16 November 2006 External T.I. 2005-0152241E5 - Trust and mentally handicapped minor child

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 a distribution date at age 65 would satisfy the condition in paragraph 13(c) of IT-268R4 for a transfer of farm property from a parent to a trust for the sole benefit of a minor child under subsection 73(3) of the Act, where the minor child is mentally disabled.

Position: Yes

Reasons: The condition in paragraph 13(c) of IT-268R4 is part of the conditions that ensure that the transfer of the property to an inter vivos trust is for the sole benefit of the child such that the child has an enforceable right or claim in the absolute ownership of the property so transferred, even though the child may not be entitled to the immediate enjoyment of all the benefits arising from that right.

XXXXXXXXXX 2005-015224
Tim Fitzgerald, CGA
November 16, 2006

Dear XXXXXXXXXX:

We are responding to your letter of September 23, 2005 wherein you requested our views regarding the transfer of farm property to a trust for the benefit of a minor child. We apologize for the delay in responding to you.

You described a hypothetical situation in which a parent ("Parent A"), who is a full time farmer actively engaged in the business of farming, wishes to transfer some of his farm property (land, depreciable property and eligible capital property) to a trust for the benefit of his child, who is a minor ("Child B"), on a "rollover" basis pursuant to subsection 73(3) of the Income Tax Act ("the Act"). You indicated that Child B is mentally disabled and unable to make prudent financial decisions without assistance.

In your letter you referred to paragraph 13 of Interpretation Bulletin IT-268R4 Inter Vivos Transfer of Farm Property to Child, which reflects the CRA's administrative position in terms of the conditions that must be met in order to qualify for the rollover treatment under 73(3) in respect of a transfer of farm properties to a trust for the exclusive benefit of a minor.

Paragraph 13 of IT-268R4 states:

Trusts for Minors

13. A parent may transfer property described in subsection 73(3) (see ¶2 above) or 73(4) (see ¶14 below) to a trust solely for the benefit of his or her minor child. However, for property transferred to such a trust to qualify for a rollover under either of those subsections the following additional conditions must be met:

(a) the trust must be irrevocable;

(b) the terms of the trust must provide for the property to be held in trust for the exclusive benefit of the child and there must not be any trust provision which could have the effect of depriving the child of any rights as the beneficial owner of the property; and

(c) the terms of the trust must provide for the distribution of the property to the child absolutely upon reaching a certain age and for the distribution of that property to the child's estate upon the child's death before that age.

You are concerned about the condition in paragraph (c) above. You suggest that it would be problematic for farm property to be distributed absolutely to Child B at a specified age, such as upon Child B reaching the age of 18, given that Child B is not mentally capable of making business decisions without assistance. Accordingly, you have asked whether in our view, it would be acceptable for the purpose of the condition (c) in paragraph 13 of IT-268R4 that the terms of the trust specify that the property shall pass absolutely to Child B upon Child B reaching the age of 65.

Our Comments:

The tax implications of particular transactions cannot be confirmed unless the transactions are proposed and are the subject matter of an advanced ruling request submitted in the manner set out in Information Circular 70-6R5. Nonetheless, we have considered the situation outlined in your letter and offer the following general comments, which may be of assistance but are not binding.

Generally, when anything is disposed of by a taxpayer to a person with whom the taxpayer does not deal at arm's length for no proceeds or for proceeds that are less than its fair market value, under paragraph 69(1)(b) of the Act the taxpayer is deemed to have received proceeds of disposition equal to its fair market value. An exception to paragraph 69(1)(b) is provided by subsection 73(3) when a parent, while living, transfers farm property to his or her child. Farm property is property used in the business of farming and includes land in Canada, depreciable property in Canada of a prescribed class and eligible capital property of a business carried on in Canada. Subsection 73(3) permits the deferral of tax on any capital gains and income inclusions such as recapture of capital cost allowance on the transfer of the above-described properties from the parent to the child. The provisions of subsection 73(3) are discussed in IT-268R4.

The "rollover" under subsection 73(3) applies if certain conditions are met. One such condition is that the taxpayer must transfer the farm property to a child of the taxpayer. If the transfer is not made outright to a child, the rollover is arguably unavailable. Where the farm property is not transferred to a child because the child is a minor but instead it is transferred to a trust solely for the benefit of the child, the CRA has developed an accommodating administrative position, which is reflected in paragraph 13 of IT-268R4. The conditions for the administrative position ensure that, although the farm property is transferred to an inter vivos trust for the minor child, the child has an enforceable right or claim in the absolute ownership of the property in such a manner that the right cannot be defeated by future events, even though the child may not be entitled to the immediate enjoyment of all the benefits arising from that right. Without the condition in paragraph 13(c) of IT-268R4, which provides for a distribution date for the property to the child upon reaching a certain age and for the distribution of the property to the child's estate if the child dies before that date, it would be difficult to regard the child as having the right in the absolute ownership of the property.

Whether a particular property is held in trust for the exclusive benefit of the child, whether the trust is irrevocable and whether there are any trust provisions, which could have the effect of depriving the child of any rights as the beneficial owner of the property, are all questions of fact that can only be ascertained after a review of the circumstances and an examination of all relevant terms of the trust documents.

In answer to your question regarding the situation you described, we are not aware of any reason under the Act and the Income Tax Regulations that would prevent the farm property from being held by an inter vivos trust until the child reaches the age of 65.

If you are dealing with an actual situation, we are prepared to consider the application of subsection 73(3) of the Act (and the conditions in paragraph 13 of IT-268R4) to such situation by way of an advance income tax ruling requested in accordance with the procedures outlined in Information Circular 70-6R5.

We trust our comments are of assistance.

Yours truly,

Sandy Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch