2007 Ruling 2007-0241581R3 - amendment to a joint spousal 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. Will the proposed variation result in a resettlement of the trust or a disposition of the trust's assets?

2. Will the proposed variation result in a disposition of any of the beneficiaries' capital interest in the trust?

3.Will either of sections 105 or 245 apply?

Position: No to all.

Reasons: Consistent with past rulings.

XXXXXXXXXX 								2007-024158

Attention: XXXXXXXXXX

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling 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:

• Declaration of Trust dated XXXXXXXXXX, and
• the proposed amendments to the Declaration of Trust prepared on XXXXXXXXXX and amended on XXXXXXXXXX.

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"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. The following terms have the meanings specified:

"Corporation A" means XXXXXXXXXX, a taxable Canadian corporation;

"Corporation B" means XXXXXXXXXX, a taxable Canadian corporation;

"Corporation C" means XXXXXXXXXX, a taxable Canadian corporation;

"Declaration of Trust" means the written trust indenture for the Trust dated XXXXXXXXXX as amended from time to time;

"Settlor" means the late XXXXXXXXXX;

"Spouse" means XXXXXXXXXX, spouse of Settlor;

"Trust" means the XXXXXXXXXX, a joint spousal or common-law partner trust as defined in subsection 248(1) that was settled under the laws of XXXXXXXXXX on XXXXXXXXXX by the Settlor; and

"Trustees" means the current trustees of the Trust, namely Spouse, XXXXXXXXXX.

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

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

Facts

1. Prior to the death of the Settlor on XXXXXXXXXX, the Settlor and Spouse were married. The Settlor continued to be resident in Canada throughout his life while Spouse continued to be resident in XXXXXXXXXX.

2. During his lifetime and after his marriage to Spouse, the Settlor established the Trust. The Settlor's intent in establishing the Trust was to ensure that she would be adequately provided for during the remainder of her lifetime in the event that he predeceased Spouse. The Trust is an inter-vivos trust as defined in subsection 108(1) and its taxation year ends on XXXXXXXXXX .

3. With the exception of Spouse and her son, XXXXXXXXXX, all the Trustees are residents and citizens of Canada. The Trust is resident in Canada.

4. The key terms of the Trust that are relevant to the ruling are as follows:

(a) During his lifetime, all of the income of the Trust was to be paid to the Settlor and no one other than the Settlor was entitled to any of the capital of the Trust.

(b) From the date of death of the Settlor until the date of death of Spouse, all of the income of the Trust is to be paid to Spouse. During the lifetime of Spouse and following the death of the Settlor, no person other than Spouse is entitled to any of the income or capital of the Trust. In addition, the Trustees are to ensure that Spouse receives a minimum of XXXXXXXXXX annually from the Trust with such amount adjusted annually for inflation. If the income of the Trust is less than this amount in any particular year, the Trustees are to make a distribution of capital from the Trust such that the total distribution to the Spouse from the Trust will equal XXXXXXXXXX as adjusted for inflation.

(c) If Spouse is not eligible for the medical coverage currently provided to her by XXXXXXXXXX. in any particular year, the Trustees are required to make an additional distribution of capital from the Trust to the Spouse equal to the amount of premiums required to ensure Spouse has sufficient medical coverage as reasonably determined by the Trustees.

(d) Upon the last to die of the Settlor and Spouse, the Trust is to become a fixed trust whereby all of the Trust assets will be divided equally among the XXXXXXXXXX children of the Settlor who are alive as of that date. If such a child is not alive but has children of their own who are alive, their share will be divided equally among their respective children.

5. Paragraph XXXXXXXXXX of the Declaration of Trust allows for the amendment of the terms of the Trust in any manner whatsoever from time to time by unanimous agreement of the Trustees as evidenced by deed, provided that no such amendment:

(a) causes someone other than the Settlor or Spouse to become entitled to the income or capital of the Trust while the Settlor or Spouse are alive;

(b) causes a revocation of the original Declaration of Trust; or

(c) causes an amendment to or deletion of paragraph XXXXXXXXXX of the Declaration of Trust.

6. Spouse is a resident and citizen of XXXXXXXXXX and is not a resident or citizen of Canada. Spouse is XXXXXXXXXX years of age.

7. The fair market value of the net assets of the Trust is currently in excess of $XXXXXXXXXX. The Trust's assets are comprised of shares of Corporation A, Corporation B and Corporation C and a non-interest bearing note receivable from Corporation C. More specifically:

(a) The Trust owns XXXXXXXXXX% of the voting non-participating common shares of Corporation A.

