25 January 2001 External T.I. 1999-0013485 - Meaning of the Word Distributed

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 Issues: does "distributed" referred to in subsection 107(2) & 107(5) require physical distribution or is asset encumberment sufficient?

Position: the words "distributed by the trust" in 107(2) & 107(5) imply some positive action must be taken by the trustees (i.e. physical distribution)

Reasons:

		1999-001348
XXXXXXXXXX 	990751
L. Holloway
Attention:  XXXXXXXXXX 	613-957-2104

January 25, 2001

Dear Sirs:

Re: The meaning of "distributed" in Section 107 of the Income Tax Act (the "Act")

This is in reply to your letter of March 19, 1999. We apologize for the delay in our response. Your enquiry revolves around the meaning of the word "distributed" found in subsections 107(2) and (5) of the Act. In your view, an issue that arises under these provisions is whether a distribution referred to therein occurs (i) at the time when the beneficiary becomes absolutely entitled to the property of the trust or (ii) at a later time when the property is actually conveyed or delivered to the beneficiary. In your opinion, the time when a distribution occurs in the context of subsections 107(2) and 107(5) is the time indicated in (i), when the beneficiary becomes absolutely entitled to the property.

Our Comments

Subsections 107(2) and (5) refer to a distribution by a trust. A distribution is an action taken by the trustee in response to a fiduciary duty. This view is supported by the recent decision of Mai Tai Chan v. The Queen 99DTC1215 (TCC) as seen by the comments made by Judge Bonner at page 1219:

"Subsection 107(1) deals with ordinary dispositions by way of sale or gift of the taxpayer's interest in the trust. Subsection 107(2) is tailored to suit cases in which a trust "distributes" the property of a trust to a beneficiary thereby reducing or eliminating the latter's beneficial interest. A rollover is provided in the case of a subsection 107(2) transaction because there is, in substance, no disposition whereby a gain could be realized. The beneficiary in such a case holds, after the transaction has been completed, full title to the property of which previously was a beneficial owner....

Here the payment to the Appellant was not a "distribution" of trust property to the Appellant for it was not an action taken by the trustee in response to his obligations under the trust. The word "distribute" in the context of subsection 107(2) refers to an allotment of trust property to a beneficiary in accordance with his proportionate share. Such a distribution, being an action taken by the trustee in response to fiduciary duty, is one for which consideration cannot be exacted except in accordance with a provision in the trust deed. Here the deed of release and disclaimer is quite inconsistent with any sort of distribution of property of the trust in the form of cash to the Appellant qua beneficiary. The Appellant's father demanded and received consideration as provided in the form of the deed of release and disclaimer. The deed transferred to the father and the mother beneficial ownership in the 3,500 shares which they had previously held in trust. The transaction was, quite simply, a sale. The disclaimer of the Appellant's beneficial interest in the shares cannot be dismissed as an empty gesture. It formed part of the consideration for the payment to the Appellant of the money. Subsection 107(2) of the Act therefore does not apply." (emphasis is ours)

Judge Bonner considered that the word "distribute" in subsection 107(2) referred to the allotment of trust property and that after such "transaction" was completed, the beneficiary possessed full title to the property "of which previously" he was a beneficial owner. He was also of the view that a distribution is "an action taken by the trustee in response to fiduciary duty."

The issue of whether a beneficiary's interest in a trust is a right to compel the trustees to properly administer the trust and a right to the trust property has not yet been settled. However, as it can be said that the beneficiary already had the beneficial entitlement to the property held by the trust, it is our view that subsections 107(2) and (5) require a positive action by the trustee. Generally this would be the physical distribution of the property by the trust.

We trust these comments will be of assistance.

Yours truly,

Theresa Murphy
Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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