2002 Ruling 2001-009555A - Reversionary Trust - Non-Res Settlor

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Where a non-resident individual settled a discretionary inter vivos trust that is resident in Canada and it is now proposed to distribute the property of the trust to non-resident beneficiaries including the settlor, will 107(4.1) apply by virtue of 75(2) having been applicable previously?

2. Will the property that is distributed from the trust constitute capital property in the hands of the beneficiaries.

Position:

1. No.

2. Probably yes.

Reasons:

1. XXXXXXXXXX .

2. The property is purported to be capital property of the trust, and thus the distribution itself of the property will not cause the property to not be capital property when received by the beneficiaries. This is similar to previous rulings provided to other taxpayers.

XXXXXXXXXX 2001-009555

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX (the "Trustees"), XXXXXXXXXX (the "IV Trust")

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the Trustees of the IV Trust. We acknowledge your subsequent letters of XXXXXXXXXX and our related telephone conversations.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling:

(a) is in an earlier return of the IV Trust or any of the beneficiaries of the IV Trust;

(b) is being considered by a tax services office or a taxation centre in connection with a previously filed income tax return of any of the taxpayers or related persons;

(c) is under objection by any of the taxpayers or related persons;

(d) is or has been before the courts; or

(e) is the subject of a ruling previously considered by the Directorate in respect of any of the taxpayers or related persons.

In this letter the following terms have the meaning specified:

(a) "Act", means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.l, as amended to the date hereof and every reference to a section, subsection, or paragraph is a reference to the relevant provision of the Act;

(b) "capital property" has the meaning assigned by section 54;

(c) "cost amount" has the meaning assigned by subsection 248(1);

(d) "personal trust" has the meaning assigned by subsection 248(1); and

(e) "proceeds of disposition" has the meaning assigned by section 54.

Other terms are defined in the letter as follows:

(f) "Bare Trust," as described in 11, is the trust that will hold legal title to the Subject Property on behalf of the Beneficial Owners;

(g) "Beneficial Owners" are the appointed Beneficiaries to whom the Trustees will distribute the Subject Property, as described in 10;

(h) "Beneficiaries" with respect to the IV Trust are the Settlor, the children of the marriage of the Settlor and the Settlor's Spouse, and the children of such children;

(i) "IV Trust" is as defined above, the tax account number of which is XXXXXXXXXX;

(j) "Settlor" means XXXXXXXXXX, settlor of the IV Trust;

(k) "Settlor's Child" means XXXXXXXXXX, a child of the Settlor;

(l) "Settlor's Spouse" means XXXXXXXXXX, spouse of the Settlor;

(m) "Subject Property" is a parcel of vacant land located at XXXXXXXXXX; and

(n) "Trustees" are as defined above. The original trustees of the IV Trust were XXXXXXXXXX. By deed of appointment dated XXXXXXXXXX was appointed trustee of the IV Trust in place of XXXXXXXXXX. A copy of the deed of appointment was submitted by you.

Facts

1. The IV Trust is a discretionary inter vivos trust and a personal trust that is resident in Canada. It was established on XXXXXXXXXX pursuant to a trust indenture executed on that date. A copy of the trust indenture was submitted by you.

2. Since the time that the IV Trust was established, each of the Trustees has been a resident of Canada for the purposes of the Act.

3. Although the Settlor was resident in Canada prior to XXXXXXXXXX, the Settlor has been resident in XXXXXXXXXX since XXXXXXXXXX. The Settlor's Child is also a resident of XXXXXXXXXX.

4. Some of the Beneficiaries are and some of the Beneficiaries are not resident in Canada for the purposes of the Act.

5. On XXXXXXXXXX, the IV Trust acquired the Subject Property at a cost of approximately $XXXXXXXXXX.

6. The acquisition of the Subject Property by the IV Trust was financed by the contribution of the required cash to the IV Trust by the Settlor.

7. The Subject Property is capital property and was acquired as a long-term investment by the IV Trust. It has never been used for income-producing purposes.

8. The only property owned by the IV Trust is the Subject Property and a XXXXXXXXXX coin. The Subject Property has a current fair market value of approximately $XXXXXXXXXX.

9. The Trust Indenture provides that the Trustees are obligated to distribute the property of the IV Trust at such time and to such of the Beneficiaries as the Settlor's Spouse may, by deed during his lifetime or by will upon his death, appoint.

Proposed Transactions

10. Pursuant to the provisions of the Trust Indenture, the Settlor's Spouse will exercise the power described in 9 above and will by deed appoint the Settlor and the Settlor's Child as the Beneficial Owners. In accordance with a direction in the deed of appointment, the Trustees will distribute the Subject Property to the Beneficial Owners as joint tenants. The Beneficial Owners will acknowledge that the distribution will be in satisfaction of all or part of their capital interest in the IV Trust. A draft copy of the deed of appointment was submitted by you.

11. The distribution of the Subject Property to the Beneficial Owners will be evidenced by an instrument described as XXXXXXXXXX However, the instrument will not be registered immediately with the provincial Land Title Office and so legal title to the Subject Property will be held in the Bare Trust in the name of the Trustees for the sole benefit of the Beneficial Owners. The Beneficial Owners will be the sole beneficiaries of any income or advantages arising from the Subject Property notwithstanding its legal ownership by the Bare Trust. The Beneficial Owners will retain the ability to jointly revoke, alter or amend the terms of the Bare Trust at any time and the Beneficial Owners will have the unfettered ability to deal jointly with the Subject Property as they see fit. The Trustees will not deal with the Subject Property except as directed by the Beneficial Owners, and upon demand, the Trustees will transfer legal title of the Subject Property to the Beneficial Owners. A draft copy of the proposed Bare Trust agreement was submitted by you.

12. An election will not be filed under subsection 107(2.001).

Purpose of Proposed Transactions

13. The purpose of the proposed transactions is to distribute the Subject Property from the IV Trust to the Beneficial Owners prior to the application of paragraph 104(4)(b) to the IV Trust.

Rulings

14. Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are carried out as described above, our rulings are as follows:

A. Subsection 107(2) will apply to the distribution by the IV Trust of the Subject Property, such that the IV Trust will be deemed to dispose of the Subject Property for proceeds of disposition equal to its cost amount to the IV Trust immediately before the time of the distribution and the Beneficial Owners will be deemed to have collectively acquired the Subject Property for that same amount;

B. Paragraph 212(1)(c) will not apply to the distribution of the Subject Property by the IV Trust to the Beneficial Owners;

C. Pursuant to subsection 104(1), the Bare Trust will, except for the purposes stated in subsection 104(1), be deemed not to be a trust. Accordingly, subsection 104(4) will not apply to the Bare Trust; and

D. Provided that the Subject Property constitutes capital property to the IV Trust, the proposed transactions will not, in and by themselves, cause the Subject Property not to be capital property when it is received by the Beneficial Owners from the IV Trust.

These rulings are based on the Act as it currently reads and do not take into consideration any proposed amendments thereto. These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch