char tax credit)

    c)   s 150(1)(c) tax filing dates: return required by 90 days after end of tax yr – and stub period at wind-up of T

    d) clearance certificate required from CCRA before trust assets are distributed – s 159(2)- t’ee can be held
       personally liable if distribute without, to the extent of ppt distributed

    e)   2 main types of T’s: inter-vivos and testamentary
         i)       definitions in s 108(1); which refers to s 248(9.1) which defines testamentary T’s as arising on, or
                  as a consequence of death (includes T made by will or by Ct order re E and dependent’s relief
                  legislation – in ON SLR Act or FLA) of an individual
         ii)      distinctions for tax purposes:
                            tax rates: TT at graduated rates, IV at ighest marginal rate
                            taxation years: TT can choose, IV calendar yr only
                            tax installments: TT pays at end of yr, IV must pay tax installments

    f)   choosing the taxation year for testamentary trust: can be significant deferral possibility
                           - can choose earlier yr end and income split 1st yr
                           - can choose some date prior to anticipated income receipt
                           - can choose longest possible date to defer as long as possible

    g) s 104(2): multiple trusts can be combined and treated as one trust – esp if same ben and ppt contributed
       by single S’or, esp since TTs subject to marginal rates Mitchell: in class of bens, each child can have their
       own T

Deemed dispositions of trust capital: “21-year rule”

    a)   s 104(4) general rule: dd of all non-dep cap ppt and land inventory at fmv at end of specified days (dd
         days), and deemed re-acquisition at fmv immediate thereafter; similar rules:
                  104(5) for depr. cap ppt
                  104(5.2) for resource properties

    b) actual dd days depend on type of T:

                       (i) post-1971 qual sp/clp Ts – 1st dd on day sp dies, then every 21 years thereafter
                       (ii) pre-1972 sp Ts – generally, later of Jan 1, 1993 and day sp dies, and every 21 years
                             thereafter
                       (iii) “will substitutes/living wills”: lots of flexibility to make changes vs will, and T ppt not
                             subject to probate and does not become part of public record
                             1. alter ego trusts: S’or > 65 yrs of age, S’or transfers ppt to T for S’or as ben, S’or
                                 entitled to all th einc and no one but S’or entitled to cap of T
                                      = day that individual S’or dies, every 21 yrs after that

                            2.   joint sp’l or joint clp Ts: again > 65 yrs, either S’or or sp/clp entitled to all of inc
                                 and no one but entitled to cap of T
                                                                                                                        30


                                    = later of day that sp or t/p dies, and every 21 years thereafter

                 Note: for alter ego trusts, can elect that 1st dd day is 21 years after T created
                     (iv) all other trusts – later of Jan 1, 1993 and 21 years after day trust was created, and every
                          21 years after

    c)   policy behind 21-year rule: arguments against the rule:
                          - very arbitrary: 21 yrs chosen as reasonable time period b/c would allow minors time
                              to mature, but no guarantee of maturity in that time period (esp if disability)
                          - keeps Ts being set up to keep cg’s deferred beyond one’s death – if drafted well
                              could shelter for generations
                          - outright gift = dd at transfer and give control away but T = dd after 21 yrs and
                              control can be retained
                          - the former deferral of the rule to last death of child beneficiary (introduced in 1991,
                              repealed in 1995)

    d) 21 yr rule n/a to “exempt property” defined in s 108(1)
                          - ppt owned by non-resident trust
                          - want to avoid bumping up acb of ppt if the gain on that ppt is not taxable in Can (b/c
                             could then later transfer to Cdn R)

NOTE: 21 yr rule = potentially a huge tax liability – so must bear this in mind when setting up T

Computation of trust income

    compute income according to same rules for individuals –start with gross inc then deduct expenses:

    deductible expenses:
                           -    expenses for purpose of earning inc from B or ppt;
                           -    expenses for services or advice re: purchase or sale of securities if trustee/executor in
                                that business;
                           -    interest deduction where loan used for income earning purposes

         under 104(6) T can deduct income paid or payable to ben(s) in year:

         i)      if actually pd, or ben entitled to enforce payment: s104(24);
         ii)     deduction is optional, and can be all, whole or partial deduction
         iii)    potential problem re: deductions of cg’s (not inc for T purposes, but inc for tax purposes), unless
                 trust doc allows payment thereof, then ben gets inc only, not cg’s, thus ben cannot enforce
                 payment of cg’s and T cannot deduct and T is taxed
                 (since pre ’72 cg’s not taxed, old docs may not specify) – if T doc specifies inc and cg to cap ben
                 of T, cg’s would have to be payable in the yr for the T to get the deduction

         no 104(6) deduction:

                 i) for cg’s arising at dd at death under s104(4)(a)(iii) sp/clp T; or under s104(4)(a)(iv) alter ego
                 or joint sp Ts (means that always T inc and always taxable to the T);
                 ii) under s107(4) re distributions from sp T to non-sp ben before the death of sp,
                 iii) similar rule for alter ego and joint sp Ts
                           - b/c requirements for r/o violated, no one other than spec ben was entitled to T cap
                           - these cg’s trapped and taxable at the T level; no deduction for inc paid out to non-sp
                                 ben either
                           - note: re cap distrib, was r/o so dd at fmv fair; but inc rule kind of harsh
                           - sp T benefit is dd at acb not fmv, gov’t cannot undo even if terms changed later by
                                 variation order for eg
                 iv) under 107(4) no deduction if NR T, for inc paid or payable to NR ben
                                                                                                                  31


                     -    prevents Cdn S inc from never being taxed in Can and just funneled out

    T can designate that inc deemed not to be pd or payable to ben under s104(13.1) (ordinary income) and
(13.2) (taxable capital gains);

            -   generally, income (including taxable capital gains) that is paid or payable to beneficiaries but
                not deducted by trust under s.104(6)
            - income is included in trust’s income (because s.104(6) deduction not taken); amount
                designated in respect of ben not included in ben’s income
            - reasons for election: loss carryforwards (which cannot be flowed out to bens),or may want to
                shelter at T level if T is lower tax bracket than ben – can designate all amt not distributed but
                some limits as to distribution b/n bens
            example 1 in today’s problems:
            - 10K pd or payable, thus T can deduct 10K and 10K is inc for ben
            - T can choose to deduct 4K, then T includes 6K in income and losses will offset to reduce to
                nil
            - T would designate under 104(13.1) $6K as not deducted, and ben includes $4K on which they
                would pay tax, and the T has no tax payable

    deduction for income deemed to be paid to minor; s.104(18)

                 o   can retain and accumulate inc for the benefit of a minor and be taxed at minor’s
                     marginal rate and still take deduction for the yr even tho not paid or payable (deemed
                     paid to minor)
                 o   int must be vested in the yr – only contingency allowed: living to age of 40 yrs
                 o   minor gets taxed even tho doesn’t get inc at the time
                 o   if child has to pay tax, may need to pay out or encroach so child can pay
                 o   after yr end, inc becomes cap of T, and cap is paid out tax free, unless cap earns more inc

    deduction for accumulating income allocated to preferred beneficiary; 104(12)

                     -    for disabled bens (ie qualify for disability credit) T can deduct even if not paid or
                          payable to preferred ben and ben is taxed on income

    deduction for inc paid for upkeep, maintenance, taxes for ppt held by life tenant; s. 104(6)
            - and any such amt is included in the inc of the life tenant 105(2)
                                                                                                                 32


                                TAXATION OF BENEFICIARIES

a)   Bens include T inc pd or payable in ben’s taxation yr in which T’s taxation yr ends; 104(13)

b) T inc is deemed inc from ppt unless otherwise provided; 108(5), but flow-through for certain types of T
   inc, eg div’s, cg’s retain their character

c)   T losses, and deductions, cannot be flowed out to ben’s

d) Ben rec’s tax-free if T designates under s104(13.1) or (13.2);
                     - allows T to use cl carryforwards, can designate an amt to ben as not payable and ben
                          rec’s tax free
                     - can be used to take advantage of different marginal rates (TTs) to achieve some inc
                          splitting
                     - however, designation must be proportionate b/n bens
            Limit: amount equal to ben’s proportionate share of T inc that is paid or payable but not deducted
   by T (proportion equals the proportion of ben’s share of T inc to all bens’ shares of trust income);

         A/B X (C–D–E)

         A = ben’s share of T inc                           B = share of all bens
         C = total amt payable                              D = amt deducted under 104(6)
         E = amt designated under 104(13.1)

     -   These provisions enacted b/c losses trapped in Ts, thus designation allows capture of cl’s – not
         intended as inc splitting prevention thus reason of proportional limit
     -   Taxes owed by T, T doc will usually stipulate how to pay – can be paid out of cap if power to
         encroach, or T can reduce pay out and retain sufficient inc to pay tax but retained portion not deducted
         (as not paid or payable)
     -   Bens rec tax free if so designated, so if T doc says all inc must be paid to ben, could arrange for ben to
         reimburse for tax paid as result of making designation
     -   Note: TT status requires that no ppt be rec’d by T other than from D, but CCRA determines that
         reimbursement for tax by ben does not offend character as TT
     -   For amt paid to ben other than sp under qual sp T, cannot claim deduction from inc, even tho ben still
         has to include as inc – can avoid double tax problem if designate under (13.1) and not taxed to ben byt
         taxed to T (CCRA probably didn’t have this in mind at the time)

Problem 2
    IV T – 2 bens, each gets ½ T inc on annual basis
    T inc = 10K and loss carryforwards = 6K
             B1 & B2 entitled to 5K ea, T can deduct 10K
             T can designate that 6K not pd under (13.1), thus 6K not deducted by T
             Must designate 3K to ea ben (proportionate), thus each ben includes 2K as inc

     value of benefits to ben (other than T inc) included in inc; 105(1)

    T inc paid for upkeep, maintenance and taxes on property used by life tenant / beneficiary is included in
income; 105(2)

     preferred ben includes allocated portion of T’s accumulating inc even if not paid or payable

     inc distributed to NR ben’s subject to 25% WH tax under s.212(1)(c); although often this amt reduced by
treaty provisions, and Part XII.2 additional tax payable by T on Cdn S tcg or Cdn S bus inc to bens
                                                                                                                    33


Flow-through of trust’s taxable capital gains – 104(21)

    a) net tcg’s of T, to extent paid or payable to ben, can be designated by T as tcg’s of ben; s104(21)
                  note: cannot designate cg to inc bens
                  T doc must indicate whether ben entitled to inc or cg

    b) tax-free receipt to ben if T designates amt in respect of ben under 104(13.2)
        ben’s proportionate share of all tcgs designated by trust under 104(21) and that were not deducted by
            trust under 104(6), can be designated and therefore deemed not to be paid or payable to ben under
            104(13.2);
        ben’s proportionate share for these purposes equals the proportion of tcgs designated to ben under
            104(21) to all tcgs designated to all bens under 104(21)
        might want to do this if T had ncl’s or if ben had lower marginal tax rate

    c)   unclear whether T’s tcg’s on dd’s are included in recipient ben’s income (eg the 107(4) dd at fmv where
         ppt transferred to non-sp ben of a sp T while sp still alive)  make 104(13.2) designation just in case to
         avoid double taxation

                                                                                                       not examinable
Flow-through of the capital gains exemption for QSBC shares – 104(21.2)

    a) Procedure to flow through cgx:
       iv)      T designates amt under 104(21),
       v)       Then, T must make designation to bens under 104(21.2) re the T’s QSBC net tcg’ (T’s “eligible
                tcg’s” as described below)
       vi)      Must deduct any desig under 104(13.2) so only include tcg’s in ben’s inc
       vii)     Amt desig to each ben = amt desig under (21) other than (13.2)
    b) shares must qualify as QSBC shares of T(eg 24-month holding period applied to T)
    c) total amt designated by T under 104(21.2)(b)(ii) (see Amount ‘A’ in formula):
       viii)    T must designate all of its “eligible tcg’s” that were designated to bens under 104(21) (other than
                those designated under 104(13.2) deemed not to be paid or payable)

         “Eligible taxable capital gains” under s108(1) means:

         i)     the trust’s net taxable capital gains in year from disposition of QSBC shares

         (taxable capital gains from QSBC shares minus allowable capital losses from QSBC shares in year; non-
         QSBC allowable capital losses first applied against non-QSBC taxable capital gains in year, and if any
         excess non-QSBC losses in year, must then be applied against QSBC taxable capital gains)

         minus the total of

         ii)        net capital loss carryovers deducted against QSBC net taxable capital gains in the year;
         iii)       allowable business investment losses (ABILs) after 1984 (to extent that the ABILs did not reduce
                    a previously claimed capital gains deduction), and
         iv)        cumulative net investment losses (CNILs) after 1987 (to extent that the CNILs did not reduce a
                    previously claimed capital gains deduction)

         N.B: you will notice that the “eligible tcg’s” of a T is essentially the same as the amount of net QSBC tcg’s
         that individuals can claim under the cgx, except no $250,000 limit – the monetary limit applies at the
         individual level, not at the T level

    d) amount designated to each ben under 104(21.2)(b)(ii) (see Amounts ‘B’ and ‘D’ in formula):
       ix)     generally, ben’s proportionate share of all of T’s “eligible tcg’s” that were designated by the T as
               above
                                                                                                                      34


         x)      ben’s share for these purposes equals proportion of tcgs designated to ben under 104(21) other
                 than those designated under 104(13.2) to all tcgs designated to all bens under 104(21) other than
                 those designated under 104(13.2)
         xi)     amount deemed to be a tcg of ben from disposition of QSBC shares in ben’s taxation year in
                 which trust taxation year ends, for purposes of capital gains exemption
    e)   example – today’s problem with answer email – Feb 19 class problem

Flow-through of dividend income – 104(9)

                  Note: highest rate in ON on div’s is 32%

    a) taxable div’s rec’D from Cdn R corps by the T, to extent included in ben’s income, can be designated as
       such to ben under 104(19);
       - relevant for purposes of dividend tax credit (DTC) – 1/3 of gross up (gross up = 25% of div)
       -
    b) potential loss of some of DTC if expenses incurred by T in earning the div’s and net amt then paid out to
       ben b/c DTC applies to gross up, then deduction, thus some of DTC is lost
       - (see last example in CB s. 3.4.2); don’t worry about actual DTC calculation, just the concept

Disclaimers, releases and surrender of income interests in trusts

    a)   if disclaimer, no disposition of interest; if release or surrender, may give rise to disposition at fmv and
         income inclusion
         - must disclaim within a reasonable time according to RC, at c/l can disclaim at any time b/f acceptance
               inaction may be implied acceptance

    b) unclear whether ben can disclaim right to future income once some trust income is received; CCRA says no


Direction under will for a beneficiary to pay income to non-beneficiary

    Eg: will leaves real estate to son, with request that portion of rent inc be paid to D’s sp
    a)        issue: who is taxed? Son (legatee) or sp (recipient)?
    b)        If a request and not a demand then ben taxed on all
    c)        If legally binding demand: eg “shall pay x for next 10 yrs to Y”
    main issue is whether the ben (legatee) or the non-ben to whom the amt is directed (recipient) is taxable on
    the amount; paragraphs 3 and 4 of IT-446 reflect law on point
              a) if secured by a charge on ppt then could poss give rise to claim on ppt and must be included in
                    that person’s inc
              b) if not secured, only a personal claim (eg against the son rather than the ppt) then all inc included
                    in ben’s inc (son) even tho paid to another (sp)
              c) not that common, but could be used to ensure that ben has actual control over ppt

Non-taxable portion of capital gains earned by a trust

    if paid to ben, tax-free receipt; obviously no deduction for trust
         eg: acb = 10 and pd = 100 = 100 cg, and 50 tcg
         if ben paid, 50 included as inc, other 50 not inc to T, can be retained as T capital or paid out, same for
         initial 10  T must make designation under 104(21) to ensure cg char retained
         no deduction for non-tax portion of cg

Amount deemed to be payable in year to minor beneficiary; 104(18)

    a)   amount not otherwise payable, ben’s right to amount vested, ben less than 21 years old at end of year, no
         future condition other than a condition that ben survive to an age not exceeding 40 yrs
                                                                                                                      35


    b) amount deemed to be payable in year for purposes of 104(6), (13)

    c)   n/a to discretionary trusts – power to encroach on capital would not disqualify: see note below re minor
         payment of taxes b/c of designation

    d) designations under 104(13.1), (13.2) available (see note below re designation) if have losses etc, thus not
       taxable to bens
    Note: The power to encroach on the capital of the trust would be acceptable for purpose of paying tax liability
    as a result of designation under 104(18). The minor beneficiary treatment under s 104(18) does not apply where
    the beneficiary's right to the trust income (in the income tax sense, therefore including taxable capital gains)
    vests because of an exercise or non-exercise of a discretionary power of the trustee; the provision can apply if
    the only discretion is re: the encroachment of other trust capital. Therefore, a payment from trust capital could
    work.

    Another way for minor ben to meet tax liability would be to have the trust provide that enough of the income
    actually be paid out to the beneficiary to cover his or her tax liability (the remaining income would remain in
    the trust even though the beneficiary had a vested right to it).

Preferred beneficiary election: s 104(14)

    a)   definition of “preferred beneficiary”; 108(1)

         -      qualifies for disability tax credit; or disabled and infirm and dependent on another
         -      pref ben must be related to S’or: sp, ch, gr ch, gr gr ch, or clp
         -      qualify on yr by yr basis – can change
         -      key: doesn’t have to vest in pref ben, and pref ben may not even rec inc

    b) any or all of “allocable amount” for pref ben of “accumulating income” of T can be subject to election
       under 104(14) – joint election b/n T and pref ben (or their legal rep)

         i)         elected amount included in pref ben’s income under 104(14)
         ii)        trust gets deduction of amount under 104(12)
         iii)       BUT, cannot designate under 104(13.1), or (13.2)

    c)   “accumulating income” of trust and “allocable amount” of pref ben
         i)     “accumulating income” of trust, s.108(1); income of trust without reference to 104(4)(a) dd at
                creation of T, 107(4) distributions out of sp T to other than sp dd, and as if maximum 104(6)
                deductions taken by trust
         ii)    “allocable amount” of pref ben; s.104(15) – generally equal to all accumulating inc of T
         iii)   note: 104(14) election re: each pref ben (where more than one) need not be on proportionate basis

         rationale for allowing the election: uncertainty re costs of providing for disable persons, needs of pref ben
         may change as conditions changes, hard to predict requirements with accuracy at time of T creation

Section 105 benefits under a T

    a)   s.105(2): income of trust used for upkeep, maintenance or taxes of property used by life tenant/ben as is
         reasonable in circumstances is included in ben’s income, and deducted by trust under 104(6)
         i)       eligible for 104(13.1), (13.2) designations to be taxed at T level
         ii)      note that CB text implies that 105(2) n/a to T inc so used if ben is D’s sp; this is not correct
         iii)     “unreasonable” portion, if any – not included in 105(2) and prob included in 105(1) bens as life
                  tenant or remainder person’s inc (not clear, no caselaw)
                  note: no corresponding deduction for T under 105(1)
                                                                                                            36


b) s.105(1): value of benefits to a t/p, whether ben or non-ben, are included in taxpayer’s income, not
   deductible by T:

    benefits excluded from 105(1):
    - amounts included under 105(2) or otherwise included in income
    - payments of trust capital to ben (not included in ben’s inc)
    - rent-free use of personal-use property (house, boat, etc) by ben (or by person related to ben)
    - interest-free loans to ben (Cooper v MNR – says loans excluded)
    - payments of trust capital for upkeep, maintenance of home used by ben?

