Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. Whether property distributed from a trust to a parent or other guardian of a minor beneficiary of the trust will be considered to be held by the parent or guardian in a new trust?
2. If so, will 104(5.8) apply, such that the new trust will not be able to avoid the impending deemed disposition pursuant to subsection 104(4)?
Position:
1. Question of fact and law.
2. It is our view that a trust (other than an excluded trust as per ¶(f) or (g) of the definition of “trust”) in which there is only one beneficiary (e.g. the minor) and that beneficiary’s interest in the trust is vested indefeasibly, the conditions of paragraph (g) of the definition of “trust” in subsection 108(1) will be met, in which case 104(4) will not apply to the (new) trust even though 104(5.8) could otherwise apply.
Reasons:
1. A new trust could be created intentionally. Nevertheless, in other situations, whether or not the holding of property by a parent or guardian on behalf of a minor constitutes a trust is a legal question the answer to which may depend on provincial legislation as well as the facts of a particular case.
2. Background: In order to avoid the (in many cases) impending 21-year deemed disposition rule for trusts pursuant to 104(4), a trust may decide to distribute its assets to the beneficiaries. However, where the beneficiary is a minor, the distribution may be made to a parent or guardian of the minor due to the fact that minors do not have the capacity to enter into legally binding contracts.
If the parent or guardian is considered to hold the distributed trust property in (a new) trust for the minor, 104(5.8) would generally apply to the new trust, in which case the impending deemed disposition rule will not be avoided. However, 104(4) will not apply if the new trust is excluded from the definition of “trust” in 108(1); i.e., by virtue of paragraph (g), which excludes certain trusts where all interests in the trust have vested indefeasibly and no interest in which may become effective in the future. Where there is only one beneficiary (e.g. the minor) and that beneficiary’s interest in the trust is vested indefeasibly, there is no other interest in the trust which must be determined prior to the minor’s interest becoming effective, and thus the conditions of paragraph (g) will be met.
XXXXXXXXXX J.D. Brooks
973382
Attention: XXXXXXXXXX
November 24, 1998
Dear Sirs:
This is in reply to your letter of December 18, 1997, in which you requested our views concerning the application of subsections 104(4) and (5.8) of the Income Tax Act to a hypothetical fact pattern.
You noted that, in order to avoid the deemed disposition of its assets pursuant to subsection 104(4), a trust may make actual dispositions to its beneficiaries. However, a problem arises where the beneficiaries are minors, due to the inability of minors to make legally binding arrangements. To circumvent this problem, it is contemplated that a distribution may be made to a parent or guardian of the minor. You expressed concern that, if the property so distributed were considered to be held in trust by the parent or guardian for the benefit of the minor, subsection 104(5.8) would seem to operate so as to defeat the purpose in making distributions from the first trust.
Our Comments
Although you have asked for a technical interpretation, the scenario presented appears to be an actual fact situation. Should this situation involve a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling. However, should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation (including identification numbers) to the appropriate tax services office for their comments. We are, however, prepared to provide some general comments.
Whether the property held by such a parent or guardian would be viewed as being held in a trust relationship is a question of fact and law. Obviously, a trust could be created intentionally; but in other situations, the result may depend on provincial legislation as well as the facts of a particular case.
If a trust relationship does exist, subsection 104(5.8) would generally apply to the new trust, in which case the impending deemed disposition rule in subsection 104(4) would not be avoided. However, subsection 104(4) will not apply if the new trust is excluded from the definition of “trust” in subsection 108(1); e.g., by virtue of paragraph (g) thereof, which excludes certain trusts where all interests in the trust have vested indefeasibly and no interest in which may become effective in the future. Where there is only one beneficiary (e.g., the minor) and that beneficiary’s interest in the (new) trust is vested indefeasibly, there is no other interest in the trust which must be determined prior to the minor’s interest becoming effective, and thus the conditions of paragraph (g) will be met.
As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not an advance income tax ruling and consequently, is not binding on Revenue Canada.
We trust our comments will be of assistance to you.
Yours truly,
T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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