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:
1. Does 75(2)(a)(i) apply to dividends on shares transferred to trust from beneficiary in exchange for a non-interest bearing demand note with no scheduled terms of repayment?
2. Does 152(4)(b)(iii) apply to extend the reassessment period?
Position:
1. yes 2. yes
Reasons:
1. The shares held by trust may revert to the transferor either by reason of being a beneficiary.
2. The circumstances under which the shares were transferred to the offshore trust is indicative of a non-arm's length relationship with the trustee and the attribution under 75(2) is directly linked to the transfer which is the transaction with the non-arm's length non-resident trustee
July 17, 2000
International Tax Advisor HEADQUARTERS
Southern Ontario Region A. Humenuk
c/o Toronto North Tax Services Office
Attention: Michael K. Yee
2000-001255
XXXXXXXXXX
Application of subsection 75(2) and subparagraph 152(4)(b)(iii)
This is in response to your memorandum of March 3, 2000, as clarified in our telephone conversation of June 30, 2000 (Yee\Humenuk), concerning the application of subsection 75(2) to the income earned by the above-noted trust from certain shares transferred to the trust by XXXXXXXXXX and whether the extended reassessment period described in paragraph 152(4)(b) applies in respect of any such income that is so attributable to XXXXXXXXXX for the XXXXXXXXXX taxation years.
XXXXXXXXXX
With respect to the application of subsection 75(2), the audit proposal letter and the taxpayer's representation focus on the conditions under which subparagraph 75(2)(a)(ii) or paragraph 75(2)(b) might apply in respect of XXXXXXXXXX shares transferred to the trust by XXXXXXXXXX. As stated in your letter, it is not necessary to establish the level of control XXXXXXXXXX had over the trust in order for subsection 75(2) to apply if it can be established that the XXXXXXXXXX shares (or property substituted for the shares), can revert back to XXXXXXXXXX under the terms of the trust.
Subparagraph 75(2)(a)(i) applies when property is held by a trust on the condition that it, or property substituted for it, may revert to the person from whom it was received. At the 1991 Canadian Tax Foundation, we stated that subparagraph 75(2)(a)(i) would not apply to a bonafide unconditional sale of property to a trust solely by reason of the fact that a portion of the purchase price was unpaid.
However, when the terms of the trust are such that there is a possibility, however remote, that the person who transferred the property to the trust may reacquire the property (or property substituted for such property), subsection 75(2) applies notwithstanding that the person may have received consideration equal to the fair market value of the property so transferred. As XXXXXXXXXX is a member of the appointed class of persons that may be added as a beneficiary of the trust, the XXXXXXXXXX shares (or property substituted for the shares) could potentially revert to him under the terms of the trust. Since XXXXXXXXXX is beneficially interested in the trust within the meaning of subsection 248(25), the above-noted comments made at the 1991 Canadian Tax Foundation do not apply and it is our view that subsection 75(2) applies to any income earned by the trust on those shares (or property substituted for the shares).
XXXXXXXXXX of the trust deed states that where an individual transfers property to the trust to be held subject to the terms of the trust, the trust shall make no distribution of income or capital to any person who is a "designated person" within the meaning of subsection 74.5(5) in respect of that individual at that time. Presumably, the purpose of this clause is to ensure that section 74.3 will not apply to attribute to XXXXXXXXXX any income payable to a beneficiary other than himself. While we agree that XXXXXXXXXX is not a "designated person" in respect of himself for the purposes of section 74.3, XXXXXXXXXX of the trust deed has no bearing on the application subsection 75(2) to the income derived from the XXXXXXXXXX shares.
To the extent that subsection 75(2) does not apply to all or part of the income of the trust for XXXXXXXXXX, paragraph 94(1)(c) applies to deem the trust to be resident in Canada for certain purposes (in particular, the foreign trust reporting rules and the taxation of its income). The determination of whether the exemption described in subclause 94(1)(b)(i)(A)(III) applies in respect of a person who has transferred property to a non-resident trust is made at the end of a particular taxation year (which is December 31 for an inter vivos trust). Accordingly, a non-resident discretionary trust will be deemed to be resident in Canada under paragraph 94(1)(c) for the whole taxation year where the total number of months in one or more periods in which the individual who transferred the property to the trust was resident in Canada exceeds 60 months at any time in or before the end of that taxation year. Even if the trust is wound up in the year it becomes a resident of Canada, including the scenario in which it is wound up before the end of the 60 month period referred to in subclause 94(1)(b)(i)(A)(III), the trust will still be deemed to be resident in Canada under paragraph 94(1)(c) for that year. The taxation year of an inter vivos trust is December 31, regardless of when it is wound up. Based on our understanding that XXXXXXXXXX had been resident in Canada for more than 60 months by the end of XXXXXXXXXX , the trust could not avoid the application of paragraph 94(1)(c) by winding up during that year.
With respect to the statutory authority for reassessing XXXXXXXXXX taxation years beyond the normal reassessment period, the provisions of subparagraph 152(4)(b)(iii) will extend the normal reassessment period for a particular taxation year where it can be established that there is a causal connection between the amount of the adjustment for that year and a transaction with a non-resident person with whom the taxpayer is not dealing at arm's length (i.e., the reassessment can reasonably be regarded as relating to the transaction described in subparagraph 152(4)(b)(iii) as required by subsection 152(4.01)). The taxpayer's representative has questioned the validity of any reassessment of the XXXXXXXXXX taxation years at this time since it is his view that XXXXXXXXXX was dealing at arm's length with the trustee in respect of the transfer of the XXXXXXXXXX shares to the trust and that the proposed reassessments do not relate to the transfer of the XXXXXXXXXX shares (i.e., the payment of the dividends to the trust does not reasonably relate to the transfer of the XXXXXXXXXX shares to the trust).
The taxpayer argues that XXXXXXXXXX deals at arm's length with the trust because he was not related to the trustee. While paragraph 22 of IT-419R states that the general presumption that a settlor is dealing at non-arm's length with the trustee can be ignored if the trustee is a professional trustee, e.g., a public trust company, it remains a question of fact as to whether a settlor (or any other contributor to the trust) and trustee are dealing at non-arm's length within the meaning of paragraph 251(1)(b) in a particular fact situation. In our view, the fact that XXXXXXXXXX accepted non-interest bearing promissory notes, payable on demand, in satisfaction of the transfer of the XXXXXXXXXX shares to the trustee is indicative of the fact that the trustee was not dealing at arm's length with XXXXXXXXXX in respect of the transfer of those shares. The fact that XXXXXXXXXX was also beneficially interested in the trust at the time of the transfer adds further support to a finding that he was not dealing at arm's length with the trustee in respect of the transfer of assets to the trust.
The proposed reassessments are based on the fact that subsection 75(2) applies to attribute to XXXXXXXXXX the dividends received by the trust in respect of the XXXXXXXXXX shares. Since the application of subsection 75(2) to the dividend income earned by the trust is a direct result of the conditions under which the XXXXXXXXXX shares were transferred to the trust, it is our view that the causal connection required by subsection 152(4.01) has been established and that XXXXXXXXXX income tax returns can be reassessed within the timeframe specified in paragraph 152(4)(b) to include the income attributed to him under subsection 75(2) as a result of his transfer of the XXXXXXXXXX shares to the trust.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 819 994-2898. The severed copy will be sent to you for delivery to the client.
T. Murphy
Manager
Trusts Section
Resources, Partnerships & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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...cont'd
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