(b) The Trust owns XXXXXXXXXX% of the common and preferred shares of Corporation B. Corporation B is a holding company that holds the shares in an operating company that has never paid, nor is it anticipated that it will ever pay, any dividends to Corporation B. As Corporation B has no income producing assets, it has no source of income or cash flow to allow it to pay dividends to the Trust.

(c) The Trust owns all the outstanding shares of Corporation C. Corporation C owns shares and non-interest bearing note from Corporation A. Corporation A owns shares of a wholly owned XXXXXXXXXX subsidiary corporation which owns real estate in the XXXXXXXXXX. The real estate owned by the subsidiary corporation is currently being leased to a related company for use in its active business carried on the XXXXXXXXXX. The subsidiary corporation has not paid any dividends in recent years nor is it anticipated that it will pay any dividends throughout the remainder of Spouse's lifetime as it reinvests its profits in the expansion of its business. Corporation A borrowed funds to invest in the subsidiary corporation and to provide it with the capital needed to acquire the real estate. Corporation A has also borrowed funds for the purpose of advancing funds to related corporations for use in their respective businesses on an interest bearing basis, with the capital being repayable on demand. The interest rate spread between the interest payable on the money borrowed by Corporation A and the interest charged to the related companies is not significant. As a result, Corporation A has not paid any dividends to the Corporation C nor is it anticipated that it will be able to do so throughout the remainder of Spouse' lifetime. As Corporation C has no income producing assets, it has no source of income or cash flow to allow it to pay dividends to the Trust.

(d) The non-interest bearing loan receivable from Corporation C is currently in excess of $XXXXXXXXXX.

The shares of Corporation A, Corporation B and Corporation C form a group of closely held companies, the shares of which are not traded in a public market.

8. The Trust has had nominal income in the past few years. It is anticipated that its income will continue to remain nominal for the remainder of the Spouse's lifetime.

Proposed Transactions

9. Pursuant to paragraph XXXXXXXXXX of the Declaration of Trust, the Trustees will unanimously agree to amend the Declaration of Trust to allow them to encroach on the capital of the Trust to permit an additional capital distribution from the Trust to Spouse of an amount not exceeding $XXXXXXXXXX.

10. Spouse will make arrangements to purchase an annuity in her name that will pay an annual amount of $XXXXXXXXXX that will be adjusted annually by XXXXXXXXXX%.

11. Subsequent to the transactions described in paragraphs 9 and 10, the Trustees propose to make a capital distribution to or for the benefit of the Spouse sufficient to cover the cost of the annuity described in paragraph 10. Spouse will agree that the amount of such capital distribution is made in satisfaction of her annual entitlements to a minimum distribution from the Trust of XXXXXXXXXX as referred to in paragraph 4(b) above, except to the extent that the annual inflation in any particular year exceeds XXXXXXXXXX%.

12. The funding for the capital distribution from the Trust and the purchase of the annuity will come from a repayment of a portion of the Trust's loan receivable from Corporation C. As the capital distribution will result in a partial disposition of Spouse's interest in the Trust, a clearance certificate will be requested from the Canada Revenue Agency pursuant to section 116 prior to the capital distribution being made.

Purpose of the Proposed Transactions

13. The purpose of the proposed transaction is to ensure that the original intention of the Settlor and the Trust is satisfied. The proposed transaction will provide a greater level of guarantee that Spouse is adequately provided for during the remainder of her lifetime. Although the Trust has assets of value, it is anticipated that the Trust will earn little or no income from those assets in the future. Based on this expectation, it is recognized that the Trustees will be required to encroach on the Trust's capital for each of the annual distributions required to be made to Spouse under the terms of the Trust. As the annual payments by the Trust to Spouse are to be denominated in XXXXXXXXXX, the Trustees wish to reduce their foreign exchange exposure by "locking in" on their obligation to Spouse at the currently favorable XXXXXXXXXX foreign exchange rate.

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 there are no other transactions that may be relevant to the rulings given, our rulings are as follows:

A. There will not be a resettlement of the Trust or a disposition of the shares or other assets held by the Trust as a result of the variation of the Trust.

B. There will not be a disposition of the income or capital interests of any beneficiary of the Trust solely as a consequence of the variation of the Trust for purposes of subsections 106(2) and 107(1) and the definition of "disposition" in subsection 248(1) of the Act.

C. Subsection 105(1) of the Act will not be applicable solely as a consequence of the variation of the Trust.

D. Section 245 will not be applicable to redetermine the tax consequences set out in the rulings provided above.

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 the proposed transactions described above 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