CRA finds that discretion of trustees to retain capital or income rather than distribute to the sole current beneficiary does not preclude the latter being the beneficial owner

Two of the conditions for the s. 107.4 rollover to apply to a disposition of capital property by an individual to a trust is that the disposition “not result in a change in the beneficial ownership of the property” (s. 107.4(1)(a)), and that s. 73(1) (ignoring any election out of s. 73(1) and any application of s. 73(1.02)) does not apply to the disposition (s. 107.4(1)(i)). CRA appeared to find that both conditions could be satisfied where an individual transferred capital property to a trust of which he and another were the trustees. Under the trust deed, he was the sole beneficiary during his lifetime, but any remaining corpus would, in accordance with Art. 1297 of the Quebec Civil Code, go to his estate on his death. Furthermore, the trustees had the discretion to retain capital and income rather than distribute it to him.

CRA found that this discretion did not detract from him being the continued beneficial owner, stating:

Having regard to paragraph 248(3)(e) and subsection 248(25), it is reasonable to consider that the transfer of property to a trust governed by the C.C.Q. of which the transferor is the sole beneficiary does not result in a change in beneficial ownership for the purposes of paragraph 107.4(1)(a).

Thus, a discretion accorded to the trustees, under the terms of the trust indenture, as to when they may distribute capital and income to the beneficiary, would not, in and of itself, affect the determination of whether or not there is a change in beneficial ownership as long as the individual is, as a result of the transfer of the property to the trust, the sole person beneficially interested in the trust within the meaning of subsection 248(25).

Regarding, s. 107.4(1)(i), this situation did not meet the requirement in s. 73(1.01)(c)(ii) that, after transferring the capital property to the trust, the “individual is entitled to receive all of the income of the trust that arises before the individual’s death” given the trustees’ discretion to retain income. Accordingly, s. 107.4(1)(i) also was satisfied.

Neal Armstrong. Summaries of 9 April 2020 External T.I. 2014-0527261E5 F under s. 107.4(1)(a) and s. 107.4(1)(i).