g10140-tx chapter 16.0 clearance certificates, estates
TRANSCRIPT
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16.0 Clearance certificates, estates and trusts
(Revised February 2015)
16.1.0 Clearance Certificate Program
(Revised February 2015)
16.1.1 Introduction
(Revised February 2015)
Subsection 159(2) of the Income Tax Act (ITA) requires that legal representatives, other than
trustees in bankruptcy, obtain a clearance certificate that certifies that all taxes have been paid or
that acceptable security has been provided before distributing any property under their control.
Representatives effectively act for the deceased or other taxpayer in all matters relating to that
person's tax matters. For the definition of legal representative, go to subsection 159(1).
Clearance certificates are most frequently issued on the distribution of property of a deceased
individual, that person's estate, or a testamentary trust arising on the person's death. Clearance
certificates are also required if a corporation surrenders its charter on the winding up of its
affairs.
A clearance certificate can be issued only after all required income tax and goods and services
tax/harmonized sales tax (GST/HST) returns have been filed and assessed and income tax and/or
GST/HST liability of the taxpayer paid or secured.
Representatives that fail to get a clearance certificate before distributing the property in question
are liable for any unpaid taxes. However, such liability is limited to an amount not greater than
the value of the property distributed.
The requirement to obtain a clearance certificate under subsection 159(2) does not apply to a
trustee in bankruptcy. Issuing a clearance certificate to a trustee in bankruptcy would be
misleading as the certificate would not cover any liability of the trustee under section 128.
It is important to note that the issue of a clearance certificate does not prevent the minister from
seeking to recover any unpaid tax from an estate or its beneficiaries, but relieves the legal
representative from personal liability for such tax.
Requesting a clearance certificate
Income Tax Information Circular IC82-6R10, Clearance Certificate, at www.cra-
arc.gc.ca/E/pub/tp/ic82-6r10/, explains:
• why a clearance certificate is necessary;
• how a representative requests a clearance certificate and the information and documents
that must accompany the application form (Form TX19, Asking for a Clearance
Certificate, available at www.cra-arc.gc.ca/E/pbg/tf/tx19/);
• what actions the representative must take regarding the distribution of the property under
their control; and
• the conditions that must be met before the Canada Revenue Agency (CRA) will issue a
clearance certificate.
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A payment or allocation of trust income to a beneficiary is not a distribution of property. As a
result, a clearance certificate is not required.
Procedures for obtaining a clearance certificate are also in Tax Guides:
• T4011, Preparing Returns for Deceased Persons, at www.cra-
arc.gc.ca/E/pub/tg/t4011/README.html; and
• T4013, T3 Trust Guide, at www.cra-arc.gc.ca/E/pub/tg/t4013/.
The tax services office (TSO), where the representative is located, will handle and process the
request, even if the deceased taxpayer's file was handled by a different TSO. Clearance
certificates are handled by a separate Estates and Trust group or by other designated officers in
the TSO.
Note: A change of address should be made in the RAPID system to reflect the address of
the legal representative in the case of a deceased taxpayer.
Processing of clearance certificate requests
A request for clearance certificate cannot be processed if there are outstanding returns. However,
if the representative does not have sufficient information to complete and file the returns, an
application (in writing) can be made for a waiver to not file those returns.
If a clearance certificate cannot be issued due to outstanding returns, the representative is advised
to reapply after the notice of assessment has been received for the unfiled returns. For a sample
letter, go to Appendix A-16.1.1, Confirmation of Request for Clearance Certificate.
Form TX19, Asking for a Clearance Certificate, available at www.cra-
arc.gc.ca/E/pbg/tf/tx19/README.html, is forwarded to the audit clerk who determines, from
RAPID or the Automated Trust System (ATS), if there are any outstanding income tax returns.
Final T1 General – Income Tax and Benefit Return for a deceased individual
A representative has a period of at least six months to file a deceased person's final T1 return.
The due dates for the final T1 return are:
Period when death occurred Due date for the final return
January 1 to October 31 April 30 of the following year
November 1 to December 31 Six months after the date of death
If the deceased or the deceased's spouse or common-law partner earned business income during
the year of death, special rules apply. For more information, go to Tax Guide T4011, Preparing
Returns for Deceased Persons, at www.cra-arc.gc.ca/E/pub/tg/t4011/README.html.
Form T3RET, T3 Trust Income Tax and Information Return, available at www.cra-
arc.gc.ca/E/pbg/tf/t3ret/, may not be necessary if the estate is distributed immediately after the
death of the person or if the estate did not earn any income before its distribution. If the filing of
a T3 return is required, the due date will depend on the type of trust. For more information, go to
Tax Guide T4013, T3 Trust Guide, at www.cra-arc.gc.ca/E/pub/tg/t4013/README.html.
Referrals to Collections
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The representative will be advised if the Estates and Trust officer determines that there are
outstanding amounts to be paid. If there are outstanding amounts, a note is made on a log of
action or Form T2020, Memo for file, and Collections is advised of the request for a clearance
certificate.
Inventory control
The Estates and Trusts Group maintains an inventory control system of requests for clearance
certificates. Requests are inventoried on receipt with the relevant tombstone data noted. The
inventory is monitored regularly to ensure that the requests are being handled on a timely basis.
Reasons for delays in processing requests are verified.
A separate inventory of cancelled requests is maintained to monitor the need for a follow-up.
Requests will be cancelled when the outstanding debt has not been paid within 30 days of the
date of the request for payment. The log of action, permanent file, or ACSES is updated to
indicate that a request was made and then cancelled. Requests for clearance certificates can be
reinstated in certain situations. If necessary, the Estates and Trust officer will review further.
References
Income Tax Act
• Section 159
Income Tax Information Circular
• IC82-6R10, Clearance Certificate, at www.cra-arc.gc.ca/E/pub/tp/ic82-6r10/
Tax Guides
• T4011, Preparing Returns for Deceased Persons, at www.cra-
arc.gc.ca/E/pub/tg/t4011/README.html
• T4013, T3 Trust Guide, at www.cra-arc.gc.ca/E/pub/tg/t4013/README.html
Application form
• Form TX19, Asking for a Clearance Certificate, at www.cra-
arc.gc.ca/E/pbg/tf/tx19/README.html
16.1.2 Processing requests for clearance certificates – Deceased taxpayers and trusts
(Revised February 2015)
When a request for a clearance certificate is received, the Estates and Trusts officer enters the
information in the inventory control system and:
• requests relevant returns;
• contacts the representative if information is missing or documents were not included with
the request (noted in the acknowledgement letter);
• reviews all information and returns and notes items for follow-up with the representative;
• completes Form TX20, File Request and Clearance Certificate, after reviewing the
necessary RAPID and GST/HST options for source deductions, non-residents, and other
tax matters;
• clears queries with the representative (preferably by telephone);
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• determines if an audit is warranted based on the review of the returns, financial
statements, and other pertinent information;
• issues the clearance certificate when Form TX20 is completed;
• for T3s, changes the ATS account to Inactive by setting the Master Status Code to 03
(ATS option 02.02); and
• places a copy of the clearance certificate in the permanent document (PD) folder.
For a sample letter, go to Appendix A-16.1.2, Confirmation of Clearance Certificate Issued.
Referrals to Audit – Clearance certificates
Estates and Trusts officers rely on their experience and knowledge in determining the need for a
referral to Audit. If necessary, the situation is discussed with the team leader. These criteria
indicate that a referral to Audit may be warranted:
• T1 income that exceeds the threshold set by the TSO;
• accounts with outstanding debts;
• T1 or T3 returns that indicate significant legal and trustee fees that may be capital in
nature;
• T1 return loss greater than PROTECTED;
• T3 returns that indicate capital or income distributions;
• 21-year trust renewals; or
• losses claimed under subsection 164(6) with respect to the disposition of capital and
depreciable property of the estate of the deceased taxpayer.
Additional issues may be identified during the review of returns or additional information
submitted by the representative may also indicate that a referral to Audit is warranted. Officers
should watch for:
• section 85 and spousal or common-law partner rollovers;
• personal use of company assets;
• residency questions;
• capital vs. income considerations on dispositions of estate or trust property;
• contributions to the trust created from an estate;
• income attribution concerns;
• commercial activity of the individual;
• income splitting;
• qualified small business investment shares greater than $500,000;
• multiple beneficiaries resulting in potential T3 requirements;
• buy/sell agreements on death;
• significant insurance proceeds;
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• elective returns (for example, T1 for rights and things);
• returns involving appraisal of real estate, shares of private corporations, and controlling
shareholder’s holdings;
• deceased taxpayers who had loans to/from corporations regarding possible shareholder
appropriations;
• registered retirement savings plans (RRSP);
• registered retirement income funds (RRIF);
• registered pension plans (RPP);
• deferred profit sharing plans (DPSP);
• partial distributions of capital assets that may require revaluation of all capital assets (the
estate may have to pay income tax on some capital gains, especially when assets are
distributed to non-residents);
• possible unreported Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and death
benefits;
• RAPID option DD.3 income;
• requests to carry-back losses under subsection 164(4) from the estate to the T1; and
• charitable donations on death involving a tax credit claim under subsection 118.1(6).
If an audit is considered necessary, the representative is advised accordingly.
Reference
• Paragraph 150(1)(c) of the ITA
16.1.3 Clearance certificates – Corporations with leave to surrender charter
(Revised February 2015)
A corporation may wind up its affairs and distribute its assets as a winding-up dividend to its
shareholders. The representative will submit a request to surrender the corporation’s charter and
have the company struck from the federal or provincial corporate register.
A corporation is considered to have been wound up if:
• it has followed the procedures for winding-up and dissolution provided by the appropriate
federal or provincial companies act or winding-up act; or
• it has carried out a winding-up, other than by means of the statutory procedures and has
been dissolved under the provisions of its incorporating statute.
Generally, applicable federal or provincial statutes authorize the dissolution of a corporation only
if it can be shown that:
• the debts, obligations, or liabilities of the corporation have been extinguished or provided
for, or the creditors have given consent to the dissolution; and
• after the interests of all creditors have been satisfied, all remaining property of the
corporation has been distributed among its shareholders.
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Subsection 88(1) of the ITA provides rules that apply if a subsidiary has been wound up into its
parent corporation provided that both corporations are taxable Canadian corporations and the
parent owns not less than 90% of the issued shares of each class of the subsidiary’s capital stock.
The provisions in subsection 88(2) apply to a winding up of a Canadian corporation to which
subsection 88(1) does not apply.
Corporations that are dissolved under the provisions of their incorporating statute or wound up
by law will surrender their charter according to either the Canada Business Corporations Act or
the applicable provincial corporations’ legislation. The date of issue of the dissolution certificate
is significant to the CRA, as that is when the corporation is deemed to have disposed of all of its
assets.
An involuntary dissolution can occur when a corporation fails to fulfill the requirements of the
incorporating jurisdiction, such as the payment of certain fees or filing periodic reports.
Depending on the statutes of the incorporating jurisdiction, it may be possible to restore the
dissolved corporation. The procedures vary and may include the submission of an application
and the payment of a fee. Usually, the corporation continues to operate.
Under the corporation acts, there may be a significant period of time between the struck off date
and the dissolution date, during which the corporation actively seeks or is forced to seek a formal
dissolution.
Time limits
The CRA can reassess a dissolved corporation or one that has been struck permanently from the
corporate registry, subject to the provisions of the applicable corporate statute. The corporation
does not have to be revived in the following jurisdictions that allow a civil, criminal, or
administrative action to be initiated within a specified time period following the date of
dissolution:
Incorporating
Jurisdiction
Corporate Act
Provision Time Limit
Canada 226(2) 2 years
Ontario 242(1) 5 years
Newfoundland 355(2) 2 years
New Brunswick 152(2) 2 years
Manitoba 219(2) 2 years
Saskatchewan 219(2) 2 years
Alberta 219(2) 2 years
Yukon 228(2) 2 years
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In all other jurisdictions, the corporation has to be revived before a notice of assessment or
reassessment can be issued; there are no time limits or windows of opportunity. Revivals are
usually methods of last resort to assess a corporation.
If a clearance certificate has not been obtained under subsection 159(2), it is possible to assess
the representative who is responsible for the affairs of the corporation.
After property of a corporation is distributed to the shareholders, they are liable for taxes,
interest, and penalties but only to the amount of the distribution made to them and subject to the
time limits for actions that can be taken against the shareholders. This action must be brought in
the province where the corporation had its registered office immediately before dissolution.
Prior to bringing any action, the CRA must obtain the financial statements, minute books,
shareholder register, books of account, and other records to ascertain the information relevant to
each shareholder’s distribution. The onus is on the CRA to prove the extent of the shareholder’s
liability and to determine the applicable section of the provincial corporations act.
Audit procedures for charter-surrendered corporations
These audit procedures should be completed when reviewing the account of a dissolved
corporation:
• Review RAPID:
• Confirm that the corporation has been struck off the corporate register or surrendered
its charter.
• Determine if a clearance certificate has been issued.
• Note the date of the last filed T2 return.
• Confirm that there has been no activity beyond the struck off date by reviewing
mainframe information relating to income tax and source deductions.
• Identify the shareholders and review their T1 returns to determine income that might
relate to the corporation.
• Review of returns filed:
• Obtain the relevant returns.
• Ensure that returns have been filed to the date of charter surrender.
• Determine if there is notification of a final return, wind-up, or amalgamation.
• Determine if there has been a final distribution of assets.
• Determine if a clearance certificate was issued or requested.
• In the case of an amalgamation, identify the merging corporations and determine if
the new corporation files returns.
• Consider referrals to GST/HST Registration for name changes.
• Review of the balance sheet:
• Note if the corporation had any assets such as capital property and inventory.
• Determine the amount of shareholders’ equity.
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• Determine the status of shareholder loans (asset or liability).
• Determine if subsection 15(1.2) relating to forgiveness of shareholder debt is
applicable.
• Determine if there is potential for assessing deemed dividends.
• Miscellaneous audit procedures:
• Review expenses and verify further any unusual items.
• Determine if other areas such as Registration, Collections, and Enforcement have any
concerns.
• Follow-up on the distribution of assets if the corporation has ceased operations.
• Determine if there is a change in use of real property; determine if there are any
income tax consequences.
• Review all notes (SUDS and ASCES) to determine if additional verification or
concerns have been noted.
• Determine if a final income tax audit is required.
• Consider if there are any valuation issues for capital assets or inventory.
• Consider calling the taxpayer for a certificate of revival if any collection or audit
action is required.
Certificate of revival
A certificate of revival may be required to assess a dissolved corporation. If a corporation has
distributed its assets, the corporation must be revived before an assessment can be made. In
either case, it may be in the best interests of the shareholders to ensure that the certificate is filed.
A revival deems the company to exist from the time of its incorporation so the assessment is
valid under subsection 152(1). Assessments are addressed to the dissolved corporation, in care of
the representative who is responsible for the affairs of the corporation. The representative is
assessed under subsection 159(3), but the representative’s liability for payment is limited to the
value of the property distributed.
Instructions on how to restore a dissolved corporation are available from the local corporate
registry office or the regional office of the Department of Justice.
The actions required depend on the circumstances of the case and may include:
• If the corporation has not filed returns and its retained earnings account is in a deficit
position, these procedures are required:
• Contact the taxpayer to obtain the certificate of revival and any final returns.
• Advise the taxpayer the file will be coded Inactive once the certificate of revival is
provided.
• Inform the taxpayer that the returns will be held in abeyance until the certificate is
received.
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• If the certificate is not provided, assess the taxpayer based on the last returns filed.
Ensure that refunds cannot be paid until the certificate has been issued.
• Assess shareholders with respect to income earned by the corporation from the date
of dissolution based on the shareholder’s ownership percentage. The assessments will
not be reversed until the certificate has been provided.
• If the corporation has filed returns and its retained earnings account is in a positive
position, consideration should be given to reassessing the shareholders for deemed
dividends under subsection 84(2) for the year in which the corporation was dissolved.
• If the tax centre (TC) sends several T2 returns to the TSO, including a return for a tax
year after the date of dissolution, this action will be taken:
• The TC will be instructed to process the returns for fiscal years ending before the
charter surrender date.
• The returns for the year of charter surrender are placed in the PD folder until the
certificate of revival has been obtained from the taxpayer.
