2007 Ruling 2007-0224131R3 - wind up of a personal trust

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: 1. What is the amount of the stock dividend?

2. Will the distribution of shares to the beneficiaries be subject to subsection 107(2)?

Position: 1. The amount determined under paragraph (c) of the definition of stock dividend; generally the amount by which the paid up capital of the corporation is increased. 2. Yes

Reasons: 1. With respect to the amount of a stock dividend, paragraph (c) of the definition of "amount" in subsection 248(1) states that for purposes other than those specified in (a) or (b) of that definition, the amount of the stock dividend is the amount by which the paid-up capital of the corporation is increased as a result of the payment of the stock dividend. Neither paragraph (a) or (b) applies since none of subsections 112(2.1), (2.2), (2.4), 258(3), 258(5), 95(7) or sections 191.1, 187.2, 187.3 apply in this case.

2. The trust is a personal trust and the trustee will not make the election under 107(2.001).

XXXXXXXXXX 								2007-022413

Attention: XXXXXXXXXX

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling
Account # XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling in respect of the above-noted taxpayer. We also acknowledge your correspondence of XXXXXXXXXX.

To the best of your knowledge and that of your client, none of the issues involved in the ruling request is:

• in an earlier return of your client or a related person,
• being considered by a tax services office or taxation center in connection with a previously filed tax return of your client or a related person,
• under objection by your client or a related person,
• before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or
• the subject of a ruling previously considered by the Directorate in respect of your client or a related person.

You provided us with a copy of the following documents:

• Trust Indenture for the Trust;
• Application to the Supreme Court of XXXXXXXXXX to vary the Trust;
• copy of the valuation report dated XXXXXXXXXX in respect of the shares of the Corporation; and
• copy of the actuarial report dated XXXXXXXXXX in respect of the value of the various interests in the Trust.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Except as otherwise noted, 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 (the "Act"), all terms defined in the Act have the meaning so specified and the following terms have the meanings specified:

"Adult Grandchildren" means XXXXXXXXXX;

"Alter Ego Trust" means the trust to be created by the Settlor as described in paragraph 14 below which will meet the conditions necessary to qualify as an alter ego trust as defined in subsection 248(1);

"Child 1" means XXXXXXXXXX, child of the Settlor;

"Child 2" means XXXXXXXXXX, child of the Settlor;

"Child 3" means XXXXXXXXXX, child of the Settlor;

"Child 4" means XXXXXXXXXX, child of the Settlor;

"Child 5" means XXXXXXXXXX, child of the Settlor;

"Child 6" means XXXXXXXXXX, child of the Settlor;

"Corporation" means XXXXXXXXXX, a company incorporated pursuant to the Canada Business Corporation Act;

"Grandchild 1" means XXXXXXXXXX, child of Child 3;

"Grandchild 2" means XXXXXXXXXX, child of Child 4;

"Grandchild 3" means XXXXXXXXXX, child of Child 4;

"Grandchild 4" means XXXXXXXXXX, child of Child 5;

"Material Date" in respect of any grandchild of the Settlor born after XXXXXXXXXX means the later of the death of the Settlor and the XXXXXXXXXX anniversary of the birth of the Primary Beneficiary who is the parent of that particular grandchild;

"Minor Grandchildren" means Grandchild 1, Grandchild 2, Grandchild 3 and Grandchild 4;

"Parties" means the Primary Beneficiaries, Adult Grandchildren and the Public Trustee and Guardian of XXXXXXXXXX;

"Primary Beneficiaries" means Child 1, Child 2, Child 3, Child 4, Child 5 and Child 6;

"Settlor" means XXXXXXXXXX;

"Former Spouse" means XXXXXXXXXX;

"Time of Division" means the later of the death of the Settlor and the death of the Former Spouse;

"Trust" means the XXXXXXXXXX , an inter vivos discretionary trust settled by Settlor in XXXXXXXXXX; and

"Trustee" means XXXXXXXXXX until XXXXXXXXXX, and after that date means XXXXXXXXXX is resident in Canada.

The relevant Tax Services Office for the Trust is the XXXXXXXXXX Tax Services Office and the relevant Tax Centre is the XXXXXXXXXX Centre.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. The Trust is a personal trust as defined in subsection 248(1). The Trust is irrevocable and no part of the income or capital may be paid, lent, transferred or applied for the benefit of the Settlor and for greater certainty, the Settlor cannot become a beneficiary of the Trust under any circumstance nor can any of the income or capital revert to the Settlor. The terms of the Trust provide for payments to the Former Spouse in certain limited circumstances; however, the Former Spouse died in XXXXXXXXXX and is no longer a beneficiary of the Trust.

2. Under the terms of the Trust:

(a) the Trustee has the discretion to make distributions of income to any of the Primary Beneficiaries or where a Primary Beneficiary is deceased, to any of the issue of that deceased Primary Beneficiary prior to the Time of Division or to retain such income in the Trust; and

(b) the Trustee has the discretion to encroach on capital of the Trust for the benefit of one or more of the Primary Beneficiaries or the children of deceased Primary Beneficiaries prior to the Time of Division provided that such encroachment is required to assist with education or medical treatment of the beneficiary on behalf of whom the payment is made.

3. At the Time of Division, the property of the Trust will be divided into such number of equal shares as there shall be Primary Beneficiaries then alive, provided that if a Primary Beneficiary shall then be deceased and shall have issue then living, such Primary Beneficiary shall be considered to be alive for the purpose of such division. The equal shares created upon the Time of Division shall be dealt with as follows:

(a) one of such equal shares shall be paid or transferred to each Primary Beneficiary who is alive at the Time of Division and has attained the age of XXXXXXXXXX;

(b) one of such equal shares shall be held in trust for each Primary Beneficiary who is alive at the Time of Division but has not yet attained the age of XXXXXXXXXX and when such Primary Beneficiary attains the age of XXXXXXXXXX, such share shall be paid or transferred to him;

(c) if such Primary Beneficiary dies before attaining age XXXXXXXXXX, then such share shall be held until the XXXXXXXXXX anniversary of the birth of such Primary Beneficiary when it shall be paid or transferred to the issue of such Primary Beneficiary provided that, if there are no issue then alive, such share shall be added to the share of each other Primary Beneficiary; and

(d) one of such equal shares will be held in trust for each Primary Beneficiary who has died before the Time of Division having issue alive at that time and such share will be held in trust until the XXXXXXXXXX anniversary of the birth of such Primary Beneficiary at which time it will be paid or transferred to the issue of such Primary Beneficiary and, if there are no such issue then alive, such share will shall be added to the share of each other Primary Beneficiary.

4. The Primary Beneficiaries are the children of the Settlor. They range in age from XXXXXXXXXX to XXXXXXXXXX and are all resident in Canada. The Settlor also has XXXXXXXXXX grandchildren, XXXXXXXXXX. All of the grandchildren of Settlor are residents of Canada.

5. The Trust currently holds of XXXXXXXXXX Class A Common shares and XXXXXXXXXX Class B Common shares in the authorized capital of Corporation. The Class A Common shares of Corporation are voting, non-participating shares. The holders of the Class A Common shares are not entitled to receive dividends on such shares and, on liquidation or dissolution of the company, the holders of the Class A Common shares receive only the paid-up capital of such shares which is a nominal amount. The XXXXXXXXXX Class A Common shares owned by the Trust represent XXXXXXXXXX% of the total outstanding Class A Common shares. The other outstanding XXXXXXXXXX Class A Common shares of Corporation are owned by Settlor. The value of the Class A Common shares is nominal.

6. The XXXXXXXXXX Class B Common shares of Corporation are non-voting, participating common shares. The holders of the Class B Common shares are entitled to receive dividends and, on liquation or dissolution of the company, the holders of the Class B Common shares receive all assets remaining after payment of the redemption price to the holders of the preferred shares of Corporation. The Trust owns all of the outstanding Class B Common shares of Corporation. Both the adjusted cost base and the paid-up capital of the Class B Common shares is nominal.

7. A valuation of the XXXXXXXXXX Class B Common shares of Corporation owned by the Trust has been conducted and the valuator has determined that the fair market value of the Class B Common shares was $XXXXXXXXXX as of XXXXXXXXXX.

8. Currently, the shareholdings of Corporation are as follows:

		Shareholder			Number and Class of Shares

		Settlor			XXXXXXXXXX  Class A Common
		Trust				XXXXXXXXXX  Class A Common
		Trust				XXXXXXXXXX  Class B Common
		Settlor			XXXXXXXXXX  Class C Preferred
		Child 1			XXXXXXXXXX  Class E Preferred
		Child 2			XXXXXXXXXX  Class E Preferred
		Child 3			XXXXXXXXXX  Class E Preferred
		Child 4			XXXXXXXXXX  Class E Preferred
		Child 5			XXXXXXXXXX  Class E Preferred
		Child 6			XXXXXXXXXX  Class E Preferred

Proposed Transactions

9. The Primary Beneficiaries and the Adult Grandchildren wish to vary the terms of the Trust so that the property of the Trust will be distributed to the beneficiaries in proportion to the value of their respective interests in the Trust. Under the laws of the Province of XXXXXXXXXX, the terms of a trust may only be varied if all of the beneficiaries of the trust consent to the proposed variation. In the event that some of the beneficiaries cannot consent because they lack legal capacity, the Supreme Court of XXXXXXXXXX may consent on their behalf, provided that the Supreme Court of XXXXXXXXXX is satisfied that the proposed variation confers a benefit upon the beneficiaries that it represents. In determining whether to consent to a proposed variation, the Supreme Court of XXXXXXXXXX may take into account the recommendations of the XXXXXXXXXX.

In the case of this Trust, there are four categories of beneficiaries whose interest are represented by the XXXXXXXXXX and ultimately, by the Supreme Court of XXXXXXXXXX. They are:

(i) the Minor Grandchildren;

(ii) the current great-grandchildren of the Settlor;

(iii) any future great-grandchildren of the Settlor who may be born; and

(iv) any future children or grandchildren of the Settlor who may be born.

10. An actuarial analysis of the value of certain beneficiaries' interests in the Trust was conducted in XXXXXXXXXX. Pursuant to negotiations with the office of the XXXXXXXXXX, the Parties agree that:

(a) the value of the interests in the Trust of the four Minor Grandchildren will be considered to be XXXXXXXXXX% of the amount determined by the actuarial report prepared in XXXXXXXXXX in contemplation of these proposed transactions. Accordingly, the value of the interest of each of the four existing Grandchildren in the Trust is:

(i) $XXXXXXXXXX to Grandchild 1;

(ii) $XXXXXXXXXX to Grandchild 2;

(iii) $XXXXXXXXXX to Grandchild 3;

(iv) $XXXXXXXXXX to Grandchild 4; and

(b) the total value of the interests of all the great-grandchildren of the Settlor, whether currently in existence or not, will be considered to be $XXXXXXXXXX.

11. In order to satisfy the contingent interest of any great-grandchild of the Settlor, the Settlor will settle an additional $XXXXXXXXXX upon the Trust and the Trust will settle a new trust with that amount for the benefit of the great-grandchildren of the Settlor.

12. Corporation will declare and pay a stock dividend on the Class B Common shares held by the Trust as follows:

(a) XXXXXXXXXX Class F Preferred shares having a redemption price of $XXXXXXXXXX per share and a stated capital of $XXXXXXXXXX per share;

(b) XXXXXXXXXX Class G Preferred shares having a redemption price of $XXXXXXXXXX per share and a stated capital of $XXXXXXXXXX per share;

(c) XXXXXXXXXX Class H Preferred shares having a redemption price of $XXXXXXXXXX per share and a stated capital of $XXXXXXXXXX per share;

(d) XXXXXXXXXX Class I Preferred shares having a redemption price of $XXXXXXXXXX per share and a stated capital of $XXXXXXXXXX per share; and

(e) XXXXXXXXXX Class J Preferred shares having redemption price of $XXXXXXXXXX per share and a stated capital of $XXXXXXXXXX per share.

