Tax for Estate Planners: The T2062 and Some Utter Nonsense

From time to time, in my practice, I deal with nonsense.

Laws are laws, but not all are created equally—nor do they always work as intended.

One such flawed law is the requirement for non-residents to file a form when receiving distributions from Canadian estates or trusts which at any time held real estate comprising greater than 50% of the value of the estate or trust. I wrote about this in greater detail here.

In short, due to a quirk in the Income Tax Act, these beneficiaries are considered to have “sold” their capital interest in the estate or trust—which is considered to be “taxable Canadian property”.

If the non-residents file, almost always there’s no tax payable. There’s no particular benefit to the government or CRA for the disclosure of the transfer, for the mountain of paper forced on our clients. These beneficiaries are lumped in with other non-residents more reasonably required to file on sale of Canadian real estate, or face a tax of 25% of the entire distribution (or 35% if the Liberals somehow get their tax hike off the ground).

It's nonsense, but it’s also the law. And unfortunately, filing these forms is not particularly straightforward.

So, at the risk of literally boring you to death, in this note I take you step by step through how to file in the hope that you can make this a little less frustrating for your clients.

This guide won’t be of much interest to the casual reader, but for accountants and estate planners, it may come in handy when—inevitably—this issue arises.

The form before the form: getting a tax number

As a starting point, the beneficiary needs a Canadian tax number (a temporary tax number, individual tax number or SIN). If the client has none of these, they get the Kafkaesque privilege of filing out another form: Form T1261.

This is filled out as follows:

• Reason for applying: disposing of taxable Canadian property
• Supporting documents: select valid passport and driver’s license
• Fill out beneficiary’s name in full, address, etc. and the relevant sections
• Include with the package certified or notarized copies of the passport and driver’s license with the signature of the certifier in original ink and the original seal or ink stamp (i.e. not a copy)
• The documents must be certified by public notary, lawyer, medical doctor or chartered professional accountant (include relevant membership ID for the relevant individual)

Then you mail it in, and…wait! Six to eight weeks, the CRA says. Sometimes they meet this schedule; other times, they don’t. It’s luck of the draw.

The form: the T2062

The relevant form is the T2062. You can file before the proposed transfer or after (within 10 days of transfer). It’s generally preferable to file before distribution, because the estate or trust will have certainty as to the tax result. Comments below assume that the distribution is cash only.

Here’s how to fill it out:

• The “vendor” (even though, correct, no-one is selling anything) is the non-resident beneficiary.
• For supporting documents, below “interest in a trust” check the name and account number, fair market value of property and calculation of proceeds.
• Fill out the details for the vendor and “purchaser” (yes, even though no-one is purchasing anything), the latter of which will be the relevant estate or trust.
• For details of the property, select trusts and enter the relevant details. Property description will be is “A capital interest as a capital beneficiary in the estate of John Smith”, or “the John Smith Alter Ego Trust”, etc.
• If filing before transfer of funds select “proposed disposition”; otherwise select “completed”.
• Proceeds of disposition should be the amount of the cash. Adjusted cost base should be the amount of the cash. Gain or loss should be 0. No exemptions.
• For the supporting documents, I suggest a single appendix with the answers to the following queries):

Name of the estate or trust

Account number for the estate

Description of the property received from the estate (CAD$X)

Fair market value of the property received from the estate (CAD$X)

Calculation of the proceeds of disposition (paragraph 107(2.1)(c): the fair market value of the property transferred by the estate to the beneficiary = CAD$X)

Calculation of the adjusted cost base (paragraph 107(1)(a) and subsection 108(1) “cost amount”: the adjusted cost base is equal to the “cost amount” to the taxpayer of their interest, which is the amount of money distributed to them = CAD$X)

Not required: sale documents because interest was not sold

• You can submit the form by mail or online using the Submit Documents feature on My Account for Individuals (if they have a MyAccount) or Represent a Client if the accountant submits.

Eventually, the CRA will send a certificate. If you sent the form after the disposition, you will receive Form T2068; otherwise it will be Form T2064. Both are called certificates of compliance. Both function in basically the same manner. But this is the CRA we’re dealing with. There’s no way they could just use one form!

The form after the form

As a final requirement, the beneficiaries will need to file a tax return the next year to report the disposition. In my view, the policy isn’t 100% clear on this point, but that’s how I read it. This appears to be the case even if there’s nothing owing because it’s not “excluded property”.

If you’ve made it this far and still have questions, feel free to reach out.

e-mail: [email protected]

phone: 604.425.1123.