   Note: 105(2) refers to income of T used for upkeep, not cap of T used for such– if going to allow tax free
    payments of cap to bens, shouldn’t tax those indirectly by including in 105(1) – CCRA says 105(1) but not
    clear that this is so

    benefits caught under 105(1):
    - T capital to non-ben
    - Rent free use of personal ppt to non-ben
    - Int free loan to non-ben
    - Etc – look to exclusions as to clues re inclusions
                                                                                                                       37


                          DISPOSITIONS OF INTERESTS IN TRUSTS – s106 & 107


Definitions of income interest and capital interest: 108(1) & 108(3)

         rights as a ben under personal T to all or any inc of T or right to enforce payment of inc of a T, but note
         108(3) inc of T is determined without regard to Act (thus doesn’t include cg’s)

Disposition of income interest to third party: 106(1) & (2)

    a)   If sell inc interest to 3rd party, proceeds fully included in income as ordinary income 106(2)(a)
                     not cg b/c “right to income” thus future income sold, a subsitute for future payments which would
                    have been included as ordinary income

    b) If NAL disposition, and proceeds less than fmv, dd at fmv; 69(1)(b);
               note outright gift = dd at fmv for donor, but acb could be stepped up to fmv for donee

    c)   106(1) & (1.1) allowed to deduct cost of income interest, if any: unless actually acquired from another
         ben, then cost will be deemed to be nil and proceeds fully included as income
         - and can also deduct amount re: right to enforce payment of amount by trust IF it was included in ben’s
             income under 104(13) but that amt was not yet pd to ben from T, ie payable but not yet paid

    d) nil capital gain or loss for ben under 106(2)(b) on disposition of inc int

Distribution of property by trust in satisfaction of income interest: 106(2)&(3)

         ie buying out inc int

    a)   dd of cap ppt in satisfaction of inc int by trust at fmv; 106(3) may be cg or cl taxable to T (not clear that T
         taxable on this amt, used to be so, could argue that this amt payable to ben thus T ought not be taxed)

    b) nil cg or cl for ben; 106(2)(b) on disposition of that int

    c)   ben acquires ppt at fmv; 106(2)(c)

Disposition of capital interest: 107

    a) for purposes of computing ben’s cg, if any, ben’s acb of interest deemed to be greater of:
       (i) cost of interest otherwise determined, and (ii) cost amount of interest; 107(1)(a)

                   “cost amount” of interest is ben’s proportionate share of ca of T’s ppt’s net of amts owing by
         trust; 108(1)
                   (cost amt ppt – debts) x fmv ben’s int / fmv of all int
                            Eg:      T acb = 100
                                     If 1 ben  ca = 100
                                     If 2 bens ca = 50
                   “cost of interest otherwise determined” cod is deemed to be nil unless interest acquired from
         another ben; 107(1.1)(b)

    b) for purposes of computing ben’s capital loss, if any, acb of interest is cod (ie nil) unless acquired from
       another ben thus can never trigger a cap loss
       Note: these rules attempt to replicate what would happen if T sold ppt directly
                Eg:       T acb = 100
                          Fmv = 120 = 20 cg to ben under 104(13), and T deducts same
                If sold in at 120 will be deemed acb of 100 (greater of 100 or nil) thus 20 cg to ben
                If ben acquired from another ben at 110, then acb of 110 and cg of 10
                                                                                                                     38


                 If acb = 100 and fmv = 80, 20 cl to T and 80 cash to ben tax free
                 If sells at 80, no cg b/c acb of 100, and fmv pd = 80, and if cl, then acb deemed nil, thus no cl
             possible

                  If ben purchased for 90 and sold for 80, acb = 90 and 10 loss realized

Distribution of property by trust in satisfaction of capital interest under the 107(2) rollover

         -   this r/o allowed b/c should be in same position whether t/p rec’s ppt directly thus inc or T holds ppt and
             pays t/p inc
         -   no change in beneficial interest only legal title
         -   if don’t roll out b/f 21 yrs will be dd in T if ppt held in T for 21 yrs

    a)   same rules as (4) above re: determining ben’s acb of interest, except “cost amount” of interest equals the
         ca of the distributed ppt; 107(1)(a), “cost amount” in 108(1) acb for cap ppt, ucc for depr ppt and cost for
         inventory

    b) trust deemed to dispose of ppt at ca; 107(2)(a) thus no tax at T level b/c no cg or cl

    c)   ben acquires ppt at its ca, plus “specified percentage” of amount, if any, by which ben’s cost of interest
         otherwise determined exceeds ca of interest; 107(2)(b)
         - r/o + allowed bump where int acquired from another ben at cost greater than abc
         - specified percentage = 100% for non-deprec ppt and 75% for deprec ppt or inventory
                  o note: wrong amt – should be 50% not 75% CCRA forgot to change when cg inclusion
                      reduced from ¾ to ½
         eg: acb = 100 and fmv = 120
                  o if original ben acquires at 100, T disposes at 100 – no cg or cl
                  o if acquired from another ben at 110, then acb = 100 + 10 (110-100) = 110
                  o if int is inventory (sale of inventory = income, not cap): then 20 ordinary inc to ben
                  o if original ben sells int to 3rd party, acb = greater of ca and cod, thus 100, if sold at 120 then
                      20 cg (ben would have converted 20 inc into 20 cg)
                  o if new ben purchaser buys for 120, 100 + 20 (120-100) = 120, excess 20 x 75% = 15, thus
                      only allowed 115 not 120

    d) ben deemed to dispose of interest at amt determined under 107(2)(b) as if “specified percentage” was
       100%, minus “eligible offset” of ben, if any
                 eg:      original ben acb =100 and fmv=120
                          acb = 100 and proceeds deemed 100, thus no cg to ben
       - If fmv = 80, then dd at 100 and acb = 100 for cg, thus no cg; and for cl, acb = nil thus no loss
       - If ben purchased for 110, then T acb = 100, dd = 100 – no cg or cl; ben’s acb = 110 (100 + 10 bump x
            100%) under 107(2)(b), and when ben sells ppt will be loss or gain
       “eligible offset” defined in 108(1) as any debt or obligation assumed by ben with cap acquisition, where
       distribution conditional on ben assuming debt (eg mortgage on land)
       - doesn’t have to be secured debt, broad enough to include loan to purchase ppt or unpaid purchase amt
       - has no effect on T re fmv or on ben’s acquisition, only affects disposition of in by a ben
       - equals a reduction in proceeds of cap int in T thus may generate a cl, cannot have a gain thus potential
            for gain unaffected

         remember: 2 types of bens – original (acb always nil – no cl) and acquiring (potential cl)

         eg: problem 1:    T deemed to dispose at acb of 100K, no tax consequences
                           ben gets at acb of 100K + 10K = 110K; fmv = 200K
                           upon disposition deemed pd = 110 –80 = 30K
                           cl? Cod=110K pd = 30K thus 110 – 30 = 80K loss
                           thus 80K loss and ben acquires ppt at 110K with fmv of 200K
                                                                                                                       39


                  note: with original ben would be no possibility of cl since debt already included as part of cost of
                  ppt so shouldn’t then be allowed a cl

    e)   stop-loss rule under 107(6) possible when ben sells property if loss accrued while ppt held by T and
         neither you nor sp had an int in the T
         - prohibits T trading presumably a contingent ot remainder int would satisfy

    f)   107(2)(d) deeming rule if property is depreciable property then ben deemed to have same acb as T and to
         have previously claimed difference as cca
         - to avoid recapture being converted into a cg – as recapture is treated as ordinary inc)

Distribution of property by trust in satisfaction of capital interest under 107(2.1): no rollover

    a)   dd by T at fmv; 107(2.1)(a) (N.B. text is wrong on this point)

    b) ben acquires property at fmv; 107(2.1)(b)

    c)   same rules as 4) above re: determining ben’s acb, except “ca” of int = ca of distributed ppt;

    d) ben dd of T int at lesser of : (i) fmv of ppt, or (ii) ca of ppt minus eligible offset of ben, if any; 107(2.1)(c)

    e)   T can elect under 107(2.11) that cg on dd of distributed ppt included in T’s inc (rather than ben’s); i.e.
         distribution ignored for purposes of 104(6) (T deductions) and 104(13) (ben inc) and any cg’s taxed to T
         not ben

When does 107(2.1) apply (and 107(2) not apply)? No rollover

    a) T elects out of r/o (if T has losses ot ppt has accrued loss) under 107(2.001)

    b) ben elects under 107(2.002) if NR T

    c)   distribution to ben other than sp (clp) of qualifying sp T during sp’s lifetime; 107(4) since T cannot
         deduct under 104(6), potential for double taxation b/c T always taxed on deemed cg
         - 104(13.1) T can deem cg paid to be although taxed in T
         - 107(2.11) T can elect that any gain on dd of distributed T ppt be included in T’s inc rather than ben’s
              inc

    d) T is revocable / reversionary T under 75(2) and ppt distributed to ben other than settlor or sp/clp of
       settlor; 107(4.1)

    e)   distribution to NR ben; 107(5)


Distribution of principle residence by T in satisfaction of capital interest

    a)   T can elect under 107(2.01) for dd and d re-acquisition at fmv immediately before 107(2) applies –
         deemed re-acq at fmv = T’s acb of ppt and r/o at new acb of fmv which allows T to trigger cg immed b/f
         distrib and can qualify for prx to extent that it can so qualify

    b) T may be eligible for pr exemption

    c)   disposition under 107(2) at ca of residence; ben acquires at ca – straight r/o

    d) if no 107(2.01) election but 107(2) still applies, under 40(7) ben deemed to own residence since last time
       T acquired it for purpose of ben’s pr exemption; (if ben or sp/ch of ben lived in res for those yrs for
       puposes of prx)
                                                                                                                    40



e)   if 107(2) does not apply, 107(2.1) applies



                                  Problems illustrating the 107(2) rollover

1.   A trust distributes a non-depreciable capital property to a capital beneficiary in satisfaction of the
     beneficiary’s interest. The beneficiary did not acquire the interest from another beneficiary. The
     adjusted cost base (acb) of the property to the trust is $100 and the fair market value (fmv) is $120.
     The beneficiary subsequently sells the property for $120. Describe the income tax consequences,
     assuming that the 107(2) rollover applies on the distribution from the trust.

Analysis: Trust deemed to dispose of property at cost amount of $100; therefore no tax consequences to trust.
- Ben deemed to acquire property at its cost amount, so ben acquires property at $100. (the “specified
percentage” amount is not applicable here because ben’s cost of interest otherwise determined is nil).
 - Ben deemed to dispose of capital interest for proceeds equal to same amount that ben deemed to acquire the
property, or $100. To determine whether ben has a capital gain on this disposition of the interest (after all, the
value of the property received is $120), ben’s acb of the interest is deemed to be greater of the cost amount of
the interest ($100) and the cost of the interest otherwise determined (nil). - Therefore, acb of interest is $100,
deemed disposition of interest at $100, and no capital gain.
When ben goes to sell the property for $120, there will be a $20 capital gain (acb of property to ben was $100).

2.   Same facts as 1) above, except the capital beneficiary had previously acquired the capital interest
     from another beneficiary at a cost of $110.

Analysis: Trust deemed to dispose of property at cost amount of $100; therefore no tax consequences to trust.
- Ben deemed to acquire property at its cost amount ($100) plus the “specified percentage” (100%) of the
amount by which the ben’s cost of the interest otherwise determined ($110) exceeds the cost amount of the
interest ($100); therefore ben gets “bump” in cost of property, which becomes $110
- Ben deemed to dispose of capital interest for proceeds equal to same amount that ben deemed to acquire the
property, or $110. To determine whether ben has a capital gain on this disposition (after all, the value of the
property is $120), the ben’s acb of the interest is deemed to be greater of the cost amount of the interest ($100)
and the cost of the interest otherwise determined ($110). Therefore, acb of interest is $110, deemed disposition
of interest at $110, and no capital gain.
- When ben goes to sell the property for $120, there will be a $10 capital gain (acb of property to ben was
$110).

3.   A trust distributes a non-depreciable capital property to a capital beneficiary in satisfaction of the
     beneficiary’s interest. The beneficiary did not acquire the interest from another beneficiary. The
     adjusted cost base (acb) of the property to the trust is $100 and the fair market value (fmv) is $80.
     The beneficiary subsequently sells the property for $80. Describe the income tax consequences,
     assuming the 107(2) rollover applies on the distribution from the trust.

Analysis: Trust deemed to dispose of property at cost amount of $100; therefore no tax consequences to trust.
- Ben deemed to acquire property at its cost amount so ben acquires property at $100. (the “specified
percentage” not applicable here because ben’s cost of interest otherwise determined is nil).
- Ben deemed to dispose of capital interest for proceeds equal to same amount that ben deemed to acquire the
property, or $100. To determine whether ben has a capital loss on this disposition (after all, the value of the
property received is only $80), ben’s acb of the interest is deemed to be the cost of the interest otherwise
determined (nil). Therefore, since acb of interest is nil, there will be no capital loss on the disp of the interest.
- When ben goes to sell the property for $80, there will be a $20 capital loss (acb of property to ben was $100).

4.   Same facts as 3) above, except the capital beneficiary had previously acquired the capital interest
     from another beneficiary at a cost of $110.
                                                                                                                41


Analysis: Trust deemed to dispose of property at cost amount of $100; therefore no tax consequences to trust.
- Ben deemed to acquire property at its cost amount ($100) plus the “specified percentage” (100%) of the
amount by which the ben’s cost of the interest otherwise determined ($110) exceeds the cost amount of the
interest ($100); therefore ben gets “bump” in cost of property, which becomes $110
- Ben deemed to dispose of capital interest for proceeds equal to same amount that ben deemed to acquire the
property, or $110. To determine whether ben has a capital loss on this disposition (the value of the property
received is only $80), the ben’s acb of the interest is deemed to be the cost of the interest otherwise determined
($110). Therefore, acb of interest is $110, deemed disposition of interest at $110, and no capital loss.
- When ben goes to sell the property for $80, there will be a $30 capital loss (acb of property to ben was $110).
                                                                                                                       42


                      INTER-VIVOS GIFTS AND NON-ARM’S LENGTH TRANSFERS


Meaning of non-arm’s length; s. 251(1), 251(2)(a) and 251(6)

       We dealing with individuals rather than corps in this course
    a) “related persons” deemed to be non-arm’s length
    b) related persons include individuals connected by blood, marriage or clp’ship, or by adoption
    c) related by blood: lineal descendants and ascendants, and siblings – not aunts, uncles, nieces or nephews
    d) related by marriage or clp’ship: 2 persons so related if married or clps, or if one person is married or clp to
       someone related to the other person by blood eg spouse’s parents, children of previous marriage
    e) related by adoption: if adopted by the person or by a lineal descendant or ascendant of that person
    f) ben and T deemed to be NAL, as well as T and anyone who is NAL with ben
    g) settlor and T typically non-arm’s length by virtue of above rule
    h) otherwise, whether persons non-arm’s length is a question of fact eg if dealing in concert with another
       person, would be NAL with that person

Effects of subsection 69(1) on transfers to NAL persons:

    a)   taxation of donor - if gift or sale at less than fmv, will be dd at fmv for donor

    b) cost of property to donee : if less than fmv: sale = da at actual cost (no bump) and gift = da at fmv; if more
       than fmv: sale da at fmv and relate donor dd at actual pd
                note: punitive nature of some of these – double tax potential

    c)   possible attribution after transfer – if income earned on transferred ppt

Transfers to trusts

    In general: s’or almost always NAL to T

    a)   taxation of donor – gifts and sales = dd at fmv

    b) cost of property to trust – T acquires at fmv

    c)   effect on ben – cap ben of T acquires cap int in T: acb = ca or cod of ppt in the T and ben’s proportionate
         share of ca of T ppt minus debt obligation of T, thus T’s acb reflects ca of cap int

    d) possible attribution after transfer
       - to s’or if sp or minor ch of s’or ben of T

    e)   transfers to revocable living trusts;
         - s’or retains the right to amend or revoke T
         - exceptions for alter-ego and joint partner Ts (below) -“substitute wills” b/c r.o allowed for those Ts
                                                                                                    not examinable:
    f)   transfers to protective trusts;
         - s’or only ben and upon s’or’s death T fails, ppt goes into s’or’s estate
         - not considered dispositions so no tax consequences
         - CCRA position effectively codified in 73(1.02) r/o

    g) transfers to bare trusts;
       - t’ee holds no power or responsibility, only holds legal title
       - consent of s’or required to take any action
       - may not even be real T
       - 104(1) specifically excludes bare Ts as agency type relationships
       - CCRA position codified in 104(1)
                                                                                                                       43



    h) exceptions to application of s69 where rollovers allowed (below)

Section 73 inter-vivos rollovers for transfers to sp, qualifying sp T, etc

    requirements under 73(1) or same as for 70(6) r/o except:
        - no 36 month vesting period
        - only applies to cap ppt (not land inventory)
        - both tr’or and tr’ee R in Can at time of transfer
        - r/o available re transfers to former spouse in settlement of rights arising out of marriage
    then, exempt from application of s69 dd at fmv:

    73(1) applies regarding transfers to:
        a) spouse, clp; former sp or clp in settlement of rights arising out of the relationship;
        b) “qualified sp T” - sp and clp’s, (and former sp and clp’s in settlement of marriage obligations which is
            not available for r/o at death), if qualifying T: sp entitled to all nc and no one but sp entitled to cap of T
            during their lifetime;
        c) “alter-ego trusts”; s’or is ben – entitled to all inc and no one but s’or entitled to cap; s’or must be 65
            when T created
        d) “joint partner trusts”; s’or at least 65 yrs old – s’or and sp bens and either or both entitled to all inc of
            T and no one else entitled to inc or cap of T until later of death of survivor

    application of rollover, deeming rule re: depreciable property – dd at cost of ppt (ucc for deprec ppt) and tr’ee
    deemed same acb(ucc) and excess deemed cca

election out of 73(1) rollover

         -   r/o is automatic UNLESS election out of r/o is made
         -   on ppt by ppt basis, can elect some and not others (good option if ppt is shares)
         -   election made by tr’or not tr’ee which can be an issue if former sp transfers with election thus
             transferring tax burden along with ppt (should probably get signed agreement re this if likely to be an
             issue)
         -   can be used if one has accrued losses wanting to offset
         -   does NOT prevent the application 21 year dd rule
         -   potential attribution
         -   note: “superficial loss rules” – loss denied if transfer to sp at loss and sp owns ppt 30 days later –
             don’t want losses triggered by transferring to sp; denied loss will be added to acb for sp – this rule
             DOES NOT APPLY to transfers to above Ts (sp, a/e, j/sp)

deemed disposition dates applicable to transferee trusts

         -   Q sp T – dd at sp’s death, and every 21 yrs after
         -   a/e T – dd at s’or’s death, and every 21 yrs after
         -   j/p T – dd at later of s’or or sp’s death, and every 21 yrs after if T continues
         -   Note: can elect out of dd at death and into 21 yr disposition – not affected if s’or dies b/f 21 yrs

    subsection 107(2.1) re: subsequent transfers from trust if made to non-qualifying bens
        - note: that IVTs always taxed at the highest marginal rates, but if TT then may be some savings b/c at
             marginal rates
        - T cannot deduct under 104(6) for cg arising on dd for these dispositions
        - T will always be taxed on cg – and possibility that recipient will be taxed on gain
        - To avoid this potential for double taxation: T can
                 o Designate under 104(13.2) that cg not pd to ben, thus ben will not be taxed; or
                 o T can elect under 107(2.11) that inc be computed as if distribution did not take place
                                                                                                                         44


    income paid by trusts to non-qualifying bens; no deduction for trust under 104(6)
        - T does not get deduction under 104(6) so to avoid double tax, T can designate under 104(13.1) that inc
            not pd or payable to ben

Section 73 inter-vivos rollovers for farm property

         Similar to 70(8) and (9) conditions but different that cgx requirements (& doesn’t apply to Ts):

    a)   child R in Can immediately before transfer; extended meaning of child in 70(10);

    b) land or depreciable farming ppt in Can used principally in the business of farming before transfer in
       which t/p, sp, or ch actively engaged on a regular and continuous basis: per r/o in 73(3);
       - no requirement of “immediately” b/f transfer

    c)   shares in family farm corp; where all or substantially all of fmv of corp’s ppt attributable to ppt that was
         used principally in the business of farming in Can in which t/p, sp, or ch actively engaged on a regular and
         continuous basis; per r/o in 73(4);
         - similar to r/o on death but diff than for cgx requirements of % inc and holding period

    d) application of rollover; somewhat different from testamentary farming r/o
       - on death, can elect any any b/n acb and fmv (& trigger a gain or loss)
       - inter vivos, (less flexibility) if pd b/n acb and fmv then actual pd (without ref to s69, ie gift pd = nil)
           BUT if pd above both fmv and acb then deemed to be greater of the 2 and if less than both, then the
           lesser of the 2

    e)   deeming rule re: depreciable property: deemed cca for excess of fmv and ucc

Gifts / transfers of interests in trusts to 3 rd parties (not satisfaction of T int)