When the corporation is revived, assessments will be made as a consequence of filing the final
returns. For example:
• Deemed dividends will be assessed to the shareholders using the last fiscal year before
the corporation was dissolved.
• The income of the corporation from the date of dissolution until it was restored will be
reassessed to the shareholders according to their share percentage.
Professional judgement should be exercised and materiality considered when determining
whether to pursue any adjustments for the year in which the corporation surrendered its charter.
If no adjustments are made, the corporation should be coded Inactive and the unassessed returns
placed in the PD folder.
References
Income Tax Act
• Sections 87, 88, and 159
Income Tax Interpretation Bulletins
• IT126R2, Meaning of "Winding-up," at www.cra-
arc.gc.ca/E/pub/tp/it126r2/README.html
• IT444R, Corporations – Involuntary Dissolutions, at www.cra-
arc.gc.ca/E/pub/tp/it444r/README.html
Other references
• Window on Canadian Tax, 3000, Wind-up without Dissolution, meaning of a
winding-up where a company has not been dissolved because of outstanding litigation
• Window on Canadian Tax, 3119, Assessment of Dissolved Corporation
• Form TX19, Asking for a Clearance Certificate, at www.cra-arc.gc.ca/E/pbg/tf/tx19/
16.2.0 Estates and Trusts Program
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(Revised February 2015)
In this section:
• executor refers to both the executor and the executrix; and
• representative refers to the legal representative who may be the executor/executrix,
administrator, or in Quebec, the liquidator of the estate of the deceased taxpayer.
16.2.1 Introduction
(Revised February 2015)
Whether a person dies testate (with a will) or intestate (without a will), the deceased is deemed to
have disposed of all assets immediately before death. The ITA includes provisions that apply to:
• the deceased taxpayer and the deceased’s estate created on death;
• any testamentary trust created under the deceased’s will; and
• the executor or other person administering the deceased’s affairs.
For more information, go to:
• Appendix A-16.2.1, Forms of wills; and
• Appendix A-16.2.2, Contents of a will.
When a person dies intestate, estate assets are distributed under provincial intestacy laws.
Provincial laws may affect the distribution of the deceased’s property and income taxes payable
must be determined.
The representative of the deceased is responsible for the administration of the deceased’s affairs,
including the distribution of the deceased’s remaining property to the beneficiaries after payment
of all debts, including income tax. The representative is required to obtain a clearance certificate
from the minister certifying that all taxes have been paid or properly secured before the property
is distributed to the beneficiaries. For more information, go to 16.1.0, Clearance Certificate
Program.
Definition
The ITA does not provide a definition of a trust. Tax Guide T4013, T3 Trust Guide, at www.cra-
arc.gc.ca/E/pub/tg/t4013/, defines trust as a binding obligation enforceable by law when
undertaken. A trust may be created by one of the following:
• a person (either verbally or in writing;
• a court order; or
• a statute.
Generally, a trust is created when it is properly established and there is certainty of:
1. the intent to create a trust;
2. the property to be placed in trust; and
3. who the beneficiaries of the trust are.
Deemed disposition (realization) by a trust
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Under subsections 104(4) and 104(5) of the ITA, a trust is deemed to have disposed of its capital
property (except excluded property) every 21 years at fair market value (FMV), and must report
the income, losses, and gains on the trust return for that tax year on Form T1055, Summary of
Deemed Dispositions, available at www.cra-arc.gc.ca/E/pbg/tf/t1055/. The trust is liable for taxes
owed on any gains. Some exceptions to the deemed disposition rule apply.
Referrals to Audit – Trusts
These issues may indicate the need for an audit of a trust:
• rollovers including estate freezes and butterflies;
• personal use of trust assets;
• beneficiaries of a trust reaching the age of majority;
• trusts where the 21-year rule applies;
• residency issues;
• capital and income distributions of trust property;
• contributions to the trust;
• control issues (for example, between the settlor and the trustee);
• preferred beneficiaries;
• income attribution problems;
• existence of offshore trusts;
• whether a valid trust was set up by the settlor;
• commercial activity of a trust;
• loss issues;
• family trust issues;
• multi-layered trusts; and
• indications of income splitting.
16.2.2 Estate of a deceased person
(Revised February 2015)
Income tax implications
Frequently noted issues
These issues often occur when dealing with the income tax implications of the estate of a
deceased person:
• How the estate income is to be taxed in the period during which the estate is being settled
and wound up.
• The tax consequences of estate income allocated to beneficiaries during the executor's
year.
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• The tax consequences of property dispositions when assets are transferred under the
terms of the deceased's will.
For a list of relevant legislation and administrative materials, go to Appendix A-16.2.6,
Additional legislative authority – ITA.
Confidentiality
The representative for an estate is the executor or administrator and is not acting as an agent for
other parties. Section 241 of the ITA authorizes the CRA to discuss the deceased's affairs with
the executor and prevents the CRA from discussing the tax related matters of the estate with the
beneficiaries.
Administration of the estate – General practices
To ensure uniformity of treatment, the following practice will be adopted for income earned by
the estate during the executor's year (under common law, the executor generally has one year to
administer the assets of an estate):
• While beneficiaries cannot enforce payment or distribution of estate income, any amounts
allocated to them by the representative will be included in the income of the beneficiary.
• Under Quebec law:
• The beneficiaries of estates have six months to accept or renounce their succession
from the opening of succession procedures for the family patrimony. Both spouses
share family patrimony equally and the value of the family patrimony is partitioned.
• A person may distribute personal effects, if the successors agree.
• The executor does not need a clearance certificate to distribute amounts of less than
$6,000 to the beneficiaries.
• Once the succession has been liquidated, the liquidator submits the final account
showing the net assets or deficit of the estate.
• The heirs receive the property after liquidation.
• Any distributions of income or property will be taxed in the beneficiaries' hands for
tax years ending after March 31, 1998.
• If an amount arising from the will is taxable income and capital for the trust, such as
taxable capital gains on the sale of company shares by the executor in the executor's
year, it is taxable in the hands of the executor except if it has been distributed to the
beneficiary or if a preferred beneficiary election has been made under subsection
104(14). In the latter cases, the amounts are taxable in the hands of the beneficiary.
• If the final T3 of an estate is filed for a period that terminates before the end of the
executor's year, the income and taxable capital gains earned in that period by the estate
are considered to have been paid to the beneficiary on or before the final date, unless the
trustee has disbursed these items in some other manner under the terms of the will or with
the law. This provides for payment of debts out of income.
The legal representative of the deceased person can file up to four T1 returns for the deceased for
the year of death:
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1. A final return for assets disposed of just prior to death (in the identification area of the
return, write "The estate of the late" before the name of the deceased).
2. A return for rights and things under subsection 70(2) (for example, unpaid dividends that
were declared but not paid; work in progress for professional income, if the taxpayer had
elected to exclude work in progress when calculating total income).
3. A return for a partner or proprietor for income from business under subsection 150(4).
4. A return under paragraph 104(23)(d) for income from a testamentary trust from the trust's
year-end to the date of death (this trust arises from another person's death).
The deductions and tax credits that may be claimed on the deceased's income tax returns fall into
these categories:
• Amounts that can be claimed in full on all of the returns, such as the basic amounts.
• Amounts that are divided, so that a portion of the amount is claimed on each of the
returns that are filed (for example, medical expenses, charitable donations, and other
gifts).
• Amounts that can only be claimed on the return that includes the related income (for
example, employment insurance (EI) premiums, contributions to QPP or CPP, union or
professional dues).
• Amounts that can only be claimed on the principal return (for example, losses from other
years, refund of income tax paid prior to death, and carry-forward of alternative
minimum tax).
For more information, go to Tax Guide T4011, Preparing Returns for Deceased Persons, at
www.cra-arc.gc.ca/E/pub/tg/t4011/README.html.
A testamentary trust is created on the day immediately after a person dies. Income earned or
received after the date of death is reported on Form T3RET, T3 Trust Income Tax and
Information Return, available at www.cra-arc.gc.ca/E/pbg/tf/t3ret/. The testamentary trust
continues until the executor has fulfilled all obligations related to the property and distributed the
property to the beneficiaries or until separate testamentary trusts are created through the will for
the beneficiaries. The executor must apply for a final clearance certificate for the deceased's
affairs and a certificate for the wind-up of the testamentary trust if no further trusts are created
through the will. In addition to income from property earned by the trust, the trust will also
include in income:
• salary or wages paid for the period after death, usually to the end of the month, or
payment for the full month of death if the deceased was not receiving pay, but was on
authorized leave;
• death benefits – amounts up to $10,000 are not taxable;
• future adjustments to severance pay, regardless of when the collective agreement was
signed;
• refund of pension contributions payable because of death;
• guaranteed minimum pension payments;
• DPSPs; and
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• CPP/QPP death benefits, if not reported by the recipient.
The representative may continue to look after the deceased's affairs in testamentary trusts created
by the will, if appointed to do so.
The testamentary trust acquires property from the deceased at FMV, unless there has been a
rollover of property or farm property to a spouse or common-law partner or spousal or common-
law partner trust at the deceased's adjusted cost base (ACB). This is subject to elections that may
be filed by the representative, who may or may not be the same person as the representative who
deals with the estate.
If the testamentary trust later disposes of capital property, there may be capital gains or capital
losses in the trust. Recapture or terminal losses may result if the trust disposes of depreciable
property.
Effect of dependant's relief or other measures
Although the deceased may have done tax planning regarding the disposition of assets, it is up to
the executor or the taxpayer's representative to minimize income tax payable. Consequently, the
auditor may encounter issues that relate to:
• dependant's relief provisions;
• spousal or common-law partner transfers;
• variations to wills;
• declarations by the beneficiaries to allocate funds elsewhere; and
• allowable deductions against taxable income on the special returns.
Any disclaimers, releases or surrenders must not be in favour of a particular person and must be
completed within 36 months of the deceased's death, so that the beneficiary will not be deemed
to have disposed of property allocated by the will. In these cases, the auditor should obtain the
necessary documents and verify the effect on income tax.
Terms of a will can be varied or changed by the dependant's relief provided under provincial law.
The beneficiaries, such as adult children, can reallocate property to other beneficiaries, such as
the spouse or common-law partner of the deceased, provided that the provincial conditions are
met. Tax planners will use this provision to minimize income tax applicable to the deceased's
estate. Similar results can be achieved through variation of the will, declarations, disclaimers,
and releases or surrenders. For definitions, go to Appendix A-16.2.5, Glossary – Estate of
deceased taxpayers.
Vested indefeasibly
While the estate is being administered, no beneficiary has the right to demand payment of
income or capital. Only amounts paid to the beneficiary can be included in the beneficiary's
income. For reasons such as legal disputes, estates may continue to be administered beyond the
normal executor's year.
Vesting indefeasibly is not defined in the ITA, but the conditions are noted in subsection
248(9.2) and Income Tax Interpretation Bulletin IT305R4, Testamentary Spouse trusts, at
www.cra-arc.gc.ca/E/pub/tp/it305r4/README.html. Property must be vested before any
rollover provisions can be utilized. Vesting indefeasibly refers to an enforceable right to enforce
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payment or to obtain the right of absolute ownership of the property within 36 months of the
deceased's death or some other reasonable period of time, and may occur as the result of disputes
(go to Hillis v. The Queen (1983) CTC 348, 83 DTC 5365 (FCA)).
This right can occur even if the title has not been transferred through a legal conveyance or by
registration if there are specific bequests to the spouse, spousal trust, or the child after the death
of the deceased. If the bequests are not specific, the properties will only vest when they have
been specifically identified and the beneficiaries have the enforceable right to the property. There
must be no ambiguity that the property did vest. Otherwise, any rollovers to a spouse or spousal
trust may be tainted.
Computing trust income
It is important to determine what income is considered to be taxable income of the trust. Various
sources of income and expenses have to be reviewed to determine if income is taxable or if a loss
or expense is deductible. Income from operations of the trust must be distinguished from capital
gains and/or losses.
GST/HST credit
A deceased taxpayer may have been eligible and receiving quarterly GST/HST credit payments.
If the recipient died before the scheduled month the GST/HST credit is issued, no more
payments can be issued in that person’s name or to that person’s estate. If the recipient died
during or after the scheduled month the credit is issued and the payment has not been cashed,
the payment is to be returned to be reissued to the person’s estate. If the deceased had a spouse or
common-law partner, that person may now be eligible to receive the GST/HST credit payments
based on their net income alone.
For more information, go to Tax Guide T4011, Preparing Returns for Deceased Persons, at
www.cra-arc.gc.ca/E/pub/tg/t4011/README.html.
Non-residents
A deceased taxpayer that may be deemed non-resident includes:
• a non-resident deceased taxpayer who has non-resident beneficiaries and also has taxable
Canadian property;
• a non-resident deceased taxpayer who has resident beneficiaries and taxable Canadian
property;
• a non-resident deceased taxpayer who has resident beneficiaries and no taxable Canadian
property; and
• a resident deceased taxpayer who has non-resident beneficiaries and taxable Canadian
property for distribution.
Non-resident deceased taxpayers that have property in Canada will be deemed to have disposed
of taxable Canadian property upon death. A clearance certificate is not required under section
116, since the executor must file an income tax return for the year of death under paragraph
150(1)(b), pay income tax due, and request an estate clearance certificate. If the estate clearance
certificate has not been requested in time, the executor may have filed the request under section
116.
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If non-resident beneficiaries receive taxable Canadian property and subsequently dispose of it,
they are subject to the provisions of section 116.
The rollovers permitted to Canadian residents do not apply to non-residents, unless specifically
allowed by tax treaty, as is the case under Article XXIX B of the Canada–U.S. Income Tax
Convention (1980). Capital gains arising from a deemed disposition are taxable in Canada,
unless exempt under a specific tax treaty.
There are no credits for foreign estate or inheritance taxes, unless provided for in a tax treaty.
Income paid or credited by an estate to a non-resident beneficiary is subject to Part XIII tax
under paragraph 212(1)(c), unless the income was designated under subsection 104(21) as a
taxable capital gain of a non-resident person who is the beneficiary of a mutual fund trust.
For more information, go to:
• Income Tax Information Circular IC77-16R4, Non-Resident Income Tax, at www.cra-
arc.gc.ca/E/pub/tp/ic77-16r4/README.html paragraphs 34 through 37;
• Income Tax Interpretation Bulletin IT465R, Non-Resident Beneficiaries of Trusts, at
www.cra-arc.gc.ca/E/pub/tp/it465r/README.html; and
• Income Tax Interpretation Bulletin IT420R3, Non-Residents - Income Earned in Canada,
at www.cra-arc.gc.ca/E/pub/tp/it420r3/README.html.
Under the ITA, any income a Canadian resident receives from a non-resident estate is taxable in
Canada.
If complex non-resident issues are encountered, the auditor should consult with the International
Audit Section in the TSO. For more information, go to 10.11.13, Consultation and referrals on
non-residents.
Audit considerations
The decision to audit the returns of a deceased taxpayer will depend on materiality and assessed
risk as determined by the TSO. The auditor must ensure that the applicable income tax returns
have been filed and that all taxes have been paid on behalf of the deceased. The auditor must
look to the will and any other relevant documents to determine the nature and extent of the
deceased’s property. The auditor also determines if adequate books and records have been kept
and if a clearance request is required. Audit procedures should include:
• Determine the possibility of additional distributions of property or money related to other
clearance certificate requests and valuations of property upon distribution.
• Ensure that elections, such as the election to transfer a reserve to a spouse or common-
law partner, have been properly filed.
• Determine if there are any spousal or common-law partner rollovers.
• Establish the FMV of real estate and shares.
• Determine if any releases, disclaimers, surrenders or dependant's relief provisions alter
the will.
• Find out if there have been gifts or donations of the deceased's property and ensure that
the value assigned is according to requirements.
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• Verify that deductions have been correctly claimed on the various returns filed on behalf
of the deceased.
• Determine if there is a buy/sell agreement that affects the valuation of estate property.
• Determine if the valuation of the deceased's property is affected by a life insurance
policy.
• Determine the potential income tax consequences to beneficiaries and follow up to ensure
that the transactions have been properly reported (for example, the ACB used in
calculating the capital gain on the disposition of inherited property).
• Determine if legal fees can be deducted by the estate.
• Determine if the will creates one or several trusts.
• Find out if there are non-resident beneficiaries, since the estate may be required to pay
income tax on taxable capital gains.
