11 May 2010 External T.I. 2009-0352711E5 - Subsection 75(2)

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: Does subsection 75(2) apply to a settlor who subsequently becomes a beneficiary of a trust?

Position: It depends on the facts, but in this case it appears that it does.

Reasons:	Legislation

XXXXXXXXXX 						2009-035271
							Katharine Skulski
May 11, 2010

Dear XXXXXXXXXX :

Re: Application of subsection 75(2)

This is in response to your letter of December 16, 2009 requesting our comments on the application of subsection 75(2) to a particular fact situation. Unless otherwise stated, all statutory references in this letter are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Suppl.), as amended to the date hereof.

In your example, a settlor transferred a non-income producing property to a discretionary trust. The class of beneficiaries of the trust included certain named persons, their present and future spouses, children and grandchildren. At the time that the trust was created, the settlor was not the spouse of any of the named persons nor contemplated to be a potential beneficiary of the trust. However, several years after the creation of the trust, the settlor married one of the named persons and as a result, became a beneficiary of the trust. You have asked that we confirm that the provisions of subsection 75(2) do not apply to the settlor on the basis of the facts above.

The particular situation outlined in your letter appears to relate to a factual one, involving one or more specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. An Advance Income Tax Ruling is not issued where a transaction has been completed or is significantly advanced. In those instances you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are, however, prepared to offer the following general comments which may be of assistance.

Subparagraph 75(2)(a)(i) applies where property is held by a trust (that was created in any manner after 1934) on condition that it may revert to a person from whom the property (or property for which it was substituted) was directly or indirectly received. In our view, when the settlor described above became a capital beneficiary of the trust, it became possible that the property he contributed to the trust could revert to him within the meaning of subparagraph 75(2)(a)(i).

As noted in paragraph 3 of IT-369, "Attribution of Trust Income to Settlor", it is the Canada Revenue Agency's view that the use of the word "may" means that the subsection applies even though there is only a possibility that the property reverts to the transferor, and there is no requirement that the possibility that the property will revert to the settlor must exist at the time that the trust was established.

We trust that these comments will be of assistance.

Yours truly,

Robin Maley
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch