Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: 1. Is a rollover under 73(1.02)(b)(ii) available where, having otherwise met all the requirements for a rollover under 73(1), the individual retains a specific power of appointment exercisable only in the individual's will?
2. Is a rollover under 73(1.02)(b)(ii) available where, having otherwise met all the requirements for a rollover under 73(1), the trust contains a "failure clause" in which the clause which sets out who will receive the trust property in the event the trust fails is described in terms of the intestacy of an individual?
Position: 1. No but if the requirements of 73(1) were otherwise met and the power of appointment was a general power of appointment exercisable only in the individual's will, yes.
2. No
Reasons: 1. Both 73(1.02)(b)(ii) and 107.4(1) require that there be no change in beneficial ownership in order for the provision to apply. A specific or hybrid power of appointment causes or results in a change in the beneficial ownership whereas a general power of appointment does not. Notwithstanding 248(25), a general power of appointment retained by the individual who contributed the property to the trust which is exercisable only through the individual's will does not result in the creation of any absolute or contingent rights as a beneficiary for the purpose of 73(1.02)(b)(ii) or 107.4(1)(e) because of 104(1.1).
2. The rights referred to in 104(1.1)(b) do not include rights conferred by the trust deed.
XXXXXXXXXX 2000-004873
Annemarie Humenuk
May 24, 2001
Dear XXXXXXXXXX:
Re: Restricted Meaning of Beneficiary
This is in reply to your letter of September 25, 2000, in which you requested our comments concerning the application of proposed paragraphs 104(1.1)(a) and (b) contained in Bill C-22 as they relate to the transfer of property to certain inter vivos trusts. We apologize for the delay in our response.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended or as proposed to be amended under Bill C-22 which received first reading in the Senate on May 15, 2001.
Under proposed subparagraph 73(1.02)(b)(ii) and proposed paragraph 107.4(1)(e), property may be transferred to certain inter vivos trusts on a rollover basis when the conditions set out in the respective provisions are met. Common to both of these provisions is the requirement that no one other than the individual may have any contingent right as a beneficiary under the trust. Proposed subsection 104(1.1) restricts the meaning of "beneficiary" as defined in subsection 248(25) for certain purposes, including the purposes of these two provisions.
You ask whether proposed paragraph 104(1.1)(a) would apply to exclude from the definition of beneficiary for the purposes of proposed subparagraph 73(1.02)(b)(ii) and proposed paragraph 107.4(1)(e), a person who may become a beneficiary under the trust pursuant to the exercise of a specific power of appointment where the power of appointment is only exercisable through the will or other testamentary instrument of an existing beneficiary. You also ask whether this provision would apply to exclude a right that may arise through the exercise of a specific power of appointment that is capable of being exercised separate and apart from the beneficiary's will if the beneficiary does not in fact exercise the power except through his or her will.
In addition, you ask whether proposed paragraph 104(1.1)(b) would similarly exclude from the definition of beneficiary for the purposes of the proposed rollovers, a person whose beneficial entitlement under a trust would arise solely in the event that the trust would otherwise fail (a "failure clause") where such entitlement is described in the trust deed by reference to the laws of intestacy as they would apply if a particular person were to die intestate. You advise that a typical failure clause provides that the property of the trust is to be divided among those individuals who would participate in the estate of a particular person if that person had died intestate at the time the trust would otherwise fail. You also advise that the person named in the failure clause might be the settlor of the trust, a beneficiary of the trust or some other person. If the rights described in proposed paragraph 104(1.1)(b) can include rights that may arise as a consequence of the application of a failure clause that includes a reference to intestacy, you ask whether the intestacy must be an actual intestacy of a person who did, in fact, die at the time the trust would otherwise fail or whether it can include the presumed intestacy of a person who did not die at the time the trust would otherwise fail.
Before addressing these questions, we note that another requirement which must be met in order for a particular transfer of property to an inter vivos trust to be a qualifying disposition under proposed paragraph 107.4(1)(a) is that there be no change in the beneficial ownership of the property as a result of the transfer. Proposed subparagraph 73(1.02)(b)(ii) was further amended by Bill C-22 to similarly require that there be no change in the beneficial ownership of the property transferred in order for subsection 73(1) to apply to a transfer of property from an individual to a trust for the benefit of that individual where the individual had not attained the age of 65 when the trust was created. As stated in the Explanatory Notes released by the Department of Finance, where the individual is the sole income and capital beneficiary of a trust during his or her lifetime, the retention of a general power of appointment by the individual on the transfer of property to such a trust would not be expected to result in a change in beneficial ownership of the property for the purpose of a transfer described in subparagraph 73(1.02)(b)(ii). However, if property is transferred to a trust in which the individual is the sole income and capital beneficiary during his or her lifetime and the individual retains a specific or hybrid power of appointment, it is our view that a change of beneficial ownership would arise as a result of the transfer. Accordingly, the comments which follow address the questions you raised solely in the context of beneficial interests that may arise through the exercise of a general power of appointment.
Where a power of appointment is exercisable only by will, the actual exercise of the power of appointment will arise as a consequence of the will of the holder of the power of appointment, if at all. As a result, notwithstanding subsection 248(25), a person's right to be appointed as a beneficiary of a trust under a general power of appointment which is exercisable only through the will of the beneficiary would not be considered to be a beneficiary for the purposes set out in subsection 104(1.1), including proposed subparagraph 73(1.02)(b)(ii) and proposed paragraph 107.4(1)(e). Where a power of appointment held by a beneficiary may be exercised during the beneficiary's lifetime (regardless of whether in fact the beneficiary does so), it follows that the right can arise otherwise than as a consequence of the terms of the will of the beneficiary and thus, paragraph 104(1.1)(a) would not apply to exclude a person who is otherwise beneficially interested in the trust within the meaning of subsection 248(25) from the definition of beneficiary for the purposes set out in subsection 104(1.1).
In the absence of a provision such as proposed paragraph 104(1.1)(b), it could be argued that anyone who could inherit a beneficial interest in a trust by reason of the intestacy of a beneficiary has a contingent right as a beneficiary under that trust. Proposed paragraph 104(1.1)(b) clarifies that such persons are not considered to have a contingent right as a beneficiary under the trust for the purposes set out in subsection 104(1.1). In our view, paragraph 104(1.1)(b) does not apply in respect of a contingent right that arises under the terms of a trust deed, including a right that may arise as a result of a failure clause contained in the trust deed. While a person's rights under such a failure clause may be described in terms of the laws governing a particular person's intestacy, the right itself arises as a consequence of the terms of the trust and not as a consequence of the law governing a particular person's intestacy. Proposed paragraph 104(1.1)(b) has been further amended by Bill C-22 to clarify this point.
The above comments are based on our understanding of the proposed law as it would apply in general. If you have a client who is considering transactions such as that described in your letter and would like the issue considered further, you may submit a request for an advance income tax ruling in the manner set out in Information Circular 70-6R4.
Yours truly,
T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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