• Determine the residence of the estate with respect to the disposition of taxable Canadian
property.
• Determine if the deceased had transactions with a corporation, including loans, receipt of
benefits subject to subsection 15(1), and/or personal use of corporate assets such as
automobiles, homes, and airplanes.
• Ensure that donations are within prescribed limits.
• Determine if there are transactions where valuation at the time of disposition may require
review (for example, the sale of a proprietorship business to a partnership or a
corporation or the sale of a partnership to a corporation).
• Determine if there is a loss carry-back to prior years.
• Ensure that capital gains are not taxed twice if the taxpayer claimed a capital gains
exemption relating to property owned on February 22, 1994, and held until the date of
death.
• Determine the income tax treatment of depreciable property, buildings with contiguous
land, and replacement property.
For a sample checklist/working paper, go to Appendix A-16.2.4, Checklist – Estates and Trusts.
Example 1
Mr. Taxpayer died on May 10, 1999. He is survived by his wife and two adult children. The
estate assets are:
Real estate (joint tenancy with wife) $250,000
Vacant Land 300,000
Stocks 405,000
Bonds 135,000
Joint Bank account 12,500
Bank account (deceased only) 15,000
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Life insurance (payable to estate) 200,000
Life insurance (payable to wife) 100,000
Total value of the estate $1,417,500
Situation 1 – The relevant clause in the will reads as follows:
"To my wife, Mrs. Taxpayer, providing she survives me for a period of 30 days, my entire
estate for her own use absolutely."
Provided Mrs. Taxpayer survives the 30 days, the entire estate goes to her under subsection 70(6)
of the ITA. Note that the joint property passes by operation of common law, the insurance
(where she is the beneficiary), under the terms of the insurance policy, and the remaining assets
by the terms of the will.
Situation 2 – The relevant clause in the will reads as follows:
"To hold my entire estate in trust for the benefit of my wife, Mrs. Taxpayer, and to pay the
income to, or for the benefit of my said wife until her death or remarriage. I further provide
that my executor and trustee may, at his sole discretion, pay to or for the benefit of my
children, such amounts as he deems necessary, out of the capital of my estate to advance
them in life. Such payments may be made during the life of my wife, subject only to there
being sufficient income earned to provide for her. On the death or remarriage of my wife, the
remainder of my estate is to be divided equally between my children."
The will fails to meet the exclusive trust requirements of the ITA as the result of the remarriage
clause and the clauses that provide for the children during the wife's lifetime. The wife is entitled
to the joint property, the bank account, and the life insurance under subsection 70(6), but the
remainder of the estate that transfers to the trust is subject to subsection 70(5).
Situation 3 – Mr. Taxpayer died intestate.
Mrs. Taxpayer is entitled to the joint assets, as the deed and agreements indicate that Mr. and
Mrs. Taxpayer are joint tenants (in this case, the property passes to the last survivor in the event
of death), and the insurance policy names her as the beneficiary.
The provincial statute for intestate succession determines the remaining distribution. It will
usually be pro-rated between the wife and children after an initial provision of a certain amount
for the wife.
Example 2
Mr. Connaisseur died on May 10, 1999. He left artwork worth $300,000 (the original cost was
$50,000) to a museum. In addition, he left public company shares in XYZ Company worth
$50,000 (the original cost was $150,000) to the museum. Mr. Connaisseur's executor can elect to
transfer the property to the museum at a value between the cost and the FMV to offset the losses
on the shares. In addition, a non-refundable tax credit equal to the amount of the art is available.
The donation credit may also be carried back to the prior year to the extent it was not used on the
final return.
Example 3
On July 1, 1999, Mr. Landlord died and left a rental building to his adult son. The FMV of the
land and building was $500,000. The original cost of the building was $1,000,000 with $800,000
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of capital cost allowance (CCA) claimed to December 31, 1998. The original cost of the land
was $200,000. There is no V-day value to take into consideration. The son continued to rent the
property after he received it from the estate.
The income tax implications to the deceased under the ordinary rules for depreciable property
would be:
Land Building
Original cost of the property $200,000 $1,000,000
Undepreciated capital cost (UCC)
to December 31, 1998
200,000
Allocated proceeds 500,000 Nil
Total $300,000 $ 200,000
(Capital Gain) (Terminal Loss)
In this case, the normal rules for depreciable property transferred at FMV upon the deemed
disposition by the deceased do not apply because there is land contiguous to the building. The
deceased's proceeds of disposition are re-determined to reduce the terminal loss to nil.
Land Building
Original cost of the property $200,000 $1,000,000
UCC to December 31, 1998 200,000
Allocated proceeds 300,000 200,000
Total $100,000
(Capital Gain)
Nil
(Terminal Loss)
The tax implications to the adult son for the land and building under subsections 13(21.1) and
13(21.2) and paragraph 70(5)(d) of the ITA are:
Land Building
Cost $300,000 $1,000,000
Deemed CCA 800,000
Adjusted cost $300,000 $ 200,000
Note: The provisions of subsections 13(4) and 44(1) do not apply to deceased taxpayers
if replacement property was involved. For more information, see paragraph 25 in Income
Tax Interpretation Bulletin IT259R4, Exchange of property, at www.cra-
arc.gc.ca/E/pub/tp/it259r4/README.html.
References
Jurisprudence
Rights or things
• Lamash (L.) Estate v MNR 1990 2 CTC 2534 (TCC)
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• P. Dushinsky Estate v MNR 1990 2 CTC 2012 (TCC)
• Montreal Trust Co. (Tory Estate) v MNR 1973 CTC 434 (FCA)
Fair market value
• Mastronardi Estate v R (1976) CTC 572, 576, DTC 6306 (FCTD)
Spousal rollover
• Husel Estate v. The Queen 94 DTC 1765 (TCC)
• Hillis Estate v. The Queen 83 DTC 5365 (FCA) reversing in part 82 DTC 6249
Property transferred to spouse: Vesting
• Parkes v MNR 86 DTC 1214 (TCC)
• Boger Estate v MNR (1993) CTC 81 (FCA)
• Greenwood Estate v Canada (1994) 1 CTC 310 (FCA)
Farming
• Bouchard Estate v MNR 93 DTC 1163 (TCC)
Reserves
• Fontaine v MNR 95 DTC 5580 (FCA), 88 DTC 1656 (TCC)
Taxation of an estate
• Pappas Estate v MNR 90 DIC 1646 (TCC) (also includes valuation issues)
• Evans Estate v MNR 1960 SCR 391
Disclaimers, releases, and surrenders
• Herman v MNR 61 DTC 700
Allocation of income
• Roy v MNR 78 DTC 1123 TRB
• Ida Brown v MNR 50 DTC 218
Direction to maintain others
• Wilson v MNR 55 DTC 1065
• Saunders v MNR 51 DTC 292
Legal fees
• Akenhead Estate et al v. MNR 83 DTC 105
Non-resident
• Gladden Estate v. The Queen 85 DTC 5188 (FCTD), 84 DTC 1242 (TCC)
Training material
• Learning product TD1160-000, Estates and Trusts – Audit of a Deceased Person’s
Returns
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• Learning product TD1161-000, Estates and Trusts – Auditing Trusts
• Estate and Trust Manual, 1989
Income Tax Interpretation Bulletins
• IT381R3, Trusts – Capital Gains and Losses and the Flow-Through of Taxable Capital
Gains to Beneficiaries, at www.cra-arc.gc.ca/E/pub/tp/it381r3/README.html
• IT394R2, Preferred Beneficiary Election, at www.cra-
arc.gc.ca/E/pub/tp/it394r2/README.html
• IT500R, Registered Retirement Savings Plans – Death of Annuitant, at www.cra-
arc.gc.ca/E/pub/tp/it500r/README.html
• IT513R, Personal Tax Credits, at www.cra-arc.gc.ca/E/pub/tp/it513r/README.html
• IT524, Trusts – Flow-through of taxable dividends to a beneficiary – After 1987, at
www.cra-arc.gc.ca/E/pub/tp/it524/README.html
Other references
• Tax Guide T4013, T3 - Trust Guide, at www.cra-arc.gc.ca/E/pub/tg/t4013/
• Form T3RET, T3 Trust Income Tax and Information Return, at www.cra-
arc.gc.ca/E/pbg/tf/t3ret/README.html
• Form T3 (slip), Statement of Trust Income Allocations and Designations, at www.cra-
arc.gc.ca/E/pbg/tf/t3/README.html
• Preparing the Income Tax Return of a Deceased Person, Ministère du Revenu du Québec
• Successions, Ministère de la Justice du Québec
• Tax Topic 1317, Planning for the Terminally Ill
• Taxation and Estate Planning, third edition, Cullity and Brown
16.2.3 Income allocated and designated to beneficiaries
(Revised February 2015)
A key factor in computing a trust’s taxable income is the allocating and designating of income to
beneficiaries. Income is allocated and designated either to fulfill the terms of the trust agreement
or will or because the trustee may be entitled to allocate or designate income to beneficiaries.
Therefore, the trust, the beneficiaries, or a combination of the trust and the beneficiaries may
report the income earned by the trust.
Reporting requirements are based on various rules, elections and designations. Amounts payable
to the beneficiaries are generally deductible to the trust and must be included in the income of
the beneficiary (subsections 104(6) and 104(13) of the ITA).
The trustee must provide a Form T3 (slip), Statement of Trust Income Allocations and
Designations, available at www.cra-arc.gc.ca/E/pbg/tf/t3/README.html, to each beneficiary
who has received income from the trust, and has to file Form T3SUM, Summary of Trust Income
Allocations and Designations, available at www.cra-arc.gc.ca/E/pbg/tf/t3sum/, to ensure that all
income allocated and designated by the trust is reported accurately by beneficiaries.
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It is important to be able to match the amounts deducted by the trust and those reported by the
beneficiaries.
Types of income that may be designated to a beneficiary
These types of income may be designated to a beneficiary:
• net taxable capital gains;
• certain lump-sum pension benefits;
• dividends from taxable Canadian corporations;
• foreign business income;
• foreign non-business income;
• pension income that qualifies for acquiring an annuity for a minor beneficiary;
• retiring allowance that qualifies for a transfer to an RPP or an RRSP; and
• pension income that qualifies for the pension income amount.
Amounts allocated and designated to beneficiaries are reported on Form T3SCH9, Schedule 9,
Income Allocations and Designations to Bbeneficiaries, available at www.cra-
arc.gc.ca/E/pbg/tf/t3sch9/, of Form T3RET, T3 Trust Income Tax and Information Return,
available at www.cra-arc.gc.ca/E/pbg/tf/t3ret/.
Election designating trust income
An election to designate trust income to the beneficiaries must apply to all beneficiaries and be
proportional to their share of reported trust income.
In the past, the election to designate income of the trust had to be filed with the T3 return for the
tax year to which it pertained. However, as a result of the Tax Court of Canada decision in
Jeannette Lussier v. The Queen, 99 DTC 1029, (1999), the CRA has taken the view that a
designation under subsections 104(13.1) or (13.2) may be amended, late-filed, or revoked in
certain circumstances.
16.2.4 Preferred beneficiaries
(Revised February 2015)
Income tax implications
General discussion
Under subsection 104(14) of the ITA, the preferred beneficiary election, certain income of the
trust can be allocated to a preferred beneficiary.
The rules relating to preferred beneficiaries of trusts were amended for tax years ending after
1996 as the result of income-splitting problems that resulted from tax planning using the
preferred beneficiary election provisions in the ITA.
For more information, go to Income Tax Interpretation Bulletin IT394R2, Preferred Beneficiary
Election, at www.cra-arc.gc.ca/E/pub/tp/it394r2/README.html.
The major issues pertaining to preferred beneficiary elections include:
• who can make the election;
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• eligibility of the trust;
• terms of the trust;
• procedure for filing the election (Regulation 2800);
• trusts excluded from the preferred beneficiary election;
• income of the preferred beneficiary; and
• attribution of income.
Who can make the election
The trustee has the authority to bind the trust and the preferred beneficiary and makes the
preferred beneficiary election. If the preferred beneficiary is not capable of signing the election,
the legal guardian can sign the election. If there is more than one preferred beneficiary, not all of
the preferred beneficiaries are required to sign the election.
If more than one trustee governs the trust, the trustee who signs the election must have the
consent of the other trustees.
Eligibility of the trust
Prior to the amendments, the ITA allowed trusts to use the preferred beneficiary election to
allocate accumulating trust income to certain individuals in the family, such as:
• the settlor of the trust;
• a spouse or common-law partner or former spouse or former common-law partner of the
settlor of the trust; and
• a child, grandchild, or great-grandchild of the settlor of the trust, or the spouse or
common-law partner (but not the former spouse or former common-law partner) of any
such person.
For trusts whose tax year ends after 1996, the ITA restricts the preferred beneficiary election to
an individual who is one of the above and is also:
• eligible for a disability tax credit under subsection 118.3(1); or
• 18 years of age or older, for whom a dependant tax credit under subsection 118(1) can be
claimed by another individual that is a close family member.
This qualification results in a very limited number of eligible preferred beneficiaries. The
disability status of the beneficiary can be verified on page two of RAPID Option L, by placing an
X beside “Disability.”
In addition, trusts that are exempt from the 21-year deemed disposition rules cannot make a
preferred beneficiary election. This also applies to certain inter vivos trusts that do not have a
settlor.
Terms of the trust
The term settlor is defined in subsection 108(1). An inter vivos trust created by more than one
individual (other than a married couple) does not have a settlor. As a result, such a trust cannot
make a preferred beneficiary election since it does not have a preferred beneficiary as defined in
the ITA.
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Procedure for filing the election
The preferred beneficiary election is made under the rules outlined in Regulation 2800. For a list
of documents to be included in the election, go to Income Tax Interpretation Bulletin IT394R2,
Preferred Beneficiary Election, at www.cra-arc.gc.ca/E/pub/tp/it394r2/README.html.
Trusts that have made the preferred beneficiary election for federal income tax purposes are now
deemed to have made the election for Quebec income tax purposes. Trusts will have to enclose
the election with their Quebec income tax return. The restricted federal rules are applicable in
Quebec for tax years ending after March 31, 1998.
A preferred beneficiary election must either be filed with the return or may be filed separately
but no later than 90 days after the end of the trust’s tax year for which the election is made. An
election filed on time is valid even if the trust late-filed the T3. If any elections are late-filed, the
trust is taxed on the accumulating income. However, taxpayer relief provisions may apply in
certain circumstances. For more information, go to 3.2.0, Taxpayer relief provisions.
Trusts excluded from the preferred beneficiary election
The preferred beneficiary election applies to 1988 and subsequent tax years and is not available
to these trusts:
• a non-resident trust;
• a trust exempt from tax;
• an amateur athlete trust;
• an employee trust;
• a master trust;
• trusts governed by:
• a DPSP;
• an employee benefit plan;
• an employee profit sharing plan;
• a foreign retirement arrangement;
• a registered education savings plan (RESP);
• an RPP;
• an RRIF;
• an RRSP; and
• a registered supplementary unemployment benefit plan.
• a related segregated fund trust;
• a retirement compensation arrangement trust;
• a trust whose direct beneficiaries are one of the above-mentioned trusts;
• a trust governed by an eligible funeral arrangement or a cemetery care trust;
• a communal organization; and
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• for 1999 and subsequent years, a trust where all or substantially all of the trust’s property
is held for the purpose of providing benefits to individuals for employment or former
employment.
Any income arising from the deemed disposition of trust property is excluded from the trust’s
accumulating income for the year and is not eligible for the preferred beneficiary election if it
comes from one of the following:
• a post-1971 spousal or common-law partner trust;
• a pre-1972 spousal or common-law partner trust; or
• a trust that elected to defer the 21-year deemed disposition date.
Accumulating income of a trust does not include amounts paid or deemed paid from Net Income
Stabilization Account (NISA) Fund No. 2. However, the preferred beneficiary election can
include these amounts paid to a testamentary trust while the beneficiary spouse or common-law
partner is alive.
Income of the preferred beneficiary
These types of accumulating income of the trust can be allocated under the terms of the trust or
will and be designated in total or in part to the preferred beneficiary:
• taxable capital gains;
• actual amount of dividends from taxable Canadian corporations;
• foreign business income; and
• foreign non-business income.
Attribution of income
There may be instances where some of the elected income is attributed to the settlor or to another
person under sections 74.1 to 74.5 or subsection 56(4.1), if the preferred beneficiary is the
spouse or common-law partner or a minor child of the settlor. There may also be situations
where subsection 75(2) applies. This provision provides for the attribution of income from a trust
property to a person who transferred the property to the trust and continues to maintain certain
rights over the property.
An amount designated under subsections 104(13.1) or 104(13.2) reduces the ACB of the
beneficiary’s capital interest in the trust, unless the interest was acquired for no consideration
and the trust is a personal trust.
For more information, go to Income Tax Interpretation Bulletins:
• IT369RSR, Special Release: Attribution of Trust Income to Settlor, at www.cra-
arc.gc.ca/E/pub/tp/it369rsr/README.html
• IT510, Transfers and loans of property made after May 22, 1985 to a related minor, at
www.cra-arc.gc.ca/E/pub/tp/it510/README.html
• IT511R, Interspousal and Certain Other Transfers and Loans of Property, at www.cra-
arc.gc.ca/E/pub/tp/it511r/README.html
Non-resident beneficiaries
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If there are non-resident beneficiaries of a trust, Part XII.2 and Part XIII taxes may be applicable.
Audit considerations
These steps should be considered with respect to preferred beneficiary issues:
• Determine if the income allocated to the preferred beneficiary has been correctly
reported.
• Ascertain how the trustee keeps track of income allocated to the preferred beneficiary.
• Verify that the beneficiary has a valid Disability Status on RAPID Option E, for tax years
ending after 1996.
• Review the relevant T1 returns to ensure the beneficiary meets the conditions for making
a preferred beneficiary election.
• Ensure that the election was filed on time.
• Review any changes in the trust arrangement to determine if retroactive tax planning has
taken place.
• Determine from discussions with the taxpayer if an advance income tax ruling was
obtained. If so, ensure that the transaction was carried out according to the ruling.
Example 1
Adam has a grandson, Noah, who was born blind. In 1990, Adam set up a trust for Noah. At that
time, Noah was 10 years old. The trustee is Noah’s father, Harold. The trust document indicates
that income earned from the trust is retained in the trust until Noah is 21 years old.
In 1999, the trust realized capital gains of $6,500. Noah is now a university student. Due to his
disability, Noah qualifies as a preferred beneficiary. Noah and Harold may jointly elect to
allocate $6,500 to Noah. It is beneficial to have the gains taxed in Noah’s hands rather than in the
trust as the trust is subject to a higher rate of tax. The trust will claim $6,500 as a deduction
regarding the allocation of the accumulating income for the year. Noah will receive a T3 slip and
report the income on his T1 return, although the income will be retained in the trust.
Example 2
Mark is the trustee of an inter vivos trust that earned foreign non-business income in 1999. Mark
made a preferred beneficiary election (joint with the beneficiary, who is not an infirm dependent
but is the 15-year-old grandchild of the settlor) and then designated the income to retain its
identity. The preferred beneficiary election is not allowable in this case. The trust is required to
report the income on the T3 return and to pay the applicable income tax.
If the beneficiary was an infirm grandchild, the designation of income as non-foreign business
income would be valid and the funds would be taxed in the grandchild’s hands.
Example 3
Roberta is 10 years old. Because she is severely disabled, Roberta qualifies for the disability
credit under section 118.3 of the ITA. Roberta sued her grandmother, through her parents, to
recover insurance damages with respect to a severe brain injury that left her disabled. The injury
was incurred in a car accident while Roberta was a passenger in her grandmother’s car. After
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several years of litigation, a settlement was reached whereby a trust was set up with Roberta as
the settlor and the sole beneficiary. The trust terminates upon Roberta’s death.
Roberta’s parents are the trustees of the trust and they have full discretion to use the income of
the trust for her benefit. The trustees can only encroach on the capital with the express consent of
the courts. The trust is allowed to accept contributions if the total of these contributions is less
than the amount of the insurance settlement. The extra contributions are segregated from the
settlement amount in order to keep track of income earned from the various sources.
The income tax consequences are:
• The trust is a personal trust as defined in subsection 248(1).
• Roberta is the settlor of the trust if the total FMV of any other capital contributions to the
trust is less than the insurance settlement.
• The insurance settlement is non-taxable.
• Any income or loss from property acquired as a result of the settlement held in trust is
deemed under subparagraph 75(2)(a)(i) to be Roberta’s income. However, under
paragraph 81(1)(g.1), it is excluded from her computed income until the end of the year
in which she reaches the age of 21 and is included in the income of the trust.
• Any income earned by the trust that is paid or payable to Roberta under subsection
104(13) or subject to a preferred beneficiary election under subsection 104(14) is exempt
from income tax under paragraph 81(1)(g.1).
• When Roberta turns 21, the trust can elect, under subsection 81(5), deeming it to have
disposed of any capital property relating to the insurance settlement for proceeds of
disposition equal to the FMV of the property immediately before her birthday and to have
reacquired the property at a cost equal to the proceeds.
• Roberta is a preferred beneficiary because she is disabled and is entitled to the credit
under section 118.3.
• The attribution rules in sections 74.1, 74.2, and 74.3 do not apply to income earned or
gains realized with respect to property acquired under the insurance settlement or any
substituted property.
References
Income Tax Act
• Subsection 104(12), Deduction of amounts included in preferred beneficiaries’ incomes
• Subsection 104(13), Income of beneficiary
• Subsection 104(14), Election by trust and preferred beneficiary
• Subsection 104(14.01), Late, amended or revoked election
• Subsection 104(14.02), Late, amended or revoked election
• Subsection 104(15), Allocable amount for preferred beneficiary
• Subsection 108(1), Definition of preferred beneficiary
• Subsection 248(25), Definition of beneficially interested
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• Subsection 251(1), Arm’s length
• Subsection 251(4), Definitions concerning groups
• Section 118.3, Credit for mental or physical impairment
Income Tax Regulation
• 2800, Elections in respect of accumulating incomes of trusts
Income Tax Interpretation Bulletins
• IT381R3, Trusts – Capital Gains and Losses and the Flow-Through of Taxable Capital
Gains to Beneficiaries, at www.cra-arc.gc.ca/E/pub/tp/it381r3/
• IT394R2, Preferred Beneficiary Election, at www.cra-
arc.gc.ca/E/pub/tp/it394r2/README.html
• IT465R, Non-Resident Beneficiaries of Trusts, at www.cra-
arc.gc.ca/E/pub/tp/it465r/README.html
• IT500R, Registered Retirement Savings Plans - Death of an Annuitant, at www.cra-
arc.gc.ca/E/pub/tp/it500r/README.html
• IT513R, Personal Tax Credits, at www.cra-arc.gc.ca/E/pub/tp/it513r/README.html
• IT524, Trusts – Flow-through of taxable dividends to a beneficiary – After 1987, at
www.cra-arc.gc.ca/E/pub/tp/it524/README.html
Other references
• Tax Guide T4013, T3 - Trust Guide, at www.cra-arc.gc.ca/E/pub/tg/t4013/
• Form T3RET, T3 Trust Income Tax and Information Return, at www.cra-
arc.gc.ca/E/pbg/tf/t3ret/
• Form T3 (slip), Statement of Trust Income Allocations and Designations, at www.cra-
arc.gc.ca/E/pbg/tf/t3/
16.2.5 Bare trusts
(Revised February 2015)
General comments
A bare trust is a form of inter vivos trust and is not defined in the ITA. Auditors must rely on
CRA policy to determine the tax treatment of these trusts. The CRA generally considers the trust
to be a bare trust when:
• the trustee has no significant powers or responsibilities and can take no action without
instructions from the settlor regarding any aspect of the trust;
• the trustee’s only function is to hold legal title to the property; and
• the settlor is the sole beneficiary and can cause the property to revert to them at any time.
Under a bare trust, the settlor and the beneficiary are usually the same person. The trustee
appointed by the settlor plays a passive role with respect to the property; the trustee only holds
the property and performs minimal administrative functions to protect the trust assets. The trust
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is not considered a bare trust if the trustee has other duties that involve independent or
discretionary powers.
A bare trust corporation may be viewed as a passive agent for another person. The other person
is considered to be the beneficial owner of the property and all dealings related to the property
are attributed to that person or, in some arrangements, to the shareholders of the other
corporation that is the beneficial owner.
For example, the trustee of a bare trust could be a nominee corporation that holds legal title to
property in trust for third parties under a trust agreement (or other documents establishing a
trust), and has limited powers, duties, and responsibilities. The third parties could be the
shareholders provided they exercise all of their discretionary powers over the property outside
the trustee corporation. For instance, the third parties should provide instructions to the
corporation or the directors, through whom the corporation acts, regarding management of the
bare trust property. However, if the directors are also the beneficial owners and if they cause the
corporation to perform management functions without clear written instructions from the
shareholders, the CRA will consider this a true trust relationship and not an agency relationship
as exists in a bare trust.
It is the view of the CRA that there must be a written agreement that includes the three parties
for a trust, including a bare trust, to exist. A written agreement must address the three certainties
previously mentioned and identify the terms. Specifically, the written agreement must contain
the name and address of the beneficiary, a description of the property, and the object of the trust.
The agreement must also take effect before the creation of the trust, not after the fact.
Bare trusts are used for a variety of purposes, including:
• to avoid transfer fees in real estate transactions by arranging for changes in beneficiaries
with no change in a nominee corporation;
• to hold securities or funds in trust, such as NISA funds, publicly traded shares, bonds, or
warrants registered in a broker’s name;
• to administer partnerships or joint ventures if a nominee corporation holds title to the
property for a group of co-owners;
• to handle reorganizations of ongoing commercial enterprises involving multiple steps and
transfers of ownership; and
• in the oil and gas industry, to allow a vendor to hold assets in a bare trust until
completion of the sale after the effective date (the effective date can be different from the
date of sale).
Quebec civil law
Under civil law in Quebec, the bare trustee is the mandatory (agent) and the beneficial owner is
the mandator (principal). A trust in Quebec is a patrimony by appropriation, if the property is
transferred to the trust, and the possession and administration of the property are given to one or
more trustees. The concepts may differ in law, but the intent is that the concept of trust in civil
law is the same as in common law.
Existence and nature of the trust
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The general view is that if a person holds property in trust as an agent for a beneficial owner and
not as the trustee, all dealings related to the property are attributed to the beneficial owner. If a
trustee performs functions in addition to holding bare legal title, but does so on the instructions
of the beneficial owner, the trust may still be a bare trust. If the trustee has independent powers
and discretion with respect to the property, a true trust relationship exists.
It is possible that an agency relationship and a trust relationship can co-exist. The auditor will
have to examine the facts and the trust documents to determine the nature of the relationship.
There may be situations when a written trust agreement does not exist. Consequently, the auditor
will have to look at secondary factors and it will be a question of fact if a bare trust exists. The
auditor may ask the taxpayer to provide documents that describe the intentions of the bare trust.
In this case, the auditor should be aware of the possibility for retroactive tax planning.
Income tax implications
The general view is that if a person holds property in trust as an agent for a beneficial owner and
not as a trustee, all dealings with the property are attributed to the beneficial owner.
If property is held by a bare trust, the trust is ignored for income tax purposes. The settlor is
considered to be the owner of the property held by the trustee, who is the agent of the settlor. As
a result, all income, losses, terminal losses, recapture, gains, etc. arising in respect of the property
are attributed to the settlor.
Under subsection 104(1), trusts do not include arrangements where a trust can reasonably be
considered to act as an agent for its beneficiaries with respect to all dealings in all of the trust’s
property. Paragraph 248(1)(e) provides that there is no disposition of property where the transfer
does not involve a trust and does not result in a change in the beneficial ownership. Therefore,
transfers of property into and out of a bare trust are not considered dispositions for purposes of
the ITA.
If a Canadian resident transfers property to a non-resident bare trust, the transfer will be a
disposition and the bare trust is treated as an ordinary trust under the ITA. Any complex issues
involving non-resident bare trusts should be referred to the International Audit section in the
TSO. For more information, go to 10.11.13, Consultation and referrals on non-residents.
Audit considerations
These audit procedures should be considered:
• Review the trust documents to determine if a trust exists.
• If an income tax ruling was obtained with respect to a bare trust, verify that the applicable
transactions have been carried out according to the ruling.
• Determine if a bare trust exists under the trust agreement by reviewing the trustee’s duties
outlined in the trust deed and by observing the actions of the trustee regarding the trust
property.
• Review any written instructions from the beneficiary to the trustee to determine if the
trust is a bare trust.
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• Review income tax mainframe information relating to the trustee and others involved
with the trust to assist in determining if the appropriate person is reporting taxable
transactions.
• Examine the income tax returns (T1, T2, and T3) of all taxpayers involved in the
transactions to determine the treatment of the trust assets for income tax purposes.
Example 1
In 1999, a Canadian resident transfers resort property in Florida to a non-resident bare trust. The
trustee is a lawyer who is resident in Florida. The transfer is a disposition for proceeds not less
than FMV of the net trust assets associated with the interest. The rules in subsection 107.4(3) of
the ITA may apply. The trust will be treated as an ordinary trust for income tax purposes and not
as a bare trust.
Example 2
This example shows that auditors must examine the circumstances and the facts to determine if a
bare trust exists.
Mr. X, who receives a disability pension, purchased real property registered in his name for the
use and benefit of Ms. Y. The purchase was financed partly by a mortgage from a financial
institution. Mr. X paid the closing costs for the property before the purchase. Ms. Y then got the
keys and moved into the property. Mr. X has no right to enter, inspect, or view the property
without the express written agreement of Ms. Y. There is no trust agreement between Mr. X and
Ms. Y, but there is a written agreement with these terms:
1. Ms. Y is responsible for all property expenses such as insurance, repairs, taxes, utilities
and services.
2. Ms. Y will pay Mr. X a monthly payment until the closing costs and mortgage payments
have been repaid.
3. Mr. X is responsible for making the mortgage payments until the property is transferred
to Ms. Y.
In 1999, Ms. Y sold the property and directed Mr. X to deal with the real estate agents to close
the sale. Ms. Y received the net proceeds of the sale after paying the real estate commission,
mortgage, closing and legal costs related to the sale.
In this case, the written agreement does not constitute a trust or a bare trust, as Ms. Y is not the
settlor. Ms. Y is not the sole beneficiary, as she cannot cause the property to revert to her at any
time until she has repaid Mr. X. Mr. X does not hold the property as a bare trust for Ms. Y
because one of the conditions for a trust is not present. Mr. X is not the sole beneficiary and
cannot cause the property to revert to him at any time.
However, based on the facts, Ms. Y is the beneficial owner of the property subject to a
conditional sales agreement, as she has the right of possession, the obligation to repair, and the
obligation to pay all the expenses related to the property. For more information, go to Income
Tax Folio S1-F3-C2, Principal Residence, at www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-
c2-eng.html.
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Consequently, Ms. Y will have to report the transaction if there are any income tax
consequences. She will be able to claim the principal residence exemption to reduce or eliminate
any income tax arising from the sale of the property. Mr. X, who receives a disability pension,
will not have to report the transaction and his disability pension will not be adversely affected.
References
Income Tax Act
• Subsection 248(1), Definitions of individual, person, trust, taxpayer, and disposition
• Subsection 104(1), Reference to trust or estate
• Subsection 104(2), Taxed as individual
• Subsection 108(1), Definition of trust
• Subsection 248(25.1), Trust to trust transfers
• Subsection 107.4(1), Qualifying disposition
• Subsection 107.4(3), Tax consequences of qualifying dispositions
Income Tax Folio
• S1-F3-C2, Principal Residence, at www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-c2-
eng.html
Jurisprudence
In these cases, the establishment of if there was a bare trust depended on the facts in each case:
• Brookview Investments Ltd. et al. vs. MNR (1963) CTC 316
• Trident Holdings Ltd. v. Danand Investments Ltd., (1988) 64 O.R. (2nd) 65 (Ont. C.A.)
• Demond Jr., 99 DTC 893
• Patricia M. Fraser v. Her Majesty, The Queen, 95 DTC 5684
• Pan American Trust Co. v. MNR (1949) CTC 229
• Christie v. MNR (1984) CTC 2533
• J. N. Laxton v. The Queen, (1988) 1 CTC 19
• Bibby v. R. (1983) CTC 121 83 DTC 5148 FTD
• Ferrel v. R. (1999) CTC 101 FCA from CTC 2269 (1998) TCC (precedent case
discussing the trust terms)
16.2.6 Mutual fund trusts
(Revised November 2013)
Mutual fund trusts are a type of unit trust that resides in Canada, whose only undertaking is the
investment of its funds in property (other than real property or an interest in real property) or
acquiring, maintaining, leasing, or managing real property or an interest in real property that is
capital property of the trust. There are prescribed conditions relating to its units and unit-holders.
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Mutual fund trusts are entitled to a refund of capital gain for distributions paid to the trust’s unit-
holders. As a result, the double taxation of capital gains is prevented. Mutual fund trusts are
required to distribute substantially all of their taxable income and capital gains to its unit-holders,
resulting in the trust paying virtually no income tax.
Section 132.2 of the ITA provides for an election whereby a mutual fund corporation or trust
transfers its property to a mutual fund trust without realizing any accrued gains on the property.
The transfer also allows the investors to trade their units with no immediate tax effect applicable
to transfers after June 1994.
Mutual fund trusts can elect to have a fiscal period end of December 15, under subsection
132.11. Effective 2000 and subsequent years, the election can be revoked.
References
Income Tax Act
• Subsection 108(2), When a trust is a Unit Trust
• Subsection 132(6), Meaning of mutual funds
• Section 132.11, Taxation year of mutual funds trust
16.2.7 Real estate investment trust
(Revised February 2015)
The real estate investment trust (REIT) is a type of mutual fund trust. A REIT is an inter vivos
commercial trust where units or interests in a commercial trust can be bought and sold
(subsection 132(6) of the ITA).
REITs are used primarily in the syndication of real estate deals or as an alternative to other tax
shelter and investment vehicles. These other investment vehicles have had problems related to
valuation and redemption of mutual fund trusts and to the experience of investors in limited
partnerships.
The REIT investor is concerned about the liquidity and yield of the investment. REITs have a
long history in the United States. A considerable body of income tax law relates to REITs that
are specifically defined for income tax purposes both in Canada and in the United States. In
Canada, REITs have begun to be privately placed and publicly listed.
There are various types of REITs:
• mortgage REIT – invests in mortgage loans secured by real estate;
• equity REIT – formed to acquire an interest in real property, real estate, or a particular
investment, such as health care facilities;
• hybrid REIT – a combination of a mortgage REIT and an equity REIT; and
• specialty REIT – formed to own and operate nursing homes or hotels.
A REIT is usually a closed-end investment trust; the units are traded on Canadian stock
exchanges and the trust’s activity is passive investment. REITs are closed-end trusts because the
holder cannot redeem the units on demand, but they can be redeemed under limited
circumstances.
REITs are of interest to various investors, including:
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• tax-exempt entities looking for a good return on investment;
• owners of property seeking capital to upgrade or refinance capital real property; and
• financial institutions wishing to realize real estate portfolio investments.
REITs are not mutual funds under the Securities Act, but under the ITA they can be treated as
mutual fund trusts. They are usually set up by large corporations and have these characteristics:
• The REIT must be a Canadian resident.
• The trust issues units to investors called unit-holders.
• There must be at least 150 unit-holders investing at least $500 per unit.
• Each unit is entitled to one voting right.
• Unit-holders do not have precedence over one another.
• Non-residents cannot own more than 49% of the units.
• A prospectus must be available to investors if the REIT is publicly listed.
• Private placements can be made.
• Any income earned in the trust is distributed to the investors who report the income,
capital gains, recapture, etc. allocated to them on a unit basis.
• The income is not taxed at the trust level and any distribution from the REIT is not a
taxable dividend.
The REIT invests passively in real property using these methods:
• Investing through a holding corporation that acquires hotels, nursing homes, or
commercial properties that are leased to an operating corporation that may also be related
to the holding company.
• The REIT may own shares of a real estate corporation or have a partnership interest in
real property.
• The REIT may be involved in leasing or managing real capital property.
• The operating company may operate the hotels through a joint venture or management
agreement with the original owner of the hotels, who may act as an advisor to the REIT
with respect to the property.
Advantages of REITs include:
• Small investors can acquire REIT units.
• REITs are generally sponsored by well-known financial institutions.
• The REIT is not subject to tax under Part I.3 (tax on large corporations) because it is not
a corporation.
• REITs are qualified investments under Regulations 4900(1)(d) and 4900(1)(d.1) for
RRSPs, RRIFs, and DPSPs.
• Section 210.1 exempts mutual fund trusts (REITs qualify as a mutual fund trust) from
Part XII.2 tax on distributions to non-resident and tax-exempt beneficiaries.
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• The 21-year rule does not apply to REITs.
• REITs are good investments for non-resident investors; the capital gains that are realized
on the disposition of the investor’s units are not taxable subject to the following:
• The non-resident unit holder must not own more than 25% of the units at any time in
the five-year period ending on the date of sale.
• Tax is levied at the investor level, therefore minimizing income tax of the operating
entity.
• Cash flow and distributions to investors are relatively stable because there is minimal or
restricted reinvestment in the underlying business.
• The investment has a high degree of liquidity since the units can be traded on public
markets.
• Growth of the underlying business may increase cash flow and potential capital gains to
the investors.
Disadvantages of REITs include:
• The unit-holder is personally liable for the REIT’s obligations, such as environmental
liabilities, if the REIT does not satisfy those obligations.
• REITs cannot speculate in real estate.
• The number of investors must exceed 150 individuals.
• Income tax rollovers are unavailable to REITs regarding the transfer of assets to the trust.
• Losses incurred cannot exceed the REIT’s rental income and cannot be allocated to the
unit-holders.
• There may be a conflict of interest when trustees also manage the property.
• The REIT may not have sufficient cash flow to distribute to the unit-holders.
Income tax implications
General discussion
A trust must meet the conditions of paragraph 108(2)(b) and subsection 132(6) and follow the
requirements of Regulation 4801 in order to qualify as a REIT.
The REIT must be resident in Canada. In addition, since it must not be established for the benefit
of non-residents, foreign ownership cannot exceed 49%. Transfer agents have to be advised of
the foreign ownership content. For more information, go to Income Tax Folio S6-F1-C1,
Residence of a trust or estate, at www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s6/f1/s6-f1-c1-eng.html.
Eligible activities of a REIT are listed in paragraph 132(6)(b). The development of real estate is
an eligible activity as long as it relates to the earning of passive income from capital property of
the trust. For more information, see Technical Interpretation 9714095, November 4, 1997.
As long as the REIT is a mutual fund trust on March 31 of the year following its creation, it will
be deemed under subsection 132(6.1) to be a mutual fund trust from its inception. However, the
REIT must meet the prescribed conditions relating to the number of unit-holders, dispersal of
ownership, and public trading of its units.
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REITs are not normally subject to income tax because the declaration of trust provides for
payment of taxable income to the unit-holders. However, income tax applies to the trust’s taxable
income and net realized capital gains in each tax year if it did not pay out all of the income and
gains to the beneficiaries. The actual cash paid to the unit-holders may exceed the allocated
taxable income because the declaration of trust allows for distribution of at least 85% of the cash
flow before depreciation. REITs are allowed to claim permissible deductions such as CCA.
REITs are entitled to elect to determine the distributions for the tax year within one month of the
end of the trust’s year. This distribution is deemed to have been made before year-end.
Transfers of property into the REIT are taxable at FMV; rollovers are not permitted. However,
REITs may take certain measures to defer income tax, including:
• entering into partnerships;
• transferring less than 100% of the property to defer recapture; and
• acquiring long-term leases with prepaid rental agreements.
REITs are allowed to amalgamate tax-free under section 132.2 by making a qualified exchange
with another REIT. The assets are transferred on a rollover basis and the investors in the
transferor receive units of the transferee on the same rollover basis. The transactions have to
occur within 60 days of each other. Within six months after the transfer, both funds have to
jointly elect, using Form T1169, Election on Disposition of Property by a Mutual Fund
Corporation (or a Mutual Fund Trust) to a Mutual Fund Trust, available at www.cra-
arc.gc.ca/E/pbg/tf/t1169/, to have this section apply. These transactions are usually supported by
advance income tax rulings that should be reviewed during the audit.
Unit-holders are required to report their portion of the taxable income of the REIT, including net
capital gains and recapture. Any excess cash distributed to unit-holders according to the trust
documents is not taxed. Instead, the ACB of the units is reduced by the excess amount. A
negative ACB will result in a taxable capital gain. Until a capital gain occurs, tax on the excess
distribution is deferred, unless the units are sold triggering a capital gain or loss.
Losses incurred by the REIT cannot be allocated to the unit-holders. Unit-holders cannot claim
rental losses, as the claim for CCA is restricted to the amount of rental income.
If a non-resident unit-holder and related parties do not own at least 25% of the issued units of a
REIT at any time during the 60 month period before the disposition of units, the capital gain on
the sale is not taxable since the units are not considered taxable Canadian property as defined
in subsection 248(1). However, property held in the REIT is subject to the capital gains rules
when sold.
If a non-resident receives taxable income from a REIT, the income is subject to withholding tax
at a rate of 25% under paragraph 212(1)(c) and not subject to relief under tax treaty. Part XII.2
tax that imposes a 36% tax on income from real property earned by non-residents who own an
interest in certain Canadian trusts, is not applicable to a REIT under section 210.1.
Employees of a REIT who acquire units under an employee option agreement are deemed to
have received a benefit equal to amount of the FMV less the amount paid to acquire them. In
most cases, the benefit is recognized in the year the units are acquired; however, an election is
available under subsection 7(10) to defer recognition of the benefit to the year when the units are
sold.
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Debentures issued by a REIT, as well as units in a REIT, are qualified investments for RRSPs,
RRIFs, and DPSPs under Regulation 4900(1).
Audit considerations
These audit procedures should be considered:
• Verify that the REIT qualifies as a mutual fund trust.
• Determine if a bare trust arrangement exists whereby a related party holds legal title to
the property while the REIT maintains beneficial interest.
• Verify that the activities of the REIT are passive (that is, the operations are managed
outside the trust by professional managers and trustees are not involved in day-to-day
business).
• Verify that not more than 49% of the unit-holders are non-residents (the number of
non-resident trustees must also be restricted),
• Review the prospectus for public offerings and all agreements that relate to the operation
of the trust to identify potential income tax issues.
• Determine if a referral to Valuations is required where property transferred into the trust
from related parties may not be transferred at FMV.
• Determine if a referral is required regarding GST/HST issues.
• Review advance tax rulings or opinions relating to the trust.
• Verify that benefits relating to the acquisition of units under an employee option
agreement are correctly reported.
• Determine if any capital vs. income issues exist with respect to expenditures for property
beneficially held by the REIT.
• Verify distributable income to ensure these have been excluded:
• CCA;
• capital gains and losses;
• terminal losses;
• net recapture income;
• amortization of cumulative eligible capital; and
• issue costs.
• Verify designations of taxable income or net taxable capital gains to the unit-holders.
• Verify the calculation of reserves included in deductions from taxable income that is
distributed to unit-holders.
• Determine if there are capital vs. income implications and if the trust has hedged any
investments. Ensure that the trust’s investment restrictions and operating policies permit
hedging.
• Verify that income tax has been withheld on any payments to non-residents.
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• Verify that rental losses are properly calculated.
• Verify that losses are not allocated to the unit-holders.
• Verify that any incidental income left in the trust is reported on a T3 return.
• Examine and verify reports such as tax receipts issued to unit-holders.
• Verify that any revisions to taxable income in the REIT are reassessed and taxed in the
hands of the trust on the basis that any corrections would not have been paid or payable at
the end of the tax year.
These audit procedures should be considered with respect to the unit-holders:
• Verify that the taxpayer received a T3 slip.
• Examine the taxpayer’s return to ensure that the amounts reported are supported by
proper documents.
• Ensure that the ACB of the units has been reduced as a result of excess distributions to
unit-holders.
• Verify the ACB calculated when the unit-holder reinvests distributions to acquire more
units.
• Verify the capital gain calculated on the disposition of units or when the ACB of the units
is a negative amount.
• Ensure that rental income earned in the REIT does not flow to the unit-holder and is not
being used in calculating income for RRSP purposes.
• Determine if the REIT is under audit and if there are any income tax implications to the
unit-holder.
Contact Aggressive Tax Planning Division or Large Business Audit Division, Large File Cases,
when a corporate group that is part of a REIT structure is under audit to determine if the REIT is
under audit and if there are any income tax issues that would affect the taxpayer.
Examples
These excerpts are taken from prospectuses issued by REITs:
Example 1 – Hotel REIT
On October 29, 1999, ABC REIT issued a prospectus for units in the REIT to finance the
purchase of a hotel portfolio and capital expenditures to update the hotels. The offering consisted
of 59,244,492 units, of which:
• 30,496,328 units were sold on an installment basis of $10.00 per unit;
• 19,748,164 units were sold on a fully paid basis of $9.80 per unit ($0.20 represents
underwriter fees); and
• 9,000,000 units were sold on a fully paid basis of $9.80.
The taxation of the trust was described as follows:
“The trust will generally be subject to tax under the ITA in respect of its taxable
income, including net realized capital gains in each tax year, except to the extent
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that such taxable income including net realized capital gains is paid or payable or
deemed to be paid or payable in such year to unit-holders.
The declaration of trust provides that, as of the last distribution date for a tax year,
all the income (other than realized taxable capital gains and net recapture income)
of the trust (computed without regard to subsection 104(6) of the ITA), less
distributions of the trust’s income for that year previously made by the trust, shall
be paid or payable to unit-holders and its net realized capital gains and net
recapture income shall be paid or payable to unit-holders on the last distribution
date in the tax year. Under the declaration of trust, the trust is required to deduct
for tax purposes, such amount of its income (computed without regard to
subsection 104(6) of the ITA), including net realized taxable capital gains and net
recapture income, as are paid or payable to unit-holders under Part I of the ITA on
its income, including net realized capital gains.
Losses incurred by the trust, if any, cannot be allocated to unit-holders, but may
be deducted by the trust in future years according to the ITA.
The trust will be subject to the rental property rules that may restrict the amount
of CCA available to the trust in any particular year.
Trusts are subject to a special tax on their designated income under Part XII.2 of
the ITA. However, this special tax does not apply to a trust that qualifies as a
mutual fund trust throughout the year. Therefore, provided the trust qualifies at all
times as a mutual fund trust, it will not be liable to pay such tax.”
Example 2
A hotel real estate investment trust (REIT) issues units in the trust and debentures on the open
market to obtain financing for its plans. The REIT invests the money at FMV in a large hotel
portfolio that includes 12 hotels. The REIT receives the beneficial ownership of hotel property.
ABC Ltd., a wholly owned subsidiary of the trust, holds the legal title to the hotels, operates
them, hires staff, and leases hotel property from the trust. The REIT receives interest and rental
income from ABC Ltd. The REIT’s operation is passive and complies with the income tax
requirements for REITs. Taxable income in the REIT can flow to the unit-holders and be taxed
in their hands.
Example 3 – Commercial property debenture REIT
On October 1, 1999, XYZ REIT floated a debenture issue to finance its expansion into 60
business properties. The REIT had issued the units through another public offering in 1999 for an
initial installment of $6.00 per unit payable on October 21, 1999, with the final installment of
$4.00 per unit payable upon closing. Underwriter fees were deducted from the proceeds received
from the unit-holders.
This is an extract about the Canadian federal income tax considerations noted in the prospectus
issued for the REIT in relation to the debenture:
“A debenture holder that is a corporation, partnership, unit trust, or trust, of which
a corporation or partnership is a beneficiary, will be required to include in its
income for a tax year any interest on a Series 2 debenture that accrues to the
debenture holder to the end of the tax year or becomes receivable or is received
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by it before the end of that year, except to the extent that such interest was
included in the income of the debenture holder for a preceding tax year.
Any other debenture holder will be required to include in income for a tax year,
any amount received or receivable in that year as interest, depending on the
method regularly followed by the debenture holder in computing income.
Upon an actual or deemed disposition of a Series 2 debenture by the debenture
holder at any time, the debenture holder will be required to include in income, an
amount equal to the amount of interest that has accrued to the date of disposition.