         -    s69 applies – gifts = dd at fmv, sales if NAL could be adjusted – see above

    a) income interests

         -    under 106(2) pd fully included in ordinary inc
         -    vendor can deduct if int includes amt previously included in vendor’s inc (ie amt payable but not paid
              by T)
         -    any amt to acquire

    b) capital interests

         -    included as cg or cl
         -    acb deemed as greater than “ca” [fmv of ben’s int/fmv of all bens x proportionate share of ca of T
              minus debt obligations] OR cod [nil, unless acquired from prev ben] for purpose of computing cg or cl

    c)   cod of int can include deemed acquisition cost of interest from another ben as result of gift or inheritance –
         b/c of dd at fmv, you would get da at fmv = actual cod

    d) ca of capital interest reduced by future income payable by trust to income ben?
       - prof thinks would not capture future income payable – disagrees with technical argument made by CB
           (says more theoretical than practical)
       - b/c 108(1) defines debt obligation as an obligation for any amt that was outstanding

Disclaimers, releases and surrenders of income interests in trusts

    a)   if disclaimer, no disposition of interest (void ab inititio) thus no tax consequences; at c/l can disclaim if
         not accepted
                                                                                                                          45


          - if not disclaimed, inaction may lead to presumption of acceptance
          - CCRA says must disclaim within a reasonable time of awareness of gift if not yet accepted
          if release or surrender, may give rise to deemed disposition at fmv and income inclusion
          - Considered a disposition
          - As long as no direction as to whom will benefit as a result, then CCRA says no pd, and no tax
          - Note: inc attribution rules may apply if sp or minor ch bens in T  seems inconsistent to treat as
               transaction for inc attr rules but deem pd to be nil, but makes sens if effect of release is transfer of
               economic right to sp/ch will be caught by attribution rules

     c)   unclear whether ben can disclaim right to future income once some trust income is received; CCRA says no
          – can’t carve out int in that way – ie accept some inc but not other, accepting some = acceptance of gift

     d) Analogous rules presumably apply to capital interests?
        - unclear although c/l seems to suggest it is possible to disclaim after rec’ing some
        - seems that the above rules appy to cap int according to CCRA

Notes:
1. Rollovers to spousal, c-law, alter-ego, joint partner trusts: “income” requirement of trust refers to income w/o
    reference to Act (ie doesn’t include cg’s – same rules for TTs)

2.   Superficial loss rule (which normally denies loss if sp holds int 30 days later) n/a to transfers to above-noted
     trusts – so can trigger losses by transfers to sp T
                                                                                                                      46


                     PART 3: INCOME SPLITTING AND THE ATTRIBUTION RULES

                                        INCOME ATTRIBUTION RULES


Policy underlying the rules:
    Why do we need them?
        - prevent income splitting due to features of Cdn tax system
                o individuals, not families as tax units;
                o progressive not flat tax rates
        - equity concerns ie “ability to pay” concept underlies these provisions
        - also implies that redistribution of wealth is a function of the tax system

Overview of the attribution rules

    a)   74.1 and 74.2: inc and cg respectively re transfers or loans to or for the benefit of spouse, c-law partner, or
         minor children
    b)   74.3: transfers or loans to trusts with spouses, etc. as beneficiaries: application rule – says when 74.1 and
         74.2 apply to transfers to Ts
    c)   74.4: transfers or loans to corporations with spouses, etc. as shareholders – underlying purpose test
         distinguishes this provision from others above
    d)   74.5: exceptions to the rules (when rules do not apply), plus clarifications, deeming rules
    e)   75(2): transfers to “revocable” trusts (eg consent of S’or required to distribute to ben)
    f)   56(2), (4): indirect payments (direction or concurrence of a payment for own or other’s benefit), transfers
         of rights to income
    g)   56(4.1): low-interest loans made to non-arm’s length persons – purpose test re reduction or avoidance of
         tax payable
    h)   120.4: tax on split income of minor: kiddie tax – no attribution but taxed at highest marginal rate on priv
         corp div’s and inc from T where goods or services provided by related individual – in response to various
         income splitting schemes

74.1 and 74.2 - Transfers or loans to or for the benefit of sp, clp, and minor ch

    a)   attribution re: income or loss from property: 74.1(1) and (2)

         i) 74.1(1) transfers or loans to spouse, c-law partner – or one who later becomes one – deems inc or loss t
         be that of tr’or
         - tr’or must be alive and R in Can;
         - ceases to apply upon divorce, or living apart due to marital breakdown
         - a net value – expenses to be deducted
         - deemed to be inc or loss of tr’or

         ii) 74.1(2) transfers or loans to minor children
         - under 18 yrs of age in the yr – ie in the yr turns 18 will be no attr for that entire yr
         - NAL children AND nieces and nephews
         - Ceases when tr’or dies
         - Not clear that ceases upon divorce as with sp’s – practically CCRA has not indicated that they would
              attribute but arguably could continue

         iii) attributed dividends eligible for DTC under 82(2)

    b) 74.1(3) property used to repay transferee’s existing indebtedness –
       t/p pays off existing debt of sp or minor ch OR pays off balance of unpaid purchase price
                eg if t/p pays off sp’s bank loan with which sp acquired ppt

                  formula = fmv of loan on ppt/cost of the ppt
                                                                                                                        47



         Problem 1
                 60K / 100K = 0.6
                 0.6 of $5K div = $3K div attributes back to sp, and sp eligible fot DTC under 80(2)

    c)   74.2(1) attribution re: capital gain or loss from property – no attribution back to parent from minor ch
         (except farm ppt subject to IV r/o) but attr of cg from sp to t/p
         - net gain or loss  losses applied against gains
         - attr ceases if not R in Can, or one party dies
         - ceases upon divorce or living apart due to marital breakdown IF joint election filed (diff from 74.1
             where no joint election required)

    d) 248(5) continued attribution re: “substituted property” – ongoing transaction and changes of ppt will still
       be captured
       - if new ppt bought with proceeds from sale of old ppt, then any accrued gains in new ppt will also be
           attributed back as substituted ppt
       - CCRA considers all of new ppt as substituted ppt
       - Cts have not addressed this issue
       - BUT, If sp uses interest income from ppt transferred from sp to purchase new ppt, new ppt does NOT
           attr back

    e)   74.2(2) deemed cg or cl re: transferor’s cgx
         - deemed gains from QFP or QSBC will qualify for purpose of cgx - same requirements
         - you and qualified person (ie sp) must hold for 2 yrs to qualify for cgx – can combine hold period

    f)   160(1) joint tax liability for transferor and transferee
         - both tr’ee and tr’or jointly and severally liable for tax liability of tr’or if attribution rules apply to
             attribute

Exceptions where 74.1 and 74.2 do not apply

    a)   transferor (or tr’ee) not alive or not resident in Can – but dd at death may attribute back to sp b/c dd is
         immediately b/f death; no issue if tr’ee no longer R
    b) transferee no longer spouse or c-law partner
    c) transferee no longer minor child – in yr child turns 18
    d) income earned from child tax benefit
    e) spouses, c-law partners living apart 74.5(3) – attribution ceases but cg attribution only ceases if joint
         election filed by both parties – but when relationship ceases through divorce or 90 day separation for clp
    f) transfers for fmv consideration 74.5(1)
         i) consideration includes indebtedness, eg promissory note: must chg prescribed rate of int, currently
    2%(based on T bill rates) and int must be paid within 30 days of end of yr or attribution rules will apply for
    that yr and ALL subsequent yrs – even loan repayment does not end attribution = very harsh rule
         ii) election out of 73(1) rollover (if applicable) – must elect out of r/o for exception to apply
    g) loans for value 74.5(2) – same rules re prescribed rate of int repaid in timely fashion
    h) property used to earn business income – gov’t concerned about taxing passive inc, more legitimate to lend
         for business purpose thus B inc earned by tr’ee
    i) property used to earn capital gains (minor children) – big way to split income – give kids $ and let them
         buy shares: reason for this exemption unclear but all gifts to kids are subject to dd @ fmv whereas gifts to
         sp can be under r/o
                    - gov’t considering changing this exception
    j) income earned on attributed income – “second generation income” not considered substituted ppt; eg int
         earned on bond attributes, but if int invested, inc on subsequent inv does not attr
         - from public policy perspective very inconsistent with earlier position re gains from one ppt used to buy
               second ppt where entire new amt attributes
         - from legal perspective makes sense b/c distinction b/n inc and cap consistent with this rule (eg rent
               from ppt is distinct from ppt that is rented)
                                                                                                                    48


    k) transfers to spousal, c-law partner RRSP 74.5(12)(a) – except under 146(8.3) re withdrawals in yr or
        contribution or in next 2 yrs will attribute back to contributor
    l) transferred property / amount is deductible from transferor’s income and included in transferee’s income
        74.5(12)(b) – eg salary or bonuses paid to sp/kids as employees
    m) forgiven loan? – if loan offside for missed int payment attribution continues, but forgiveness = benefit so
        will likely hold as imputed transfer of ppt but since no inc from this transaction no attribution likely (but
        note s80 re loan forgiveness could apply and be detrimental – don’t need to know for this course)
    note: can get around partially by having high income earner pay all the bills and low income earner use their
    funds to invest b/c personal expenditures so NOT give rise to income

