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 GAAR applies to the transfer of the property of a testamentary spousal trust to a corporation as consideration for preferred shares where a non-spousal mirror trust acquires the common shares of the corporation for nominal value.
Position: No.
Reasons: Gaar committee's decision.
XXXXXXXXXX 2004-008925
XXXXXXXXXX, 2006
Dear Sir:
Re: Advance Income Tax Ruling
XXXXXXXXXX
(XXXXXXXXXX Tax Services Office, XXXXXXXXXX Centre)
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers. We also acknowledge our subsequent telephone conversations and correspondence concerning your request. The documents submitted with your request are part of this document only to the extent described herein.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:
a) in an earlier return of the taxpayers or related persons;
b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;
c) under objection by the taxpayers or related persons;
d) before the courts; or
e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons.
Unless otherwise indicated, all references to monetary amounts are in Canadian dollars and all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) ("the "Act").
DEFINITIONS
For the purposes of this ruling request, the following terms have the meaning specified:
"Agency" means the Canada Revenue Agency;
"Common Shares" means the common shares of Newco;
"Deceased" means and refers to the late XXXXXXXXXX;
"Estate" means the Estate of XXXXXXXXXX;
"Estate Residue Trust" means and refers to the trust comprising the residue of the Estate pursuant to the terms of the Will;
"Estate Trustees" means and refers to the trustees of the Estate Residue Trust, namely XXXXXXXXXX;
"Grandchild", "grandchildren" or "deceased grandchildren" means and refers to the grandchildren or a grandchild of the Deceased;
"Minister" refers to the Minister of National Revenue;
"Newco" means a corporation that will be incorporated by the Estate Trustees under the laws of the province of XXXXXXXXXX;
"Other Assets" include a personal residence, listed personal property, shares of a XXXXXXXXXX corporation, XXXXXXXXXX, a non-interest bearing loan to XXXXXXXXXX and a small portfolio of publicly traded securities;
"Shares" refers to XXXXXXXXXX Common, XXXXXXXXXX Second Preference, XXXXXXXXXX Third Preference and XXXXXXXXXX Class B Special shares representing XXXXXXXXXX% of the issued and outstanding voting shares of XXXXXXXXXX (a privately held corporation) and the XXXXXXXXXX Common and XXXXXXXXXX Second Preference shares representing XXXXXXXXXX% of the issued and outstanding voting shares of XXXXXXXXXX (a public corporation);
"Spouse" means XXXXXXXXXX;
"Trust" means the trust settled collectively by the parents of each of the Grandchildren and described in paragraph 10;
"Trustees" means and refers to the trustees of the Trust, namely XXXXXXXXXX and
"Will" means and refers to the Last Will and Testament of the Deceased made of a series of multiple wills, each dated XXXXXXXXXX.
FACTS
1. The Deceased died on XXXXXXXXXX.
2. The Estate Trustees have administered the Estate in accordance with the terms of the Will. They have distributed certain bequests, paid specific legacies and created a residual trust of certain farm property.
3. The residue of the Estate consists of the Shares and Other Assets. A substantial portion of the aggregate value of that residue is represented by the fair market value of the Shares. It is estimated that the current fair market value of the Shares and Other Assets is approximately $XXXXXXXXXX as compared to an approximate value of $XXXXXXXXXX at the Deceased's date of death.
4. Within XXXXXXXXXX months after the Deceased's passing, the residue of the Estate was vested indefeasibly in the Estate Residue Trust for the benefit of the Spouse. The Estate Residue Trust is a spousal trust as described in subsection 70(6). By the terms of the Estate Residue Trust, the Spouse is entitled to all of the net income therefrom. Further, the Estate Trustees may at any time or times pay to or for the benefit of the Spouse any amount or amounts of the capital of the Estate Residue Trust as is considered advisable. No person, other than the Spouse, is entitled to receive or otherwise obtain the use of any of the income or capital of the Estate Residue Trust during her life. On the Spouse's death the remaining capital of the Estate Residue Trust is to be divided in equal shares per capita among the Grandchildren alive at the Spouse's death, with a gift over to the respective issue per stirpes of any Grandchild who predeceases the Spouse.
5. The share for each Grandchild who survives the Spouse is to be held in trust for him or her until he or she attains the age of XXXXXXXXXX years. Upon attaining the age of majority, each Grandchild is entitled to all of the income from such share. Should such Grandchild die before attaining the age of XXXXXXXXXX years, his or her share is to be divided in equal shares per stirpes among his or her issue, him or her surviving. The share for any issue of a Grandchild who shares in the Estate Residue Trust in the place and stead of a deceased Grandchild is similarly held in trust for such issue until he or she attains XXXXXXXXXX years of age. While a share is being held in trust for the Grandchild or remoter issue, the Estate Trustees have discretion to pay capital amounts to, or for the benefit of, such beneficiary at any time and are required to pay capital payments to such Grandchild of XXXXXXXXXX of his or her share at age XXXXXXXXXX, XXXXXXXXXX of the share remaining at age XXXXXXXXXX and the balance of the share at age XXXXXXXXXX.
6. The Spouse is XXXXXXXXXX years of age.
7. There are XXXXXXXXXX Grandchildren, each of whom has attained the age of majority.
Proposed Transaction
8. Newco will be created. Newco will be a taxable Canadian corporation as defined in subsection 89(1). The authorized share capital of Newco will consist of an unlimited number of Class A voting redeemable, retractable preference shares (the "Class A Shares") redeemable and retractable at $XXXXXXXXXX per share; an unlimited number of Class B redeemable, retractable preference shares (the "Class B Shares") redeemable and retractable at $XXXXXXXXXX per share and paying dividends at a maximum rate of XXXXXXXXXX%; and an unlimited number of Common Shares.
9. No dividends or other distributions will be payable with respect to the Common Shares if under such circumstances the ability of Newco to redeem or honour a retraction of its issued Class A Shares or Class B Shares will be impaired.
10. A parent of each of the Grandchildren will collectively settle the Trust with a $XXXXXXXXXX dollar gold coin. Its beneficiaries will be the Spouse and the Grandchildren. The $XXXXXXXXXX gold coin will be the only property contributed to the Trust by the Grandchildren's parents and will not be invested. The terms of the Trust will be the same as the Estate Residue Trust. The terms of the Trust will include the following provision:
Notwithstanding anything else herein contained, if at any particular time and from time to time while a beneficiary hereof is a "designated person" as such term is defined in the Income Tax Act (Canada), such designated person shall not be entitled to receive or otherwise obtain the use of the income or capital of the Trust Fund.
11. The Estate Residue Trust will subscribe for XXXXXXXXXX Class A Shares of Newco for $XXXXXXXXXX.
12. The Estate Residue Trust will enter into an agreement of purchase and sale with Newco wherein Newco will acquire, at fair market value, all the Shares in return for Class B Shares redeemable and retractable for the fair market value of the Shares immediately prior to the transfer (the "Transfer"). The only consideration received by the Estate Residue Trust from Newco on that transfer will be the Class B Shares and the increase in the paid-up capital in respect of all shares of Newco as a result of the issue of the Class B Shares on that transfer will be equal to the greater of the paid-up capital and the adjusted cost base (determined subject to paragraphs 84.1(2)(a) and (a.1)) of the Shares. The Estate Trustees and Newco will jointly elect, in prescribed form, and within the required time set out in subsection 85(6), to have subsection 85(1) apply to the purchase and sale of the Shares. Pursuant to the election, the agreed amount will be the adjusted cost base of the Shares.
13. The determination of the fair market value of the Shares will be undertaken by an accredited valuator. It is the intention of the Estate Trustees and Newco that the fair market value of Newco immediately after the steps described in paragraphs 11 and 12 above will be represented by the fair market value of the Class A Shares and Class B Shares.
14. The Estate Trustees will control Newco at all times.
15. Immediately after the Transfer and the issuance of the Class B Shares, the Trust, with funds borrowed from a financial institution, will subscribe for XXXXXXXXXX Common Shares of Newco for a price equal to their fair market value.
16. The Estate Trustees will have the ability to encroach on the capital of the Estate Residue Trust by retracting or causing the redemption of some or all of the Class A Shares or Class B Shares and to distribute the proceeds to the Spouse for her benefit.
17. The Trustees will hold the Common Shares of Newco as trustees of the Trust. The terms of the Trust will provide that the income of the Trust will be payable to the Spouse during her lifetime. In addition, the terms of the Trust will permit encroachments on capital for the benefit of the Spouse as the Trustees from time to time in their sole discretion decide.
18. On the Spouse's death, the remaining value in each of the Estate Residue Trust and the Trust will, subject to the Grandchildren attaining XXXXXXXXXX years of age, be distributed in equal shares per capita among the Grandchildren then alive, provided that if any such Grandchild predeceased the Spouse, or died before attaining XXXXXXXXXX years of age, his or her share, or the remainder thereof, as the case may be, will be divided in equal shares per stirpes among his or her issue, subject to the specific trusts provided for in the Will or the Trust for the Deceased's remoter issue.
Purpose of the Proposed Transaction
19. The Estate Residue Trust will be deemed to have disposed of any capital assets it holds on the Spouse's death for proceeds of disposition equal to the fair market value of such assets at that moment. Given the life expectancy of the Spouse and past investment performance, the fair market value of the Shares and of the Other Assets will in all likelihood be substantially greater than their current fair market value.
20. In order to limit such future gains in the Estate Residue Trust and income taxes on the Spouse's death, the Estate Trustees propose to freeze the fair market value of the Shares and thus limit the exposure of the Estate Residue Trust to capital gains tax on the Spouse's death and maximize the value which will pass to the Grandchildren on the Spouse's death.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Neither the Estate Residue Trust nor the Estate Trustees will, for the purposes of subsection 74.4(2), be considered to be individuals who have transferred or lent property to a corporation for the benefit of a designated person in respect of an individual.
B. The Estate Residue Trust will not by reason only of the proposed transactions cease to be:
a) a testamentary trust as defined in subsection 108(1) or
b) a trust described in subsection 70(6) and paragraph 104(4)(a).
C. The Trust will be an inter-vivos trust as defined in subsection 108(1) and subject to the provisions of paragraph 104(4)(b).
D. The Trust will not be a spousal trust as described in subsection 70(6).
E. Paragraph 85(1)(e.2) will not apply to the disposition of the Shares of the Estate Residue Trust by the Estate Trustees to Newco.
F. Subsection 85(1), other than paragraph 85(1)(e.2), will apply to the disposition of the Shares of the Estate Residue Trust by the Estate Trustees to Newco.
G. Section 84.1 will apply to the disposition of the Shares of the Estate Residue Trust by the Estate Trustees to Newco; however, the application of that section will not result in a reduction pursuant to paragraph 84.1(1)(a) in the paid-up capital of the shares received by the Estate Trustees in Newco on the disposition or in a dividend deemed to have been paid by Newco to the Estate Trustees pursuant to paragraph 84.1(1)(b).
H. Immediately after completion of the proposed transactions, the Trust will be a personal trust as defined under subsection 248(1). I. Sections 245 and 246 will not apply to the proposed transactions herein described, in and by themselves.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Agency provided that the proposed transactions are completed within six months of the date of this letter.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings given.
Nothing in this ruling should be construed as implying that the Agency has agreed to or reviewed any other tax consequences relating to any facts or proposed transactions referred to herein other than those specifically described in the rulings given above. In particular, nothing in this ruling should be construed as implying that Agency has agreed to or reviewed the determination of the fair market value, the adjusted cost base, or fair market value of any particular asset or the paid-up capital of any shares referred to herein.
XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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