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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: 1. Absent specific reversionary conditions attaching to property transferred to a trust, does 75(2) apply when the settlor trust decisions are made by the majority provided that the settlor, who is also a trustee, concurs with the decision?
2. If the answer to Q. 1 is yes, will 75(2) cease to apply if the terms of the trust are changed such that the settlor's explicit consent is not required such that trust decisions are made solely by consensus of the majority, even though the settlor remains one of three trustees?
3. Will 107(4.1) apply to the distribution of property other than the property which was subject to 75(2)?
Position: 1. Yes 2. Generally, yes 3. Yes
Reasons: 1. When the trustees must obtain the consent of the person who contributed the property before distribution or disposition, subsection 75(2) will apply whether or not the contributor is also a trustee.
2. When the settlor or other contributor is one of two or more co-trustees acting in a fiduciary capacity in administering the trust property and there are no specific terms outlining how the trust property is to be dealt with, but rather the property is subject to standard terms ordinarily found in trust indentures, we accept that paragraph 75(2)(b) will generally not be considered applicable. When the conditions which cause 75(2) to apply cease to apply at some future time, such as when the trust is varied, 75(2) will cease to apply at that time.
3. A plain reading of 107(4.1) indicates that it would apply to a capital distribution of any property, and not just the property referred to in 107(4.1)(b) since the reference to "any property" in 107(4.1)(b) does not refer to the same property as referred to in the preamble as "any property". While "the property" referred to in 107(4.1)(c) must refer to the property in 107(4.1)(b) rather than the property referred to in the preamble, this means that the condition in (c) which doesn't result in a FMV distribution can only arise in respect of property that is returned to the contributor. For example, if more than 1 person contributed property to the trust in circumstances under which 75(2) applied, 107(4.1) would apply if any particular property was returned to a person other than the person who contributed the property to the trust.
XXXXXXXXXX 1999-001308
Annemarie Humenuk
Attention: XXXXXXXXXX
August 1st, 2002
Dear Sirs:
Re: Subsection 75(2) of the Income Tax Act
This is in reply to the letter from XXXXXXXXXX dated October 5, 1999 concerning the application of subsections 75(2) and 107(4.1) where the settlor of a trust is one of three of its trustees. We apologize for the delay in our response which was necessitated by a thorough review of the issue.
All statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
XXXXXXXXXX describes a scenario in which trust decisions are made by the majority of trustees provided that the settlor, who is one of the three trustees, concurs with the decision. He asks whether subsection 75(2) would apply to such a trust and whether it would continue to apply if the terms of the trust were varied such that the settlor's specific consent was not required in respect of decisions approved by the majority of the trustees (although the settlor would continue to be one of the three trustees). For the purpose of the question, it is assumed that the property cannot revert to the settlor such that the condition described in subparagraph 75(2)(a)(i) is met. Where subsection 75(2) has applied in respect of any property of the trust at any time, XXXXXXXXXX also asks whether the application of subsection 107(4.1) is limited to the property in respect of which subsection 75(2) applied.
It is a question of fact as to whether property is held by a trust under any of the conditions described in paragraph 75(2). It is our view that the conditions described in paragraph 75(2)(b) will be met where the terms and conditions of trust expressly require the consent of the settlor or any other person who has contributed property to the trust in respect of any decision made by the trustees regarding the disposition of trust property.
The conditions in subparagraph 75(2)(a)(ii) may also be met in such circumstances. As a result, it is our view that subsection 75(2) would apply where the trustees may only exercise the discretion permitted to them under the terms of the trust if the settlor concurs with their decision.
However, where the settlor or other contributor is one of two or more co-trustees acting in a fiduciary capacity in administering the trust property and there are no specific terms outlining how the trust property is to be dealt with, but rather the property is subject to standard terms ordinarily found in trust indentures, we accept that paragraph 75(2)(b) is generally not considered applicable. A determination of whether this condition is met in respect of any particular property can only be made on a case-by-case basis following a review of all the facts and circumstances surrounding a particular situation.
The attribution rules under subsection 75(2) will cease to apply when the conditions which resulted in the application of subsection 75(2) cease to exist. This would likely include the situation described in XXXXXXXXXX letter where the terms and conditions of the trust are modified to eliminate the need for the settlor's consent to distributions and dispositions of trust property. Nevertheless, subsection 107(4.1) will typically apply to any subsequent distribution of property from that trust during the existence of the settlor or any other person who has contributed property to the trust under the terms and conditions described in subsection 75(2), unless the property is distributed to the person who transferred the property to the trust or to the spouse or common-law partner of that person. Since subsection 107(4.1) expressly applies to "any" distribution of property from the trust where the conditions in subparagraphs (a) to (d) are met, it is our view that subsection 107(4.1) would also apply to the distribution of property acquired by the trust with borrowed funds where subsection 75(2) had ever applied in respect of any property of the trust and the person who contributed that other property was in existence at the time the property was distributed.
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R4.
We trust our comments will be of assistance.
T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
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