22 June 2004 STEP Roundtable Q. 1, 2004-0069901C6 - Trust Roll-out

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.

Principal Issues: Whether subsection 107(2) will apply to a distribution of property to a beneficiary of a discetionary personal trust.

Position: It depends, but generally yes.

Reasons: The requirements of subsection 107(2) require that there be a dispostion of a (all or a part of) capital interest and that subsections 107(2.001), 107(2.002) and 107(4) to 107(5) do not otherwise apply.

MEMO FOR FILE

SUBJECT:	2004 STEP Conference			Tracking ID: 	2004-006990
		Question 1 - Trust Roll-out 

Contact:	XXXXXXXXXX 				Tel:	XXXXXXXXXX
								Fax:	XXXXXXXXXX
______________________________________________________________________

Question:

If a discretionary trust makes a distribution to a beneficiary of the trust will the rollover rules contained in subsection 107(2) apply? In other words, does this subsection apply in a situation where a personal trust distributes property to a beneficiary whose capital interest or right to receive property from the trust is subject to the exercise of any discretion by the trustee.

Response:

In general terms, subsection 107(2) provides a series of rules that apply when a personal trust distributes property to a beneficiary and there is a resulting disposition of all or any part of the beneficiary's capital interest in the trust. That is, subsection 107(2) will apply in circumstances where there is a distribution that constitutes a disposition of a capital interest in the trust and subsections 107(2.001), 107(2.002), and 107(4) to 107(5) do not otherwise apply.

Paragraph (d) of the definition of "disposition" in subsection 248(1) provides that a disposition includes a payment that can reasonably be considered to have been made because of the taxpayer's capital interest in the trust, except where paragraph (h) or (i) of that same definition apply. Paragraph (h) has no application in this situation because the trust is a personal trust. Paragraph (i) is also not applicable as we have assumed that the distribution is not out of the income of the trust nor is it in respect of an amount designated under subsection 104(20). Therefore, pursuant to paragraph (d) of the definition of "disposition" in subsection 248(1) there has been a disposition of the beneficiary's capital interest in the trust and subsection 107(2) will apply in this particular situation, subject to the exceptions noted earlier.

You have also asked whether a different result would arise if the beneficiary had paid some amount to acquire his discretionary interest in the trust. Depending on the facts of the particular situation a different result may arise. For example, if the trust was an inter vivos trust, it will not qualify as a "personal trust" as defined in subsection 248(1) if the beneficiary's interest in the trust was acquired for consideration payable directly or indirectly to the trust or to any person who has made a contribution to the trust. In these circumstances, it is subsection 107(2.1), and not subsection 107(2), that will apply to the distribution by the trust.

George Keable