An actual or deemed disposition of a Series 2 debenture will also result in the
recognition by the debenture holder of a capital gain (or a capital loss) to the
extent that the proceeds of a disposition of the Series 2 debenture, net of the
amount included in the debenture holder’s income as interest and any reasonable
costs of disposition, exceed (or are exceeded by) the ACB of the Series 2
debenture to the debenture holder.
A debenture holder that is a Canadian-controlled Private Corporation, as
defined by the ITA, may be liable to pay an additional refundable tax of 6-2/3%
on certain investment income, including interest and taxable capital gains.
A debenture holder that is a corporation will not be entitled to include any amount
in respect of the Series 2 debentures in computing its investment allowance for
the purposes of computing taxable capital (both as defined in the ITA) under Part
I.3 (tax on large corporations) of the ITA.
Debentures issued by a mutual fund trust, for the purposes of the ITA, the units of
which are listed on a prescribed stock exchange in Canada, will be qualified
investments for a trust governed by a deferred income plan. Based on information
provided to the tax advisors by the trust, at the date hereof, the trust is a mutual
fund trust for the purposes of the ITA and the units are listed on a prescribed
stock exchange in Canada. Accordingly, as long as the trust continues to be a
mutual fund trust for the purposes of the ITA and the units continue to be listed
on a prescribed stock exchange in Canada, the Series 2 debentures will be
qualified investments for deferred income plans.”
References
Income Tax Act
• Subsection 108(1), Definitions inter vivos trust and testamentary trust
• Subsection 108(2), When trust is a unit trust
• Subsection 132(6), Meaning of mutual fund trust
• Subsection 132(6.1), Election to be a mutual fund
• Subsection 132(7), Where trust established for the benefit of non-residents
• Section 132.2, Mutual funds-qualifying exchange
• Subsection 132.2(2), Definitions
• Paragraph 110(1)(d), Employee options
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Income Tax Regulations
• 4801, Prescribed conditions for purposes of paragraph 132(6)(c)
• 4900(1)(d), Qualified investments for RRSPs, RRIFs and DPSPs
16.2.8 Designation under subsection 104(2) of the ITA
(Revised February 2015)
General discussion
Subsection 104(2) deems a trust to be an individual and is therefore required to file a return and
pay tax as a separate person for income tax purposes. However, if there is more than one trust
and substantially all, 90% or more, of the property of the various trusts has been received from
one person and the various trusts are conditioned so that the income accrues to the same
beneficiary or group or class of beneficiaries, such of the trustees as the minister may designate,
shall be deemed to be, in respect of all the trusts, an individual whose property is the property of
all the trusts and whose income is the income of all the trusts. While the CRA's position is that
the phrase substantially all means at least 90%, the courts have held that the interpretation of the
phrase is a question of fact depending on the circumstances of each case and have found the
threshold to be lower. For example, refer to Keefe v. the Queen (TCC) 2003 DTC 1526 and
McDonald v. the Queen (TCC) 1998 DTC 2151.
It is the CRA's view that the word property in paragraph 104(2)(a) includes the settlement
property and any property subsequently gifted to the trust by the settlor or any other person.
Since the definition of the word property in subsection 248(1) includes money, the question
arises whether property, as used in paragraph 104(2)(a), is meant to include money received by
the trust as income and property purchased by the trust out of the income of the trust. The CRA
is of the view that the word is not meant to encompass income, as paragraph 104(2)(b) refers to
income. Also, the words property and income are used throughout the ITA and generally, the
word property is not interpreted to include income.
The term class of beneficiaries is not defined in the ITA, so its common meaning should be
used. The word class is defined in the Oxford Dictionary as a "group of persons or things having
some characteristics in common." Any definition that may exist in legislation governing trusts
that would apply to a particular case should be taken into account.
It is the CRA's position that members of the same family could be considered one class of
beneficiaries. As indicated in technical interpretation 2004-0090941E5(E):
"…one of the criteria that would be examined in making such a determination is whether the
trusts have common beneficiaries. The number of common beneficiaries and the nature of
their respective interests in each of the trusts are factors that might have some bearing in
determining whether the income of those trusts accrues to the same group or class of
beneficiaries. In this regard, it is not necessary that each trust have the same beneficiaries in
each trust; it is sufficient that the beneficiaries of each trust be of the same group or class of
beneficiaries. …"
However, ministerial discretion would not normally be exercised to designate multiple trusts as a
single trust when a settlor or testator has established a separate trust for each of their children.
Application of subsection 104(2) of the ITA
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For federal income tax purposes, a testamentary trust is subject to the graduated tax rates in
subsection 117(2). Inter vivos trusts are taxed at the highest rate under subsection 122(1). The
provinces and territories, except for Alberta, which imposes a flat rate of tax, impose basic tax at
graduated rates for testamentary trusts and at the highest rates for inter vivos trusts. Ontario also
imposes a surtax on basic tax at graduated rates (Ontario has two thresholds). Nova Scotia,
Prince Edward Island, and Yukon impose a surtax, but have only one threshold. The tax savings
from using inter vivos trusts in Ontario can be significant, as the current basic tax thresholds are
low and the surtax rates are high. Therefore, affluent residents of Ontario may use multiple inter
vivos trusts resident in Ontario to obtain a lower overall rate of provincial tax by taking
advantage of the graduated surtax rates.
Subsection 104(2) is an anti-avoidance provision which grants the minister the discretionary
power to designate multiple trusts as a single taxpayer when certain conditions are met. For
example, the designation may be used to prevent a taxpayer from splitting income by using
multiple testamentary trusts for the same beneficiary or group or class of beneficiaries, to take
advantage of the graduated rates of federal and provincial taxes. In the case of inter vivos trusts,
the designation may be used to prevent a taxpayer from using tiered trusts resident in different
provinces to shift business income from the province in which the taxpayer resides and the
business is carried on to a different province (for example, Alberta) to take advantage of its
lower provincial tax rates by avoiding the provincial income allocation rules. If an auditor comes
across a situation where multiple trusts have been set up, this may be an indicator of a potential
tax avoidance arrangement. As such, the auditor should consult with the local Aggressive Tax
Planning section for guidance.
If the provisions of the will or trust deed are unclear that the settlor intended to create separate
trusts and the assets of each trust are not administered separately (for example, separate bank
accounts, no undivided interests in property, separate accounting records) and the conduct of the
trustees is such that the trusts are treated as one trust, it may be that there is only one trust at law.
In such a case, a designation by the minister under subsection 104(2) may not be required; if the
auditor can establish the fact that there is only one trust at law, then the trust will be taxed as
such. The usefulness of a designation under subsection 104(2) is best illustrated if there clearly
are two trusts at law – if the conduct of the trustees, the accounting of the trust property, and the
intent of the settlor all support a finding that there are more than one trust. In such a case, the
minister may treat one or more trusts as a single trust once the minister has made the designation
in writing where the two statutory conditions are met. This is where the guidance of the local
Aggressive Tax Planning area will be of assistance.
When dealing with specific files, auditors may come across application and interpretive issues
for which general guidelines do not exist and, consequently, depending on the facts in the case,
the auditor will need to consider one or more of these questions in determining if the criteria for
deeming the trusts as one are met. Some of the issues relating to the application of subsection
104(2) that may be encountered include:
• if the historical cost of the property or the FMV of the property at the time the
designation is made should be considered in determining if the substantially all test is
met in paragraph 104(2)(a);
• if the property received from the person includes both direct and indirect contributions;
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• if the income of the trust accrues to the same group or class of beneficiaries, if the class
of beneficiaries of each trust is the same for each trust, except that one trust has an
additional beneficiary (for example, a registered charity) who is not a member of the
same class - the trust is discretionary and no distributions have ever been made to the
registered charity; and
• if the condition in paragraph 104(2)(b) is met if two trusts are set up with the same
beneficiaries, but the terms of the trust contain a general power of appointment (under a
general power of appointment, the person entitled to exercise the power (the donee of the
power) can add someone outside the class).
Auditors must inform the Aggressive Tax Planning Division in Headquarters of the issues
relating to designations under subsection 104(2) and consultations with both the Income Tax
Rulings Directorate and Legal Services should be carried out as necessary.
Examples of specific situations
Designation was recommended under subsection 104(2) of the ITA
1. A trust is settled for the benefit of Mr. X and his family by another family member (father-in-
law) with a gold coin valued at $227. Through a series of transactions, the trust acquired the
shares of Holdco indirectly from Mr. X. The shares of Holdco represented the majority of the
trust's assets. Several years later, a second trust was created with a nominal amount by
another family member with different trustees. The beneficiaries of the trust were the
children of Mr. X. Through a series of transactions, the principal assets of the second trust
were shares of a numbered company that were acquired by the trust indirectly from Mr. X.
The shares of the numbered company were sold by the second trust to the first trust at FMV,
resulting in a substantial loss ($11M). The conditions in subsection 104(2) were met and it
was recommended to designate the two trusts as one. If the two trusts are deemed to be the
same trust, no disposition arises as a result of the transfer from the second set of trustees to
the first set of trustees and no capital loss is incurred.
2. The taxpayers use tiered trusts to reduce their provincial taxes, where one trust resides in its
home province and another trust resides in Alberta and is a beneficiary of the first trust. Their
companies pay management fees to the first trust, which then distributes the income to the
Alberta trust, so that it is taxed in its hands under subsection 104(13) and thereby loses its
character as business income. There would be no tax savings if the companies paid the
management fees directly to the Alberta trust, as the income would be taxed under subsection
9(1) and the provincial income allocation rules would apply. There would be no tax savings
if both trusts resided in the taxpayer's home province (except for in Ontario, where inter
vivos trusts can be used to reduce surtaxes). The tax savings are generated by the shifting of
income from one trust to another.
Designation was not recommended under subsection 104(2) of the ITA
1. A representative requested, on behalf of his clients, that a designation be made under
subsection 104(2) to be able to deduct non-capital losses of prior years. In response to this
request, the Income Tax Rulings Directorate stated in Internal Technical Interpretation
9238787(E):
The intent of the subsection 104(2) of the ITA is to prevent tax avoidance. This is evidenced
by the precise wording of the provision which states in part:
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"(...) such of the trustees as the Minister may designate shall, for the purposes of this Act,
be deemed to be in respect of all the trusts an individual whose property is the property of
all the trusts and whose income is the income of all the trusts."
Therefore, any designation by the minister under subsection 104(2) would only be applicable
in respect of property of all the trusts and income of all the trusts (including gains on trust
property), and, as such, this provision would not be applicable with respect to losses incurred
by the trusts. The word income does not normally include the word loss, unless a contrary
intention is evident. This is evidenced, for example, by the wording of sections 3 and 4 and
subsection 9(2) of the Act.
As a result, it is our opinion that the prior years’ non-capital losses that may be deductible in
computing taxable income are not subject to the minister's discretion under subsection
104(2).
Procedure for making a designation
Subsection 220(2.01) provides that the minister of national revenue may administratively
delegate the minister's powers and duties under the Income Tax Act or Income Tax Regulations to
an officer or class of officers in the CRA. For a list of CRA officials authorized to make a
designation under subsection 104(2), go to Delegation under the Income Tax Act, at www.cra-
arc.gc.ca/tx/tchncl/dlgtnfpwrs/mnstr/ita-eng.html.
The decision to make a designation must be in writing. Refer to the designation in Appendix
A-16.2.7, Designation under Subsection 104(2) of the Income Tax Act, that should be used for
this purpose.
Reassessment procedures following a designation under subsection 104(2) of the ITA
If Audit makes a designation under subsection 104(2) to reassess multiple trusts as a single
taxpayer, the auditor must provide Data Assessment and Evaluation Program at the Ottawa
Technology Centre with the names and trust account numbers of the trusts involved, the years to
be reassessed, and the reason for the reassessment (subsection 104(2) designation). The auditor
will prepare Form T99, T1 and T3 tax calculation information, in the following manner:
• Form T99 is prepared for the trust that is to be designated and which should have
reported all the income from the other trusts, based on the results of the audit. The
pertinent information should be clearly noted on Form T99 (for example, keypunch fields
that require a change and any applicable explanation codes that are required on the
reassessment). All amounts should be clearly identified as an increase and should include
all amounts reported by the other trusts in order to combine the taxable income of the
trusts.
• Form T99 is prepared for each remaining trust to reduce the income of each trust to nil.
Each field to be reduced should be clearly identified and the applicable explanation
verses should be included.
Data Assessment and Evaluation Program will reassess the trusts based on the completed T99
forms. They will also ensure that each trust account in the Automated Trust System (ATS) is
coded as Combined and cross-referenced to the valid trust account number which is that of the
designated trust. An explanation code will be entered in each account indicating that the trusts
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have been designated under subsection 104(2). Any returns subsequently filed by the trusts will
be assessed as one under the valid trust account number.
• Letters will be issued automatically by the system to each of the trusts to inform them
that their accounts have been combined and that any subsequent returns they file will be
assessed as one under the account number of the designated trust.
• The ATS will automatically issue a notice of reassessment to each of the trusts to
increase the income of the designated trust by the amount of income of the secondary
trusts, to reduce the income of the secondary trusts to nil, and to reassess their taxes
accordingly.
• Taxes paid by the secondary trusts will be transferred from their accounts to the account
of the designated trust.
• Once the accounts are flagged as combined, the accounts will be combined for all
subsequent years and the accounts of the secondary trusts will not appear on the ATS, but
remain open in the Trust Subledger.
Federal and provincial taxes will be increased for the designated trust and decreased to nil for the
secondary trusts.
Reassessment procedures in doubtful cases
If there is any doubt that subsection 104(2) applies, the auditor should refer the case to the local
Aggressive Tax Planning section to consider if the General Anti-Avoidance Rule (GAAR)
should be added as an alternative position.
To protect the minister's position, auditors should not reassess the secondary trusts and transfer
their tax payments to the designated trust, unless they are certain the reassessment will be upheld
by both Appeals and the courts. There is no provision of the ITA that would permit us to reassess
secondary trusts beyond the statute-barred date to reduce their income to nil, if and when the
reassessment of the designated trust is upheld or a settlement is reached. However, the secondary
trusts can protect their position by filing a waiver. This approach is consistent with the CRA's
position in paragraph 13 of Income Tax Interpretation Bulletin IT335R2, Indirect payments, at
www.cra-arc.gc.ca/E/pub/tp/it335r2/README.html, with respect to indirect payments, which
states that the CRA will reduce the recipient's income to prevent double taxation, but will require
a waiver if the recipient's return is about to become statute-barred at the time of the assessing
action.
If a decision is made not to reassess the secondary trusts, the auditor should send a memo to Data
Assessment and Evaluation Program and request that a Pass Code 3 be put on the accounts to
stop the automatic issue of a notice of reassessment. Auditors should also request that the tax
payments not be transferred to the account of the designated trust and that a note be put on the
accounts requesting that no refunds be made. Data Assessment and Evaluation Program will
have to forward the request to Headquarters (Individual Returns Directorate, Trust Returns
Processing Section) for approval. Therefore, the auditor should explain the necessity for the Pass
Code 3 and state that Data Assessment and Evaluation Program will be advised when the matter
has been resolved and the Pass Code 3 can be removed from the accounts.
In the proposal letter issued to the designated trust, the auditor should advise the trustee that, to
protect the position of the minister, the CRA will not reassess the secondary trusts to reduce their
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income to nil for the relevant years and will not transfer the taxes paid by the secondary trusts for
those years to the account of the designated trust as tax collected on its behalf until the matter has
been resolved and the designation under subsection 104(2) has been upheld.
Since all of the trusts are affected by the designation, the auditor should also advise the trustee of
each secondary trust that the CRA proposes to tax its income in the hands of the designated trust
under subsection 104(2) and that, to protect the minister's position, the CRA will not reassess the
secondary trust to reduce its income to nil for the relevant years and will not transfer the taxes
paid by the trust for those years to the account of the designated trust as tax collected on its
behalf until the matter has been resolved and the designation under subsection 104(2) has been
upheld. The auditor should also advise the trustees to file a waiver within the normal
reassessment period to permit the CRA to reduce the income of the trust to nil once the matter
has been resolved.
References
• Income Tax Rulings - Other document - 9M19190 APFF 1999 Round Table On Federal
Taxation Question 8
Income tax rulings
• 2005–0113521I7(E), 54 superficial loss – February 25, 2005
• 2004-0090941E5(E), Application of 104(2) - December 13, 2005
• 2002-0162865(E), Unification of Trusts – November 19, 2002
• 9714835(E), Aggregation of Testamentary Trusts – June 30, 1997
• 9704805(E), 21 Year Rule – Two Trusts – May 26, 1997
• 9509257(F), Choix Bénéficiaire Privilégié et Règles d'attribution – le 2 mai 1995
• 9304865(E), Multiple Trusts Settled by a Single Person – May 20, 1993
• 9238787(E), Minister's Discretion 104(2)
Appendix 16.1.0 Letters
(Revised February 2015)
A-16.1.1 Confirmation of Request for Clearance Certificate
(Revised February 2015)
A-16_1_1 Confirmation of Request for Clearance Certificate.doc
A-16.1.2 Confirmation of Clearance Certificate Issued
(Revised February 2015)
A-16_1_2 Confirmation of Clearance Certificate Issued.doc
Appendix 16.2.0 Forms, templates, checklists, etc.
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(Revised February 2015)
A-16.2.1 Forms of wills
(Revised February 2015)
There are three forms of wills under which a person can dispose of property on death:
1. A will under common law must be written or typed and signed by the testator before
two witnesses, who must sign in the presence of each other and the testator. The
witnesses cannot be the beneficiary or the spouse of a beneficiary.
2. A notarial or authentic will must be witnessed by two notaries or one notary and
two witnesses, all in the presence of each other. This type of will is found in Quebec
and is based on Civil Code.
3. A holograph will must be written in the handwriting of the testator and signed and
dated by the testator. No witnesses are required. This is legal in Alberta, Manitoba,
New Brunswick, Ontario, Quebec, and Saskatchewan.
A-16.2.2 Contents of a will
(Revised February 2015)
Identification Gives the testator’s name, occupation, and
domicile
Revocation Revokes all previous wills
Notation of executor/trustee Names the executor or trustee
Power of appointment to trustee Gives the trustee powers to deal with the assets,
such as the power to sell, administer, or distribute
the estate
Power to pay debts Enables the trustee to pay legal debts
Specific power of sale Enables the trustee to sell a specific asset at a
certain price within a certain time
General or specific legacies Directs assets to named individuals
Distribution of residue Distributes the estate remaining after payment of
debts and distribution of legacies
Transfers to minors Allows payments to persons under legal age, with
receipt by the parent or guardian being sufficient to
discharge the trustee’s responsibility
Power of appointment to trustee Allows the trustee to invest estate funds without
being restricted to investments authorized by the
Trustee Act
Power to borrow Allows the trustee to borrow money and
exonerates the trustee from loss, providing the
borrowing was done in good faith
Signature of testator and Includes the signature of the aforementioned and
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witnesses the date they signed
The executor may take the will before a proper officer or court to obtain legal assurance that the
will is the last will and testament of the deceased person. The establishment of the validity of the
will is called probate. Not all provinces require that the will be probated. Refer to provincial
legislation to establish if probate is necessary. A list of estate assets and liabilities is included
when wills are probated.
A-16.2.3 Estate of deceased taxpayer – Tracking Form
(Revised February 2015)
Purpose: To establish if a loss of revenue exists due to incorrect tax filing for the estate of the
deceased.
Tracking Form – Estate of Deceased Taxpayer
Taxpayer Information:
Deceased Taxpayer:
Address:
BN/SIN:
Case No.:
File No.:
A-16.2.4 Checklist – Estates and Trusts
(Revised February 2015)
Estates that have elected, for federal tax purposes, to retain or distribute income or capital gains,
that would normally be allocated to beneficiaries, are deemed to have made that election for
Quebec income tax purposes. This is applicable for tax years ended after March 31, 1998. For
tax treatment prior to this, consult the Ministère du Revenu du Québec (MRQ) at
1-800-267-6299.
Residents of Quebec deal with the MRQ on all GST matters that apply to the estate. If taxpayers
are not residents of Quebec and are authorized to file separate returns for their Quebec personal
and corporate returns, if applicable, the returns are the responsibility of the MRQ. All other
GST/HST taxpayers continue to deal with the CRA. Regardless of whether the taxpayer deals
with the MRQ or the CRA, the rules for accounting periods, filing of returns, and elections are
the same.
This checklist is not exhaustive. Add or delete steps, depending on the circumstances.
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Audit Steps WP Ref Comments
Part A – General procedures and steps
1. Obtain a copy of the will, codicils, probate
documents, releases, disclaimers, and
variations.
2. Obtain a copy of the document appointing the
administrator and details of the proposed
distribution of assets if the taxpayer died
intestate.
3. Obtain a copy of the statement of distribution,
and the statement of properties and debts.
4. Obtain a copy of the authorization from the
executor allowing the CRA to communicate
with a third party, if required.
5. Identify relevant parties and clauses in the will.
6. Determine whether all of these assets have
been accounted for in the estate:
• jointly held assets;
• insurance proceeds with named
beneficiaries; and
• RRSPs with named beneficiaries.
7. Review the list of assets and liabilities of the
deceased and determine whether fair market
value of the assets has been considered.
Determine whether any referrals are required.
8. Obtain a copy of the trust contract, if available.
9. Review the list of assets of the deceased that
have been transferred to these beneficiaries:
• spouse or common-law partner;
• children or minors; and
• others.
10. Review the deceased’s tax history by viewing
the relevant RAPID screens.
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11. Review the following tax returns:
• T1s previously filed, including final,
rights or things, partnership, and trust
returns;
• T2s, if applicable;
• T3s for a testamentary trust, if
applicable, and for other trusts.
12. Verify that the returns have been filed by the
appropriate deadlines to determine whether any
outstanding returns must be filed.
13. Step removed - Filing of GST/HST returns.
14. Consider referrals to Valuations for property
such as the following:
• real estate;
• shares; and
• other property.
15. Determine whether the deceased was involved
in transfers:
• from a sole proprietorship to a
partnership;
• from a sole proprietorship to a
corporation under subsection 85(1) of
the ITA; or
• from a partnership to a corporation
under subsection 85(2) of the ITA.
16. Determine whether there are shareholder loans
outstanding.
17. Determine whether there is a buy/sell
agreement that would affect the fair market
value of shares of a CCPC.
18. Determine if there are insurance policies and
the identity of the beneficiaries.
19. Determine whether the deceased, the spouse or
common-law partner (if applicable), and the
beneficiaries are residents of Canada.
20. Determine whether the property vests
indefeasibly in a spouse or common
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law-partner within 36 months of the date of
death so that rollovers to the spouse or
common-law partner are available.
21. Determine whether there is a transfer of
property by:
• will;
• intestacy; or
• disclaimer, release or surrender under
the will or by intestacy.
22. Determine whether the representative has
requested a clearance certificate under the ITA.
23. Step removed - De-registration under the ETA.
24. Verify the acceptance of the assets by the
beneficiaries.
25. Step removed - Complete reasonableness tests.
26. Assess scope, risk, and TSO limits to
determine whether further audit is required for
the ITA.
27. Additional steps as required.
Part B – Step removed - ETA Audit steps
Part C – Dispositions
1. Determine whether the property that the
executor has distributed to the beneficiaries is a
taxable supply (that is, whether it was made or
used in the course of commercial activity).
2. Determine whether the place of supply is
outside Canada.
3. Determine the value of consideration of
proceeds at fair market value or adjusted cost
base, as determined by the ITA.
4. Make referrals to Valuations, as required.
5. Determine whether any elections have been
filed.
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6. Determine whether title under joint tenancy has
been transferred.
7. Ensure that the 21-year deemed disposition
rule is considered.
8. Additional steps as required.
Part D – General
1. Raise assessments for adjustments, interest,
and penalties, after following finalization
procedures.
2. Refer to the ITA, as required.
3. Additional steps as required.
Part E – ITA Audit steps
Income
1. Verify T1 income reported on the relevant
returns until the date of death.
2. Determine whether there are periodic payments
(Income Tax Interpretation Bulletin IT210R2,
Income of Deceased Persons – Periodic
Payments and Investment Tax Credit, at
www.cra-arc.gc.ca/E/pub/tp/it210r2/).
Note: If there are no elections available, there is
notional severance at the date of death, so accrued
income should be reported on the final return and
the beneficiary should report the balance.
3. Determine whether the following rights and
things exist:
• declared dividends not paid;
• matured bond coupons not cashed;
• unused vacation credits; or
• a former partner’s right to share of
income or loss.
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4. Determine whether the rights and things have
been:
• reported on a separate return;
• transferred to the beneficiary;
• reported on the T1 of the deceased, if
the audit takes place longer than one
year after date of death or 90 days after
an assessment.
5. Determine whether an election has been made
for income from a trust.
6. Determine whether an election to file a
separate return has been made for income from
a business.
7. For business income and losses, determine
whether:
• any reserves have been taken in error;
• inventories and accounts receivable of
cash businesses have been included;
• any CCA for a sole proprietor has been
taken in error, unless there have been
terminal losses with respect to
depreciable property; and
• tax cost reductions have been made to
property subject to investment tax
credit claims or required amounts under
paragraph 12(1)(t) of the ITA have
been included in income in the year of
death.
8. Determine whether there were large amounts
of:
• interest, dividend, rental or investment
income;
• T1 losses (greater than
PROTECTED);
• business, professional, farming or
fishing income; or
• income from a private or foreign
corporation.
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9. Determine whether any appropriations or
benefits must be included on the deceased’s
final return.
10. Determine whether any CPP or death benefits
must be reported.
11. Verify that the deceased has declared capital
gains and capital gains exemptions. If the
taxpayer claimed a capital gains exemption
relating to property owned on February 22,
1994 and held until the date of death, ensure
that the amount is not taxed twice.
12. Additional steps as required.
Capital Property
1. Determine whether the deceased had the
following types of capital property, which are
subject to fair market value determination:
• land;
• shares in a CCPC; or
• shares in other corporations.
2. Consider referrals to Valuations.
3. Examine the life insurance of the deceased. Is
there any life insurance, such as key man
insurance, that should be considered in
valuation of CCPC shares?
4. Determine whether there is a buy/sell
agreement:
• at arm’s length; or
• at non-arm’s length.
5. Verify that subsection 70(6) of the ITA was
used to rollover depreciable and
non-depreciable property
• to a spouse or common-law partner; or
• to a spousal or common-law partner
trust.
Verify the calculation of the proceeds used in
the rollover.
55
Published May 2015
6. Verify that relieving provisions applied to
rollovers of the following to a spouse or
common-law partner , a spousal or common-
law partner trust, or children:
• Farm property;
• Shares of a family farm corporation; or
• Interest in a family partnership.
7. Verify that there is a designation for the
principal residence.
8. Determine whether the deceased made an
estate freeze as part of their estate planning.
9. Determine whether the proceeds on dispostion
of depreciable property must be re-determined
for a terminal loss.
10. Verify the disposition of depreciable capital
properties for recapture or terminal losses.
11. Verify that flow-through shares have been
disposed of for fair market value unless they
have been bequeathed to the spouse or
common-law partner.
12. Additional steps as required.
Land inventory
1. Verify that land inventory has been valued at
fair market value.
2. Verify that property has vested in the spouse or
common-law partner at the adjusted cost base
of the deceased.
Resource property
1. Verify that the property has been valued at fair
market value.
2. Verify that the property has vested in the
spouse or common-law partner.
3. Verify that an election was required and has
been filed.
Eligible capital property
56
Published May 2015
1. Verify that no amount for eligible capital
property has been included on the deceased’s
final return.
2. Verify that the recipient recorded the property
at the cumulative eligible capital amount of the
deceased and claimed a deduction if the
business has been continued.
3. Determine whether the business has been
continued. If it has not been continued, verify
that a capital gain or loss has been claimed
after applying the calculation of 4/3 CEC.
Partnerships (active and retired)
1. Obtain the partnership agreement and
determine:
• whether the death of the partner triggered a
deemed disposition;
• whether there is a clause for work in
progress that deems proceeds from such
work to be income of the beneficiary or
estate, if they are not included in the
adjusted cost base of the partnership; and
• the treatment of the residual interest in the
partnership for a retired partner.
2. Determine the fiscal year-end of the
partnership for inclusion of income on the
deceased’s return or on a separate return.
3. Verify the calculation of gains or losses on
disposition of the partnership interest by the
deceased.
4. Determine whether any life insurance proceeds
have been added to the adjusted cost base of
the partnership, if the partnership was the
beneficiary of life insurance proceeds for the
deceased.
5. Make a referral to Valuations, if necessary.
Life estates (section 43.1 of the ITA)
1. Verify that the disposition was at adjusted cost
base.
57
Published May 2015
2. Verify the calculation of the adjusted cost base
of the property following the termination of the
life estate in the property.
Taxable Canadian property
1. Determine whether the deceased was a
non-resident who owned taxable Canadian
property.
2. No rollovers apply unless the spouse or a
spousal trust in the US received the property.
3. Determine the fair market value of the
property.
4. Determine whether a final return was filed for
the non-resident deceased taxpayer.
5. Determine whether a Certificate of Disposition
is required under section 116 of the ITA.
Life insurance proceeds
1. Determine whether any portion of the life
insurance proceeds is taxable.
2. Determine whether any of the proceeds are
directly designated for a charity.
3. Determine whether any life insurance proceeds
extinguish or settle any debt of the deceased
taxpayer/registrant.
Other property
58
Published May 2015
1. RRSPs: Determine whether the property rolls
over to the spouse or common-law partner,
dependent children, or dependent
grandchildren. If there is a disposition that is
taxable:
• determine whether there is a refund of
premiums or an annuity and determine
whether Form T2019, Death of an
RRSP Annuitant – Refund of Premiums
for Year 20__, available at www.cra-
arc.gc.ca/E/pbg/tf/t2019/README.htm
l, for a refund of premiums was filed;
and
• determine whether the proceeds have
been directly designated to a charity.
2. RRIFs: Determine whether the property rolls
over to the spouse or common-law partner,
dependent children, or dependent
grandchildren. If there is a disposition that is
taxable:
• determine whether there is a
designation of amounts for income of
the beneficiary;
• determine whether there is a direct
designation of proceeds to a charity;
and
• determine whether Form T1090, Death
of a RRIF Annuitant – Designated
Benefit for Year 20__, available at
www.cra-
arc.gc.ca/E/pbg/tf/t1090/README.htm
l, has been filed.
59
Published May 2015
3. RPPs: Determine whether the representative
has treated any lump-sum benefits as a right or
thing and filed a separate return.
• Determine whether an amount received
from the plan has been transferred into
an RRSP or another RPP, or whether
the personal representative has
designated a beneficiary to receive
payments as an “eligible amount.”
• Determine whether there have been any
past service contributions.
4. DPSPs: Verify that the member of the DPSP
received an allocation from the plan that is
taxable and determine whether any exceptions
apply, under subsections 147(19) through
147(21) of the ITA.
5. Commercial debt: Determine whether there has
been any settlement of commercial debt within
six months of the date of death or whether
there has been any settlement by terms of the
will.
6. RHOSPs: Determine whether the deceased had
amounts in a registered home ownership
savings plan (RHOSP) and whether the fair
market value of these amounts is included in
the income of the estate, unless the spouse or
common-law partner received the proceeds of
the plan within 15 months of the date of death.
(Note that this can occur in Quebec.)
7. Determine whether there is any other property
that is not specifically dealt with and is
acquired by the deceased’s personal
representative at a cost equal to fair market
value.
Deductions
60
Published May 2015
1. Verify if any elections were filed for reserves.
Note that no deductions for reserves can be
claimed against
• capital gains;
• proceeds on the sale of resource
properties;
• profits on the sale of trading stamps and
warranties; and
• commission income of insurance agents
or brokers.
2. Determine whether there are any capital gains
deductions for qualified small business shares,
qualified farm property or reserves for the two
aforementioned properties.
3. Determine whether capital losses in the year of
death can be carried back to a prior T1.
4. Determine whether the deceased was receiving
Canada child tax benefits. Verify that Form
RC66, Canada Child Benefits Application,
available at www.cra-
arc.gc.ca/E/pbg/tf/rc66/README.html, is on
file. (Note that the benefits can be transferred
to a surviving spouse or common-law partner.)
5. Step removed - GST/HST credits.
6. Determine whether the deceased made
donations. If so,
• Did the deceased claim 100% of net
income?
• Did the deceased claim amounts
donated?
• Did the deceased claim outstanding
amounts from the last five years before
the date of death?
7. Determine whether the deceased claimed
medical expenses in the 24-month period prior
to the date of death.
61
Published May 2015
8. Alternative minimum tax: Verify that Form
T691, Alternative Minimum Tax, available at
www.cra-
arc.gc.ca/E/pbg/tf/t691/README.html, was
filed. Note that the calculation is not applicable
to the final return. However, Form T691 may
be filed to recover previously reported
amounts.
9. Additional steps as required.
Other
1. Select required audit steps from WinALS
templates as required, in addition to the steps
noted above.
2. Determine whether the trustee or executor
provided each beneficiary with a statement
indicating their share of the estate and follow
up beneficiaries’ returns for adjustments
arising from the audit of the deceased taxpayer.
3. Determine whether the estate was distributed
immediately after death, then only T1s are
considered.
4. Determine whether the estate earned any
income before its distribution. If so, then a T3
should be filed.
5. Determine whether a separate testamentary
trust was created by terms of the will.
6. Raise assessments in accordance with audit
finalization procedures.
7. Make GST/HST referrals as required.
8. Additional steps as required.
Auditor: Date:
Team Leader: Date:
62
Published May 2015
A-16.2.5 Glossary – Estate of deceased taxpayers
(Revised February 2015)
These are terms the auditor may encounter during audits of estates:
Term Meaning
Codicil The means by which a will can be amended without the
execution of a new will. It must be executed with the
formalities of a will.
Contingent interest A future interest in real or personal property that is
dependent upon the fulfilment of a stated condition.
Corpus The principal or capital of an estate, as distinguished from
income.
Dependant’s relief The establishment of property rights under family
property legislation for the benefit of a spouse or children.
Demonstrative gift A gift by will of a sum of money to be paid from
designated funds or assets, such as a gift of $2,000 paid
from a specific bank account.
Disclaimer An outright refusal of a gift, share, or interest in a will.
Distribution To divide the estate property among the beneficiaries
according to the terms of the trust document, or according
to the applicable law.
Encroachment The power given to the executor to use capital funds for
the purpose described in the will.
Exclusive spousal or
common-law partner trust
A trust created by the deceased under which:
• The spouse or common-law partner receives all of
the income of the trust arising before the spouse or
common-law partner’s death; and
• no person, except the spouse or common-law
partner, may, before the spouse or common-law
partner’s death, receive or otherwise obtain the use
of any of the income or capital of the trust.
See subsection 70(6) of the ITA.
General legacy A specific bequest for non-specific property, such as
“$500 to my son Bob.”
Indefeasible Not capable of being annulled or rendered void.
Issue All persons who have descended from a common
ancestor.
63
Published May 2015
Joint tenancy A holding of a property by two or more persons in such a
manner that, on the death of one of the joint owners, the
survivors take the entire property.
Lapse A falling of a gift into the residual of the estate by reason
of the death of the legatee or devisee during the lifetime of
the testator.
Letter of administration A certificate of appointment or authority to settle an
estate, issued to an administrator by the appointing court.
Letter testamentary A certificate of appointment, issued to the executor by the
court in the probate process.
Legacy A gift of personal property by will (same as a bequest).
Life tenant One who owns an estate or real property for their own life
or the life of another person.
Probate Formal proof before the court that the instrument offered
is the last will and testament of the deceased.
Release or surrender A discharge of a right of action against another person. It
must be made under seal or by consideration.
Renunciation The refusal of a beneficiary to accept their interest in an
estate or the refusal of an individual named to a fiduciary
capacity to accept the appointment.
Succession The act or the fact of a person becoming entitled to the
property of a deceased person.
Specific devise A gift by will of a specific parcel of real property.
Specific legacy A gift by will of a specific article of personal property.
Tenants in common Holding of property by two or more persons who each
have an undivided interest in the property. Upon death, the
interest passes to the heirs or devises and not to the
survivors.
Testamentary capacity Mental capacity to make a will.
Testamentary debts Debts of the deceased that were outstanding immediately
before death and any amount payable by the estate as a
consequence of death.
Testator (testatrix) The deceased person who made and left a valid will.
Variation of the will A rearrangement of the terms of the will after the death of
the taxpayer by consent of the beneficiaries with respect to
their interests.
Vested interest An immediate fixed interest in property, although the right
of possession and enjoyment may be postponed.
64
Published May 2015
Will A legally enforceable document that declares the
intentions about disposition and administration of the
testator’s estate after death. It is effective only at death
and can be revoked at any time prior to death.
A-16.2.6 Additional legislative authority – ITA
(Revised February 2015)
ITA
Reference
Subject Matter
References
Income Tax Interpretation Bulletin (IT)
Income Tax Information Circular (IC)
34.1(8), (9) Alternative year-
end methods
40(2) Choice of
property to claim
as principal
residence
Income Tax Folio S1-F3-C2, Principal Residence, at
www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-c2-
eng.html
Form T2091(IND)-WS, Principal Residence
Worksheet, at www.cra-
arc.gc.ca/E/pbg/tf/t2091_ind_-ws/README.html
Form T2091(INC), Designation of a Property as a
Principal Residence by an Individual (Other Than a
Personal Trust), at www.cra-
arc.gc.ca/E/pbg/tf/t2091_ind/README.html
56(1)(a)(iii) Death benefit IT508R, Death Benefits, at www.cra-
arc.gc.ca/E/pub/tp/it508r/README.html
70(1) Computing
income
IT210R2, Income of Deceased Persons – Periodic
Payments and Investment Tax Credit, at www.cra-
arc.gc.ca/E/pub/tp/it210r2/README.html
Tax Guide RC4111, Canada Revenue Agency - What
to Do Following a Death, at www.cra-
arc.gc.ca/E/pub/tg/rc4111/README.html
70(2) Amounts
receivable for
rights or things
(elections)
IT212R3, Income of Deceased Persons – Rights or
Things, at www.cra-
arc.gc.ca/E/pub/tp/it212r3/README.html
IT234, Income of Deceased Persons –Farm Crops, at
www.cra-arc.gc.ca/E/pub/tp/it234/README.html
IT278R2, Death of a Partner or of a Retired Partner,
at www.cra-
arc.gc.ca/E/pub/tp/it278r2/README.html
IT326R3, Returns of Deceased Persons as “Another
Person,” at www.cra-
65
Published May 2015
arc.gc.ca/E/pub/tp/it326r3/README.html
IT427R, Livestock of Farmers, at www.cra-
arc.gc.ca/E/pub/tp/it427r/README.html
70(3), (3.1),
69(1.1)
Rights or things
transferred to
beneficiaries
IT427R, Livestock of Farmers, at www.cra-
arc.gc.ca/E/pub/tp/it427r/README.html
70(4) Revocation of
election in 70(2)
IT212R3, Income of Deceased Persons – Rights or
Things, at www.cra-
arc.gc.ca/E/pub/tp/it212r3/README.html
70(5), (5.1),
(5.2), (5.3),
(5.4)
Capital property
of a deceased
taxpayer:
Depreciable and
other property
IT140R3, Buy-sell agreements, at www.cra-
arc.gc.ca/E/pub/tp/it140r3/README.html
IT416R3, Valuation of shares of a corporation
receiving life insurance proceeds on death of a
shareholder, at www.cra-
arc.gc.ca/E/pub/tp/it416r3/README.html
IT313R2, Eligible Capital Property – Rules Where a
Taxpayer Has Ceased Carrying on a Business or Has
Died, at www.cra-
arc.gc.ca/E/pub/tp/it313r2/README.html
IT125R4, Dispositions of Resource Properties, at
www.cra-arc.gc.ca/E/pub/tp/it125r4/README.html
IC89-3, Policy Statement on Business Equity
Valuations, at www.cra-arc.gc.ca/E/pub/tp/ic89-
3/README.html
T2SCH6,Schedule 6, Summary of Dispositions of
Capital Property, at www.cra-
arc.gc.ca/E/pbg/tf/t2sch6/README.html
70(6), (6.1),
(6.2)
Transfers or
distribution to
spouse or
common-law
partner or spousal
or common-law
partner trust:
Exception to
subsection 70(5)
IT305R4, Testamentary Spouse Trusts, at www.cra-
arc.gc.ca/E/pub/tp/it305r4/README.html
IC07-1, Taxpayer Relief Provisions, at www.cra-
arc.gc.ca/E/pub/tp/ic07-1/README.html
70(7) Special rules for
spouse or
common-law
partner /spousal or
common-law
IT305R4, Testamentary Spouse Trusts, at www.cra-
arc.gc.ca/E/pub/tp/it305r4/README.html
66
Published May 2015
partner trusts
70(8), (10) Meaning of
certain
expressions and
definitions
IT305R4, Testamentary Spouse Trusts, at www.cra-
arc.gc.ca/E/pub/tp/it305r4/README.html
IT349R3, Intergenerational Transfers of Farm
Property on Death, at www.cra-
arc.gc.ca/E/pub/tp/it349r3/README.html
70(9), (9.1),
(9.2), (9.3),
(9.6), (9.8)
Tax deferred
rollovers on
intergenerational
transfers of
certain farm
property
IT349R3, Intergenerational Transfers of Farm
Property on Death, at www.cra-
arc.gc.ca/E/pub/tp/it349r3/README.html
IC07-1, Taxpayer Relief Provisions, at www.cra-
arc.gc.ca/E/pub/tp/ic07-1/README.html
70(13) Capital cost of
certain
depreciable
property
IT349R3, Intergenerational Transfers of Farm
Property on Death, at www.cra-
arc.gc.ca/E/pub/tp/it349r3/README.html
70(14) Order of disposal
of depreciable
property
IT349R3, Intergenerational Transfers of Farm
Property on Death, at www.cra-
arc.gc.ca/E/pub/tp/it349r3/README.html
72(1) Reserves in the
year of death
IT152R3, Special reserves – Sale of land, at
www.cra-arc.gc.ca/E/pub/tp/it152r3/README.html
IT154R, Special reserves, at www.cra-
arc.gc.ca/E/pub/tp/it154r/README.html
72(2) Elections by
representative for
reserves
IT152R3, Special reserves – Sale of land, at
www.cra-arc.gc.ca/E/pub/tp/it152r3/README.html
Form T2069, Election in Respect of Amounts Not
Deductible as Reserves for the Year of Death, at
www.cra-arc.gc.ca/E/pbg/tf/t2069/README.html
80(2)(a),
(p), (q)
Debt forgiveness
rules
104 to 107 These sections
apply to the estate
and the
representative as
if the estate was a
trust where a trust
arrangement is in
effect
108(1) Definition of
testamentary
trust
67
Published May 2015
111(2) Year of death: Net
capital losses
IT232R3, Losses – Their Deductibility in the Loss
Year or in Other Years, at www.cra-
arc.gc.ca/E/pub/tp/it232r3/README.html
118.1(4),
(5), (6), (7),
(7.1), (8)
Gifts of property IT226R, Gift to a charity of a residual interest in real
property or an equitable interest in a trust, at
www.cra-arc.gc.ca/E/pub/tp/it226r/README.html
IT288R2, Gifts of Capital Properties to a Charity and
Others, at www.cra-
arc.gc.ca/E/pub/tp/it288r2/README.html
IT407R4-CONSOLID, Dispositions of Cultural
Property to Designated Canadian Institutions, at
www.cra-arc.gc.ca/E/pub/tp/it407r4-
consolid/README.html
118.2(1), (2) Medical expenses Income Tax Folio S1-F1-C1, Medical Eexpense Ttax
Credit, at www.cra-
arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f1/s1-f1-c1-eng.html
Income Tax Folio S1-F1-C2, Disability Tax Ccredit,
at www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f1/s1-f1-
c2-eng.html
Income Tax Folio S1-F1-C3, Disability Supports
Deduction, at www.cra-
arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f1/s1-f1-c3-eng.html
Tax Guide RC4064, Medical and Disability-Related
Information, at www.cra-
arc.gc.ca/E/pub/tg/rc4064/README.html
122.5(1), (2) GST credit for
T1s
Definitions and exceptions
122.62(5) Death of
cohabiting spouse
or common-law
partner and the
child tax credit
Form RC65, Marital Status Change, at www.cra-
arc.gc.ca/E/pbg/tf/rc65/README.html
150(1)(b) Filing for
deceased
individuals
Tax Guide T4011, Preparing Returns for Deceased
Persons, at www.cra-
arc.gc.ca/E/pub/tg/t4011/README.html
150(4) Death of a partner
or proprietor
IT278R2, Death of a Partner or of a Retired Partner,
at www.cra-
arc.gc.ca/E/pub/tp/it278r2/README.html
IT326R3, Returns of Deceased Persons as “Another
Person,” at www.cra-
68
Published May 2015
arc.gc.ca/E/pub/tp/it326r3/README.html
159(2) Certificate before
distribution
IC82-6R10, Clearance Certificate, at www.cra-
arc.gc.ca/E/pub/tp/ic82-6r10/
Form TX19, Asking for a Clearance Certificate, at
www.cra-arc.gc.ca/E/pbg/tf/tx19/README.html
159(3) Personal liability
of the legal
representative
IC98-1R4, Tax Collections Policies, at www.cra-
arc.gc.ca/E/pub/tp/ic98-1r4/
159(5) Elections for
certain provisions
under subsections
70(2), (5), (5.2),
and (9.4)
IT212R3, Income of Deceased Persons – Rights or
Things, at www.cra-
arc.gc.ca/E/pub/tp/it212r3/README.html
IT278R2, Death of a Partner or of a Retired Partner,
at www.cra-
arc.gc.ca/E/pub/tp/it278r2/README.html
Form T2075, Election to Defer Payment of Income
Tax, Under Subsection 159(5) of the Income Tax Act
by a Deceased Taxpayer's Legal Representative or
Trustee, at www.cra-
arc.gc.ca/E/pbg/tf/t2075/README.html
164(6), (6.1) Application of
losses realized
upon death to the
TD1 of prior years
Regulation 1000, Election by a legal representative
for property dispositions
IC07-1, Taxpayer Relief Provisions, at www.cra-
arc.gc.ca/E/pub/tp/ic07-1/README.html
212(1)(c) Estate or trust
income
IT465R, Non-Resident Beneficiaries of Trusts, at
www.cra-arc.gc.ca/E/pub/tp/it465r/README.html
IC77-16R4, Non-Resident Income Tax, at www.cra-
arc.gc.ca/E/pub/tp/ic77-16r4/README.html
230, 230.1 Books and records
retention
IC78-10R5, Books and Records
Retention/Destruction, at www.cra-
arc.gc.ca/E/pub/tp/ic78-10r5/README.html
248(1) Definition of
disposition
248(1) Definition of
taxable
Canadian
property
IT420R3, Non-Residents – Income Earned in
Canada, at www.cra-
arc.gc.ca/E/pub/tp/it420r3/README.html
248(8) Occurrences as a
consequence of
death
69
Published May 2015
248(9) Definition of
disclaimer and
release or
surrender
IT305R4,Testamentary Spouse Trusts, at www.cra-
arc.gc.ca/E/pub/tp/it305r4/README.html
IT313R2, Eligible Capital Property – Rules Where a
Taxpayer has Ceased Carrying on a Business or has
Died, at www.cra-
arc.gc.ca/E/pub/tp/it313r2/README.html
IT349R3, Intergenerational Transfers of Farm
Property on Death, at www.cra-
arc.gc.ca/E/pub/tp/it349r3/README.html
248(9.1) How a trust is
created
IT305R4,Testamentary Spouse Trusts, at www.cra-
arc.gc.ca/E/pub/tp/it305r4/README.html
248(9.2) Vesting
indefeasibly
Regulation
204
Filing returns for
estates and trusts
IT531, Eligible Funeral Arrangements, at www.cra-
arc.gc.ca/E/pub/tp/it531/README.html
Regulation
206
Legal
representatives
and others
regarding filing of
returns
Regulation
1001
Annual
installments for
the deceased
taxpayer
A-16.2.7 Designation under Subsection 104(2) of the Income Tax Act
(Revised February 2015)
Print on appropriate pre-printed letterhead to comply with Treasury Board regulations.
A-16_2_7 Designation under Subsection 104(2) of the Income Tax Act.doc