The deceased was a shareholder of a CCPC. He had no other assets other than certain private corporation shares which have an adjusted cost base (ACB) of $100 and a current fair value of $100,000 at death. Under his will, his shares will be transferred to his wife, who is the sole beneficiary.
I understand that the transfer of private company shares on death is exempt from probate in BC and, due to the spousal rollover, no disposition is required to be reported on the deceased’s final T1 tax return.
The said shares were transferred to his wife about three months later. My questions are:
Does the executor have to file a T3 trust return for the spousal transfer of shares from the deceased to his wife? If yes, What will be the amounts for Proceeds and ACB to be reported on the T3 Trust Tax Return Schedule 1?
Will the above answer differ if a dividend of $10,000 was paid by the private company during the period after the death of the husband but before the shares were transferred to his wife?
You are correct, no deemed disposition on the CCPC shares. The capital property sits in a testamentary spousal trust on death and subsequently rolls over to the spouse pursuant to Section 107(2), assuming the spouse is a resident of Canada.
No
The dividend is taxable to the estate after death (or declared but not paid).
It is in your best interest to elect for GRE status so that the dividend is taxed at the lower bracket, if at all. Get a clearance certificate to cover your behind.
Thanks for the advice. However, I think that the transfer of shares from the deceased husband to his wife should be reported on Schedule 1 of the T3 tax return for the following reasons:
(1) Question 8 on the T3 tax return requests the trustee to attach a note on the details of the corporation if the trust holds shares in a private corporation.
(2) Question 3 on the T3 tax return requests to attach a note on the distribution of assets other than cash. I believe that the transfer of share title from the husband to the wife should be regarded as a distribution of assets.
Since the shares were transferred to the estate first before they were transferred to the beneficiary, it should be reported as an acquisition and a disposition on the Schedule 1 of the T3 Trust Tax return.
You’re thinking of an inter-vivos trust, which is a trust that is created by way of settlement during ones lifetime. Testamentary trusts are not subjected to those same reporting requirements. Question 8 does not apply unless the trust was a living trust, and was a shareholder of a corporation for the benefit of a beneficiary (usually applies to family trusts).
You said it yourself. Now apply this to the testamentary trust as well. Just have the formal legality of it dealt with on the corporate side (i.e. CSR, minute book, etc.).
The nature of the rollover is to defer the gain that has accrued on the shares. Refer to Section 70(6) that outlines the direct transfer to the spouse. No formal reporting requirement should be required on the T3. Report it in the terminal return.
Thanks for your clarification; it has changed/corrected my understanding as follows:
Same situation: the deceased husband solely owns the assets. Under his will, all his estate goes to his wife.
Under the spouse rollover rule (which is the default), the deceased will not report the disposition of the assets on Schedule 3 of the final T1 tax return. If the asset is shares in a private corporation, no probate is needed. For assets other than private corporation shares, such as rental property, probate is required. In both cases, no acquisition and disposition will be reported on Schedule 1 of the T3 trust return. No T3 trust tax return is required to file if no income is earned in the trust under the spouse rollover. A T3 trust tax return will only be required when income is earned in the trust. In this case, the answers to questions 3 and 8 will be “No.”
Should the executor decide not to apply the spouse rollover rule and report capital gain on the assets held at death (due to utilization of the deceased’s unused net capital loss), the disposition will be reported on schedule 3 of the deceased’s final T1 tax return to generate a capital gain to offset the unused capital loss of the deceased. Again, probate is required for most capital assets except for private corporation shares. On schedule 1 of the T3 Trust Tax return, the proceeds reported on the final T1 tax return will be the adjusted cost base (ACB) on schedule 1 of the T3 trust tax return. If the asset is transferred to the wife (rather than sold under the trust), the proceeds will be the same amount with no resulting capital gain or loss to be reported on the T3 Trust Tax Return. The answers to questions 3 and 9 on the T3 trust tax return will be “Yes,” and notes must be attached to the T3 trust tax return.
Any comments or corrections on the above thoughts will be appreciated.
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Correct, do not report in the testamentary trust. If you were to report it at all, it would be on the terminal return. Testamentary trust is filed for income received after terminal return, correct. Elect for 36 month GRE status for favorable tax treatment.
Correct, you elect under 70(6.2) on a property by property basis.
Further, you don’t need to report on the schedule 1, you already reported on the terminal return… otherwise you’re double booking your disposition for no reason. You’d only report on the S1 if the property was sold in trust… such as an interest being held in the estate for sale by the children (at which case the sale is taxed in the trust via GRE).
You will indicate on the ID check that capital property or interest in capital property was distributed (and get a clearance certificate) ONLY if it is held in probate and not transferred directly to the beneficiary(spouse) on death (see below). You don’t need to indicate that the trust holds private company shares, as I mentioned previously.
Some further notes: For assets other than privco shares (CCPC), depends on how the interest is carried … could be in a living trust for the spouse and bypass probate completely if structured correctly. Don’t assume everything goes to probate.
Others have covered the share transfer adequately, but I have a question about the dividend:
When was the dividend declared?
If it was declared before the death but paid after you are entitled to file a Rights and Things Terminal Return in addition to your normal Terminal Return.
If it was declared after death and the rollover was to the spouse then the shares don’t form part of the estate at all and the dividend is payable to the spouse and taxable on the spouse’s return.