All of the preferred shares that will be issued to the Trust will be redeemable and retractable at $XXXXXXXXXX per share. The paid-up capital of the shares as defined by subsection 89(1) will be equal to their stated capital.

13. Subject to obtaining court approval of the variation of the Trust, the Trustee of the Trust will make the following distributions from the Trust:

(a) the Class A Common shares of Corporation will be transferred to the six Primary Beneficiaries in equal shares;

(b) the XXXXXXXXXX Class B Common shares of Corporation will be transferred to the six Primary Beneficiaries in equal shares;

(c) the XXXXXXXXXX Class F Preferred shares of Corporation will be transferred to the Adult Grandchildren, in proportion to the value of their respective interest in the Trust as determined by actuarial report prepared in XXXXXXXXXX;

(d) the XXXXXXXXXX Class G Preferred shares of Corporation will be transferred to Grandchild 1;

(e) the XXXXXXXXXX Class H Preferred shares of Corporation will be transferred to Grandchild 2;

(f) the XXXXXXXXXX Class I Preferred shares to Corporation will be transferred to Grandchild 3; and

(g) the XXXXXXXXXX Class J Preferred shares of Corporation will be transferred to Grandchild 4.

14. To satisfy the XXXXXXXXXX that the contingent interest in the Trust of any unborn issue of the Settlor other than any great-grandchildren or remoter issue are protected, the Settlor will settle the Alter Ego Trust with XXXXXXXXXX Class C Preferred shares of Corporation which he currently owns. The valuation report submitted with your request estimates the fair market value of the XXXXXXXXXX Class C Preferred shares of Corporation as of XXXXXXXXXX to have been $XXXXXXXXXX. The terms of the Alter Ego Trust will provide that the Settlor will be entitled to all of the income of the Alter Ego Trust during his lifetime and that no one other than the Settlor will be entitled to receive or obtain the use of any of its income or capital during his lifetime. The terms of the Alter Ego Trust will also provide that, on the death of the Settlor:

(a) the Alter Ego Trust will distribute property with a fair market value of $XXXXXXXXXX to each grandchild of the Settlor who is born after
XXXXXXXXXX but before the Material Date;

(b) in the event that any children of the Settlor come into existence after XXXXXXXXXX and there is any remaining property held by the Alter Ego Trust after the distribution referred to above, the remaining property of the Alter Ego Trust will be divided among any such children of the Settlor that come into existence after XXXXXXXXXX in equal shares; and

(c) in the event that the Settlor does not have any children or grandchildren born after XXXXXXXXXX and before the Material Date, where applicable, the property of the Alter Ego Trust will be distributed among the remaining members of the Settlor's family.

Purpose of the Proposed Transactions

15. The purpose of the proposed transactions is to wind up the Trust by distributing the property of the Trust to the beneficiaries in proportion to the value of their respective interests in the Trust as determined by the valuator's report, the actuary's report and negotiations between the parties and the XXXXXXXXXX.

Rulings Given

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, the proposed transactions are completed in the manner described above and provided that there are no other transactions that may be relevant to the rulings requested, our rulings are as follows:

A. The amount of the stock dividend to be included in computing the income of the Trust under paragraphs 82(1)(g) and 12(1)(j) will be the amount by which the paid-up capital of Corporation is increased as a result of the payment of the stock dividend described in paragraph 12 above.

B. Provided that the Trustee does not make an election under subsection 107(2.001), subsection 107(2) will apply to the distribution of the shares of the Corporation by the Trust to a beneficiary who is resident in Canada at the time of the distribution in satisfaction of that beneficiary's capital interest in the Trust. Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. More particularly, no ruling is provided herein with respect to the application of sections 74.1 to 74.3 to any income earned on property distributed to the Minor Grandchildren, the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares referred to herein.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency provided that proposed transactions are completed within six months of the date of this letter. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act.

XXXXXXXXXX
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch