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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
PRINCIPAL ISSUE: Whether a trust can avoid the 21-year rule of subsection 104(4) by distributing property to the life tenant while retaining the remainder interest in the trust.
Position: No.
Reasons: Where the property is real property, it might be feasible (in a particular fact scenario) to distribute the real property to the holder of the remainder interest (not to the life tenant) and to register the life interest against the title. A distribution of property to only the life interest holder, if even possible, would not remove all the property from the trust and thus 104(4) would not be avoided.
Where the property is personal property, it is not possible to divide the property into success interests without using a trust.
983176
XXXXXXXXXX J.D. Brooks
957-2103
February 29, 2000
Dear XXXXXXXXXX:
This is in reply to an enquiry dated November 27, 1998 from XXXXXXXXXX of your office.
XXXXXXXXXX had requested our interpretation of subsection 104(4) of the Income Tax Act (the "Act") as it applies to a hypothetical situation he described. We apologize for the delay in replying.
In the generalized hypothetical situation, a farmer died and, pursuant to his Will, his farm property was transferred to a non-spousal trust. Pursuant to the terms of the Will, his wife has a life interest in the property as she is entitled to use, occupy and enjoy the property during her lifetime. The remainder capital interest in the farm property will eventually be distributed among the other beneficiaries of the trust, consisting of the children and grandchildren of the farmer. In an attempt to avoid a deemed disposition pursuant to the application of subsection 104(4) of the Act, XXXXXXXXXX queried the possibility of transferring the farm property to the farmer's wife, registering the real property (i.e. land and buildings) in her name as life tenant, with the remainder interest belonging to the trust.
Our Views
Although a technical interpretation was requested, the scenario presented appears to be an actual fact situation. We provide binding assurance with respect to actual proposed transactions only by way of advance income tax rulings. On the other hand, should this situation involve completed transactions of actual taxpayers, you may wish to submit all relevant facts and documentation (including taxpayer identification) to the appropriate tax services office for their comments. We are, however, prepared to provide some general comments.
It is difficult to respond to the query since the answer could vary depending on the facts of any particular fact situation. For instance, it is not clear whether the farm property in the hypothetical situation consists of only real property. In a real fact situation, one would not be able to determine this without reference to a specific Will. Where property is real property, it is generally feasible to divide the property into successive interests in the ownership of the property (such as interests for life and interests in the remainder) without having to resort to a trust. In that case, the property would, upon the death of the owner, become registered in the name of the holder of the remainder interest as the new owner of the property, and the life interest in the property would be registered against the title. Where property is personal property rather than real property, it is not possible to divide the property into successive interests without resorting to a trust.
If, in a real fact situation, real property were held in a personal trust and the holders of the remainder interest were known, it may be possible to distribute the real property from the trust to those persons and register the life interest against the title. If the distribution resulted in all of the capital of the trust being distributed before the earliest time referred to in subsection 104(4) of the Act, subsection 104(4) would have no effect although other provisions of the Act would have to be considered. A trust and the capital beneficiaries may be able to rely on subsection 107(2) of the Act which provides for the property being disposed of at its cost amount where the property is distributed to the beneficiaries in satisfaction of their capital interests. However, if the holders of the remainder interest are undetermined, it is apparent that the property could not be distributed. Even if the holders of the remainder interest were known, there could be pragmatic difficulties that would prevent a distribution. We would also point out that a distribution of property regarding only the life interest holder's interest, if even feasible, would not remove all the capital property from the trust and thus the application of subsection 104(4) of the Act would not be avoided. Additionally, where property is distributed to beneficiaries in satisfaction of their income interests in a trust, subsection 106(3) of the Act provides for the property being disposed of by the trust at its fair market value.
We trust that these comments are of assistance.
Yours truly,
T. Murphy
Manager, Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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