Miscellaneous application rules and deeming rules

    a)   back-to-back transfers and loans 74.5(6) – transfers to 3rd party who transfers to sp/minor ch deemed to be
         transferor unless transferred at fmv or loan at prescribed rate of interest

    b) guarantees of loans 74.5(7) – if sp guarantees loan (or part of loan) or all or part of int on loan paid, then
       deemed to make loan to sp/minor ch for attribution rules purposes  harsh rule
       exception: loan where prescribed rate of interest paid
       note: if lo inc earner gets bank loan and hi inc earner pays int – no attribution b/c transaction does not give
       rise to any inc although arguably a benefit has been transferred

    c)   transfers or loans to trust 74.5(9) where sp or minor ch has beneficial int in T,
                   transaction will be deemed for the benefit of that NAL person

    d) artificial transactions 74.5(11) – where parties would benefit from application of the attribution rules and
       one of the main reasons for the transfer was to reduce tax through application of rules (ie deliberately fall
       out of exception rules)

    e)   rules n/a to “split income” of minor 74.5(13)

John borrowed $100,000 from a bank and used the money to purchase shares in XCo. On March 1, 2002, John’s
spouse Mary gave him $60,000, which was used to partially repay the loan to the bank. During the remainder of
2002, John receives $5,000 of dividends on the XCo shares.
        60K/100K = 0.6 thus 0.6 of 5K div = 3K div attributes back to spouse, and spouse eligible for DTC

Mary gave her spouse John $100,000, which he used to purchase shares in XCo. On March 1, 2002, John sold the
shares for $150,000 and used all of the proceeds to purchase shares in YCo. During the remainder of 2002, John
receives $7,000 of dividends on the YCo shares. In 2003, John sells all of the YCo shares for $140,000.
          cg of 50K = tcg of 25K which attributes back to Mary in 2002
          CCRA construes all new ppt purchased with proceeds as substituted ppt – cts have not addressed this issue
as yet, so assuming CCRA is correct then all income of shares attribute to Mary = 7K div income in 2002
          10K loss = 5K acl attributes to Mary in 2003

On January 1, 1998, Mary lent her spouse John $100,000 and charged the prescribed rate of interest on the loan
(assume it was 4%). John used the loan proceeds to purchase a $100,000 twenty-year bond that pays 8% annual
interest. John paid the interest on the loan in respect of 1998 and 1999 in each of those years. He missed making
the interest payment on the loan in respect of 2000, although on December 31, 2001 he paid the interest owing on
the loan for 2001.
          1998 & 1999 = no attribution, John taxed on 8% of 100K, 8K interest earned less 4% interest paid to Mary
          = 4K for John in each of the years, Mary taxed on 4K, interest paid from John
          2000: 8K attributes back to Mary
          2001: 4K attributed income (net 8K – 4K interest paid) plus 4K interest rec’d as income, thus 8K
                   John: 0 income in both years

Assume the same facts as 3) above, except that John also repaid the principal amount of the loan on December 31,
2001. Even in 2002, attribution on loan continues to Mary, paying off loan does not end attribution
                                                                                                                  49


             ATTRIBUTION RE TRANSFERS TO TRUSTS AND CORPORATIONS

Transfers or loans to trusts with designated person as beneficiary: 74.3

         -    an application rule rather than an attribution rule
         -    2 rules – one for inc and one for cg’s
         -    ensures ppt 1st allocated to designated persons to the extent that included in their income

    a)   definition of “designated person” - 74.5(5)
         - sp/clp and children and nieces and nephews

    b) 74.3(1) determines amt of inc from ppt or tcgs may be subject to attribution under 74.1 or 74.2

    c)   under 74.3(1)(a), formula for income from loaned or transferred ppt for a taxation year: lesser of
         1. amount included in the designated person’s (DP’s) inc from the T in year (not including tcgs
              designated under 104(21)); and
         2. proportion of inc from the ppt (or sub. ppt) earned by T in the year; proportion equal to the DP’s
              income from T divided by total of all DPs’ inc from T for year
         is deemed to be the DP’s inc from loaned or transferred ppt for the year for the purposes of 74.1

    d) under 74.3(1)(b), formula for tcg’s from loaned or transferred ppt for a taxation year: lesser of
       1. net tcgs of trust designated to the DP under 104(21) for the year; and
       2. net tcgs earned by trust on dispositions of the ppt (or sub. ppt) in the year
       is deemed to be tcg of DP from the disposition of loaned or transferred ppt in the year for purposes of 74.2

    e)   exceptions to attribution – see the exceptions for 74.1 and 74.2


Transfers and loans to corporations: 74.4(2)

    a) deemed interest rule applicable during any period in a year in which designated person is specified
    shareholder of corp., transferor resident in Canada, and corp. not a small business corporation
        - only applies to time when not a sml bus corp
                 o exemption probably b/c goal is to prevent income splitting, and very limited room for inc spl
                     in sml bus
        - only applies to time period where minor is under 18 (diff from 74.1 where no attrib for entire yr of
            turning 18
                 o this rules applies up to day b/f 18th birthday)
        - 74.4(3) exemption re marital breakdown/separation
        - attempting to capture passive income not business income
        - drafters didn’t foresee how tax planners would get around rule – led to further rules being introduced

    b) “designated person” in 74.5(5) = sp/clp / kids / n&n; and
       “specified shareholder” in 248(1) = owns more than 10% of shares of any class of corp;
       “small business corporation” defined in 248(1) as CCPC with >90% assets used to COB in Can

    c) purpose test for the transfer or loan: a main purpose is to reduce income of transferor and benefit the
    designated person
             - difficult for CCRA to prove this, and this rule never taken to Ct yet

    d) assuming rule applies, deemed interest inclusion in year for transferor equal to:

       1. prescribed rate of interest on “outstanding amount” of loan or transfer during the period referred to
       above; (note: both prescribed rate and outstanding amt can fluctuate during the yr)
    minus
                                                                                                                       50


         2. interest received by transferor in the year in respect of transfer or loan, and
         3. 5/4 of taxable dividends received in the year from corp. on shares received as consideration for transfer
         (thus, int rec’d and/or div’s rec’d can reduce or eliminate inclusion)

     “outstanding amount” of loan or transfer at any time under 74.4(3) means:
         1. for transfer: fmv of transferred property minus fmv of consideration received by transferor for the
             property (other than shares or debt)
         - thus promissory note would not reduce amt transferred
         - if transferred for debt and corp then pays off debt, then debt included as consideration rec’d
         2. for loan: amount of loan minus any repayment of loan (otherwise than by issuance of new debt or
             shares)
         - for offside loans under 74.1, attribution continues even if loan paid off
         - here, if outstanding amt reduced to nil, then rules stops – no more attribution
         - could use rule to your benefit, esp if prescribed rate low (like now) – if ppt getting greater returns

Back-to-back loans and transfers to corp: 74.5(6)

         -    same rules for back-to-back loans to corps as for sp/kids
         -    still have to fulfill purpose test (reduction of t/p income and benefit to designated person)

Guarantees of loans to corp.: 74.5(7)

         -    any loan to corp guaranteed, or any payment in whole or in part = deemed attribution
         -    different than 74.1 and 74.2 loans provisions where if int at prescribed rate charged then get fmv loan
              exception to attribution rule, eg: if sp pays prescribed rate of int
         -    this rule doesn’t specify who paid to in order to get exception in corp rule
         -    specifies “int rec’d by transferor” thus transferor actually has to rec int
         -    technically a concern in 3rd party situations, eg bank

Transfers of “equity ownership” in corporation: Kieboom case

    a) transfer of “equity ownership” constitutes transfer for purposes of attribution rules
    b) shares acquired by a person in connection with such transfer are property substituted for the equity
        ownership
In Kieboom,
        - Ct held t/p had effectively transferred 40% equity ownership to his wife (which = ppt in the Act) and
            shares could be viewed as subst ppt thus attribution of div’s back to t/p – went from 90-10 to 50-50
            equity by issuing new cs to W at nominal cost
        - both H & W transferred equity to kids (now 21-21-58 equity) W’s transfer = dd at fmv, since 8/9’s
            of cg attributable, then 8/9’s of cg attribute back to H

note: although a surrender or release of an interest in a t is technically a disposition – no proceeds thus no tax
liability, BUT if sp releases so that minor ch takes, release will give rise to attribution according to ratio in Kieboom,
but CCRA still says no disposition

Problems

1.   A trust has four income beneficiaries who are entitled to share all of the trust income in equal proportions. John
     gives $100,000 to the trust, which is used to purchase a bond. In 2002, the trust earns $8,000 interest on the
     bond and also earns $12,000 of other income. All of the trust income is payable to the beneficiaries in 2002.
     One of the beneficiaries is John’s spouse and another is John’s minor child. The other two beneficiaries are
     John’s adult children.
         No attribution for adult children
         Attribution for spouse under 74.3 (1) (a) = lesser of
                   ¼ of (8+12K) = 5K, or
                   8K X 5K/10K = 4K
                                                                                                                    51


         thus under 74.1 (1) $4K attributes back to John
         Attribution for minor child – same calculations as above, thus $4K under 74.1(2), so entire $8K attributes
         back to John

2.   John gives $100,000 to a trust, which is used to purchase shares in XCo. In 2002, the trust sells the XCo shares
     and realizes an $8,000 taxable capital gain. The trust also realizes $12,000 of other taxable capital gains in
     2002. All of the gains are distributed evenly to the two beneficiaries of the trust in 2002, and the 104(21)
     designation is made in respect of each beneficiary. One of the beneficiaries is John’s spouse and the other is his
     minor child.
         No attribution for minor child on cg’s
         Spouse: lesser of ½ (8K + 10K) = 10K, or 8K, thus 8K cg attributes back to transferor under 74.2 which
         equals 4K ncg

3.   On January 1, 2001, Mary lends $100,000 to a corporation in which her spouse and two minor children each
     own one-third of the shares. No interest is charged on the loan. On December 31, 2001, the corporation repays
     $50,000 of the loan. On July 1, 2002, one of the children turns 18 years old. Assume that subsection 74.4(2)
     applies to the loan, and that the prescribed rate throughout 2001 was 5% and throughout 2002 was 3%.
         2001: 5K (5% on 100K for the yr) attributes back to Mary
         2002: 1.5K or 1,500 (3% on 50K) still designated person who is specified shareholder (>10% equity)
         note: $750 attrib if minor turning 18 was only des s/h thus only attrib until June 30
                                                                                                                       52


                       SUBSECTION 75(2) AND “REVERSIONARY” TRUSTS
Old rule concerning control retained by S’or re ppt transferred into a T; very broad rule – can apply to lots of Ts and
CCRA seems to have stepped up application of this rule - must be sure that T doc prevents cap ppt being distributed
to S’or (covers even remote possibility)
New ppt purchased with all proceeds or gains from old ppt still potentially subject to rule

Requirements of 75(2):

    property held by trust on condition that
    a) the ppt or sub. ppt may revert to t/p from whom it was rec’d (if s’or a capital ben of T);
    b) the ppt or sub. ppt may pass to persons to be determined by t/p subsequent to creation of T (sole t’ee in
        discretionary T ,or power of appointment); or
    c) the ppt shall not, during t/p’s lifetime, be disposed of except with t/p’s consent or in accordance with t/p’s
        direction (if sole t’ee, or in certain circumstances re powers of t’ees provided in T doc)

Application of 75(2)

    a) income or loss from ppt or sub ppt, and any tcgs or acls from such ppt, deemed to be that of t/p’s while
       alive and R in Canada
    b) such amounts not included in T’s income nor ben’s income
    c) joint liability for t/p and T under 160(1) for tax on inc arising under 75(2)

Exceptions

    a)   loans – loans to Ts do not equal “reversion” – ie repayment of a loan is not a reversion of ppt
    b)   taxpayer no longer resident or alive
    c)   income on income – 2nd generation inc not subject to this rule
    d)   business income – same as 74.1 and 74.2
    e)   ppt may revert only by reason of possible failure of trust – eg lack of certainty in some respect
    f)   non-income producing ppt; e.g. gold coin, and no other property contributed by taxpayer
    g)   otherwise fall outside of wording of 75(2); e.g. taxpayer not a capital ben under trust, trust has multiple
         trustees and all decisions made by majority vote, no additional power of appointment for taxpayer – could
         make sure of this when drafting doc

Distribution of ppt by a 75(2) reversionary trust

       ie if caught by 75(2) and distribute ppt out
    a) 107(2) rollover available for distributions to taxpayer (S’or) or sp/clp

    b) under 107(4.1), no rollover and 107(2.1) applies if distribution to any other ben while t/p alive –b/c of dd
       at fmv by T to distributed ppt and any cg attribute back to S’or

    c) 107(4.1) applicable to all property of trust if 75(2) was applicable at any time in respect of any ppt of T
    Harsh rules – original intent to keep S’or from treating ppt transferred to T as though their own

Examples: Does 75(2) apply?
   a) A settlor of a trust contributes a property to a trust under which the settlor is the sole trustee (the trust also
       has other properties). The trust provides that all of the capital of the trust will be evenly distributed to the
       two capital beneficiaries after the 30th birthday of the income beneficiary. The trust provides that the
       trustee(s) will decide which trust properties are distributed to each capital beneficiary. Yes, even though
       even distribution required, S’or as sole T’ee decides who gets what

    b) Same facts as a) above, but the trust document does not provide that the trustee(s) will decide which
       properties are distributed to each capital beneficiary. Yes, implicit that T’ee will decide who gets what if
       T doc silent
                                                                                                                    53



c)   Same facts as a) above, except that the settlor is one of three trustees. All trustee decisions must be made
     by majority vote, although the settlor has the right to veto decisions. Yes, if T’ee has veto then no disposal
     without their consent

d) Same facts as a) above, except that the settlor is one of three trustees. All trustee decisions must be made
   by majority vote, although the settlor must be one of the majority. Yes, same as above

e)   The settlor of a trust is one of the income beneficiaries of the trust. His spouse is the other income
     beneficiary, and their children are the capital beneficiaries to whom the trust property will be distributed
     upon the later of the death of the settlor and his spouse. The current trustees are the settlor, his brother and
     his lawyer, and all trustee decisions are made by majority vote. The trustees have the power to encroach
     upon the capital of the trust for the benefit of the income beneficiaries. Yes, if ppt contributed by S’or
     then caught by (1)(a) may revert back to S’or

f)   Same facts as e) above, except that the power to encroach does not apply to property contributed by the
     settlor. No. puts T back on side b/c (a) can’t apply

g) A trust has three beneficiaries, the spouse of the settlor and their two children. The settlor contributed
   shares in XCo. to the trust. The settlor has the option to purchase the shares from the trust at their fair
   market value within the first five years after the creation of the trust. Yes, ppt may revert back to S’or
   even if fmv transaction would technically be caught

h) A discretionary trust has three trustees, including the settlor. A majority decision is required for all trustee
   actions. The settlor retains the right to remove trustees or select new trustees. Yes, but if no of T’ees
   specifies as “3” in T doc then probably can get around this and not be caught

i)   A settlor of a trust is one of three trustees. At a specified point in time, the capital of trust must be
     distributed to any or all persons of a named class of capital beneficiaries of the trust. The settlor retains the
     right to choose which of the capital beneficiaries will receive trust property. However, a majority decision
     of the trustees is required to determine which property goes to each such chosen beneficiary. Yes, b/c t’ee
     can effectively chose who gets ppt and caught under (b)

j)   A parent lends money to a discretionary trust in which his spouse and children are beneficiaries. The
     parent is not a beneficiary of the trust. The parent is one of three trustees and a majority vote is required for
     all trustee actions. The loan is used by the trust to acquire a property from the parent. The parent does not
     otherwise contribute any property to the trust. No, loan itself doesn’t give rise to 75(2) if loan secured by
     ppt then could revert yes, but otherwise no, not captured

k) Same as j) above, except that the loan is used to purchase a property from a third party. The loan is secured
   by the property, so that the parent will have a claim on the property if the loan is not repaid. No, b/c ppt
   NOT contributed by S’or but by 3rd party, and loan itself does not give rise to capture by 75(2)
                                                                                                                      54


                OTHER ATTRIBUTION RULES: 56(4) (4.1) and (2), and 120.4

56(4): Transfers of rights to income to non-arm’s length person

        a) if amount would otherwise have been included in transferor’s income for the year, then include that
           amount in transferor’s income, if alive and resident in Canada
        b) can apply to all forms of inc, not just inc from ppt (unlike previous attribution rules discussed to date)
           – eg transfers or assignments of employment income to a minor child is not ppt income (note: ct might
           determine this to fall under constructive receipt doctrine in any event)
        c) n/a to income from ppt if also transfer the ppt – transfer outright means transfer of complete control –
           if sp or minor children than other attribution rules will capture in any event

56(4.1): Low-interest loans to non-arm’s length persons

        ie loans below the prescribed rate of interest
        also deals with loans to trusts, but not responsible for that rule in this course
        - loan made to or indebtedness (unpaid purchase price also included if low interest) owed by a non-
              arm’s length person
        - purpose test: a main reason for the loan / debt was to avoid tax by causing income from the property
              acquired with the loan / debt or substituted property to be included in the income of the non-arm’s
              length person
        - if provision applies, income from such property included in lender’s income, if alive and resident in
              Canada
              NOTE:
        xii)       applies to all non-arm’s length persons but has purpose test
        xiii)      assumption no income splitting intent if lending money at time of genuine need, thus relevancy of
                   purpose test – CCRA does not assess that much under this provision (no caselaw)
        - exceptions
              - 74.1 or 75(2) apply, then this provision does not apply
              - loans and debt at prescribed rate of interest – exception only applies if interest paid every year within
              30 days of the end of the year
              - business income, capital gains – does not apply
              - income on income – ie income that has already been subject to attribution; but if old ppt sold and new
              ppt purchased with the proceeds, then new ppt will be considered substituted ppt for the purposes of
              attribution
              - split income of minor – kiddie tax

56(2): Indirect payments

– very broad provision which was interpreted very narrowly by the cts, can apply to payments made to any person,
not just NAL person

        a)   four conditions required for payment to be included in taxpayer’s income under 56(2):
                 1. the payment must be to a person / recipient other than the taxpayer;
                 2. must be at the direction or with the concurrence of the taxpayer; does not have to cause the
                 payment, only to concur with the payment made to another person
                 3. must be for the benefit of the taxpayer or for the benefit of another person whom the taxpayer
                 wished to benefit; (element of purpose test) and
                 4. the payment would have been included in the taxpayer's income if it had been received by him
                 or her.

        b) CCRA has tried to use the provision to combat dividend income splitting b/c of the broadness of the
           wording of the provision, esp in the area of dividend sprinkling where spouses and minor children are
           shareholders, and parent(s) as co director directs payments to these shareholders (easy way to income
           split and funnel money off to kids – lets you do indirectly what you can not do directly)
                                                                                                                      55



          c)   Winter / Outerbridge case (referred to in Neuman and Ferell cases: this case not in the context of
               dividend payments, but no general requirement that taxpayer must have been otherwise entitled to the
               payment; however, if taxpayer was not otherwise entitled to payment, 56(2) n/a if recipient is taxable
               on payment – basically ct read in an additional requirement into the 4 conditions of the provision

          d) SCC decision in McClurg: 56(2) generally not applicable to dividends, possible exception for non-
               arm’s length situations where recipient does not make “legitimate” contribution to corporation
          xiv)     taxpayer transferred interest in business into holdco and took back voting pref shares, and issued
                   non-voting common shares at nominal amt to his spouse (classic estate freeze) and dividends
                   could be paid on either class of shares at the discretion of the directors, so declared large div’s to
                   sp and little to self
          xv)      not captured by 74.1, fmv purchase
          xvi)     although 74.4 not inexistence at the time, and wouldn’t apply if corp. qualified as small business
                   corp. (allowed exception to that rule)
          xvii)    so CCRA argued 56(2)
          xviii) ct said div’s could have remained in corp. as retained earnings, thus 4 th condition not met – similar
                   to Winter decision, Ct read in a requirement that was not included in provision as written
          xix)     note: if dividends were attached to shares but those div’s were waived, then could argue that
                   captured by this provision
          xx)      obiter suggestion that contribution to corp. exempts from this provision – formed basis of decision
                   in Neuman – bizarre suggestion b/c div’s linked to share equity not contribution to corp.

          e)   SCC decision in Neuman: followed McClurg decision but rejected possible exception from McClurg;
               held that Winter rule n/a to dividends (didn’t overrule just said does not apply to div’s);

          f)   Ferrel case: followed Winter rule; 56(2) was not applicable to parent re: management fees paid to
               family trust and flowed out to children beneficiaries who were taxable on such amounts
          xxi)     services corp. had K with trust, t/p trustee performed services
          xxii)    benefits flowed out to kids through trust
          xxiii) since t/p not otherwise entitled to amounts, and kids taxable on the amt, 56(2) wouldn’t apply
          xxiv)    again ct exempted income splitting arrangements that provision was targeting (note: a widely used
                   scheme)

3.   Finance’s response to above decisions: The tax on split income of minors 120.4 – and effectively slammed the
     door shut on these type of income splitting schemes – NOT an attribution rule: simply tax the minor at the
     highest marginal rate rather than attributed back to t/p
         a) tax at highest marginal rate, no credits except DTC and foreign tax credit
         b) applies to minors who are “specified individuals”: 3 requirements:
         xxv)      under 18 throughout the year,
         xxvi)     resident in Canada throughout the year, and
         xxvii) at least one parent must have been resident at anytime in the year
         c) not subject to other attribution rules (56(5) rules in 56 do not apply where this tax applies, similar rules
              re revocable trusts under 74.5(13), and re corp. attribution rule 74.4(2)(g)- if div’s paid out to minors,
              will reduce any ? to t/p)

120.4 “kiddie tax”:

          definition of split income in 120.4(1) includes:
     a)   dividends and shareholder benefits (broadly defined as any sort of benefit conferred upon o s/h) received
          on shares of corporations other than publicly-listed shares or mutual funds (all other div’s are caught by the
          kiddie tax rule unless public corp. div’s); and
          - very arbitrary – could capture a young entertainer or entrepreneur could be caught by this rule, if they
               are incorporated
          - even if parent has nothing to do with the kid’s corp.
                                                                                                                    56


         -  should take out as salary, thus included at regular marginal rates, rather than receive div’s (but must be
            an employee to draw a salary and must be a reasonable salary, cannot just get a salary if does not work
            for the co.)
       - 120.4 also captures dividends rec’d by child through trust or other entity (don’t need to know this for
            this course)
    b) income from T or p’ship from provision of goods or services to a business carried on by
       1. a related person,
       2. a professional corporation in which related person is a shareholder, or
       3. any other corporation in which related person is a specified shareholder (at least 10% of equity)

Exceptions to split income rules

    a) “excluded amounts”: income from property (ie shares) inherited from parent, or inherited from any other
       person if minor is full-time post-secondary student or disabled (eligible for disability tax credit) – some
       argument at the time that all inherited ppt should be excluded not just ppt from inherited from parent
    b) dividends from public corporations, mutual funds – but still might have to worry about regular rules, ie
       s74.1 if shares given to minor children
    c) interest
    d) capital gains – and generally not caught by regular attribution rules
    e) employment income – earned income ok

Parent’s joint liability for tax on minor’s split income under 160(1.2)
can be jointly and severally liable b/c minors might not have sufficient assets to cover tax liability
    a) parent a specified shareholder of corp or shareholder of professional corp (currently children cannot be
        s/h in pro p-ship) which paid dividends to minor (note: parent deemed to own all shares owned by NAL
        persons, eg child owns 10% of a class of shares – can’t get around specified s/h requirement by having
        child alone be a s/h), or
    b) parent carried on the business to which the trust or p-ship provided goods or services, or was specified
        shareholder of corp or shareholder of professional corp that carried on such business
                                                                                                                        57



                                        CHARITABLE DONATIONS

Tax credit for donations:
        no-refundable credit that reduces tax payable in current year

         -   credit is available for “charitable gifts”, “cultural gifts” and “ecological gifts” based on fmv of property
             donated

         -   federal credit equals 16% of the first $200 of donations made in a taxation year (text says 17%; rate
             was changed in 2001), and 29% on the amount of donations in the year in excess of $200; s.118.1(2)

         -   for charitable gifts, amount that qualifies for credit in a year is limited to 75% of income plus 25% of
             any taxable capital gain or recapture on donation of property

         -   75% limit n/a in terminal year and immediately preceding year

         -   for cultural gifts and ecological gifts, no limit

         -   five-year carryforward for unused credits

Inter-vivos gifts of capital property

    -    gift of capital property gives rise to deemed disposition at fmv (69(1)(b))

    -    election available under s.118.1(6) re: deemed disposition at any amount between acb and fmv of property;
         elected amount deemed to be proceeds of disposition and also fmv of the gift – any gain likely offset by tax
         credit so probably will not make this election

    -    for gifts of publicly-traded securities, only one-quarter of any capital gain included as taxable capital gain
         (CB text says 37.5%, which applied when regular capital gain inclusion rate was 3/4)

    -    for ecological gifts, also include only one-quarter of capital gain; value determined and land certified by
         Ministry of Environment – for land certified to be ecologically sensitive and important to the preservation
         of the Cdn environment; Charity must have preservation as an objective or can gift to the Crown; can
         appeal Ministry valuations to cts if disagree

    -    for cultural gifts, any capital gain is completely exempt; value determined and gift certified by Canadian
         Cultural Property Export Review Board, recipient must be designated institution: “object” certified by the
         Board as being of national importance and of historical and cultural significance

Anti-avoidance provisions - not examinable on these provisions

    Arose out of concern about gifts to private foundations over which donor still had control or influence (eg
    family foundations) and even sometimes gave gifts upon condition of granting loan to donor

    a)   gift of “non-qualifying security” of donor – credit deferred until security disposed of by charity or security
         ceases to be non-qualifying security; 60 month limit after time of donation for such events: 118.1(13)
              “non-qualifying security” means share of NAL corporation or any security issued by donor or NAL
         person (other than publicly listed securities), and any obligation of donor or NAL person

              above rule n/a to “excepted gifts”; generally meaning gift of share to charity that is a public
         foundation or charitable organization and donor at arm’s length with charity and trustees, directors, officers
         of charity
                                                                                                                         58


    b) “loanback” rule 118.1(16): if within 60 months of gift

         1.   charity holds non-qualifying security of donor, or
         2.   donor and charity are non-arm’s length and donor uses property of charity that is not used in charity’s
              charitable activities

         - fmv of gift reduced by fmv of non-qualifying security or fmv property so used

Gift of residual / remainder interest in trust

    gift of remainder interest in a trust re: any property of the trust ($ or land) can qualify for current credit; amount
    of gift is present value of the remainder interest if meets requirements under IT-226:

         1.   There must be a transfer of property voluntarily given with no expectation of right, privilege, material
              benefit or advantage to the donor or a person designated by the donor.

         2.   The property must vest with the recipient organization at the time of transfer. A gift is vested if:

              (i) the person or persons entitled to the gift are in existence and are ascertained,

              (ii) the size of the beneficiaries' interests are ascertained, and

              (iii) any conditions attached to the gift are satisfied.

         3.   The transfer must be irrevocable.

         4.   It must be evident that the recipient organization will eventually receive full ownership and possession
              of the property transferred.

         5.   normally valuator determines value of gift

    c)   trustee cannot have power to encroach (for other bens) on the property that is to be transferred to the
         charity

    d) if transfer the property into trust (other than qualifying sp T etc.), dd at fmv under 69(1)(b); CCRA allows
       election under 118.1(6) re: deemed pod of ppt and deemed fmv of gift

    e)   if transfer property into qualifying spousal trust, alter ego trust, or joint partner trust, 73(1) rollover
         applies re: pod but does not affect fmv of gift; credit based on fmv of gift transferred to sp T – get r/o on
         disposition but get credit today

    f)   if transfer into trust not claimed as a gift, CCRA allows trust to claim credit when property distributed to
         charity – if for eg couldn’t claim credit b/c of power to enc\roach, then T gets credit later – if gift made
         under will then D gets credit in terminal year but if not made under will E gets credit when it gives ppt to
         charity

Purchase of annuity from charity coupled with gift

(lots of charities permit this)

    a)   transfer funds / property to charity in return for annuity – if transfer exceeds anticipated annuity returns
         excess can be claimed as a gift NOTE: if die earlier than expected credit remains unaffected

    b) fmv of transferred property in excess of expected annuity payments is the amount of the gift (IT-211
       provides life expectancy tables etc.)
                                                                                                                     59



     c)   annuity payments treated as tax-free return of capital

     d) transfer of capital property to charity leads to deemed disposition at fmv under 69(1)(b) and 118.1(6)
         election is NOT available thus can give rise to tcg  using cash solves problem
Example
         If donate 150K to charity in return for 5K annual return and life expectancy is 20 years (thus 100K total
anticipated return) then 50K can be claimed as gift now

Inter-vivos gifts of insurance policies

     a) absolute assignment of policy qualifies as gift: charity becomes owner of policy and names self as ben
        then fmv of policy = amt of gift (note term ins likely to have value of nil, savings component of whole life
        has value)

     b) payment of premiums after assignment is also gift and will get credit for this

     c)   naming charity as beneficiary (without assignment of policy) is not itself a gift b/c can change name of ben
          at any time; however, payment of proceeds at death will be considered gift made by deceased

Valuation concerns

          Ecological gifts: Ministry values
          Cultural gifts: Board values
          If cash then no issue
          If ppt then need to get valued – charity may also get ppt valued
          CCRA can challenge both t/p and charity’s valuations – if t/p disagrees can go to ct

Problems for April 2 class

1.   A taxpayer transfers a non-depreciable capital property to a trust under which he is the sole income beneficiary
     for life and a registered charity is the sole remainder (capital) beneficiary in respect of the property upon the
     taxpayer’s death. The adjusted cost base of the property is $10,000 and its current fair market value is
     $100,000. The current fair market value of the remainder interest is $60,000.

2.   Same facts as 1) above, except the sole income beneficiary of the trust is the taxpayer’s spouse, and the transfer
     of the property to the trust qualifies for the subsection 73(1) rollover.

				
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