14 September 2001 External T.I. 2000-0027015 - Trusts and Farm Property Rollovers

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. Where a discretionary trust is set up to benefit a class of beneficiaries being the issue of the testator is the rollover under 70(9) available?

Position: 1. No

Reasons: 1. the property cannot vest indefeasibly where a trustee has discretion

XXXXXXXXXX 2000-002701
L. Holloway, CA
September 14, 2001

Dear XXXXXXXXXX:

Re: Testamentary Transfer of Trust Property

This is in reply to your letter of May 18, 2000 requesting a technical interpretation on the testamentary transfer of farm property. We apologize for the delay in our response.

Your letter posed several questions as reproduced below.

1. Would a transfer to a trust for a child qualify for the rollover under subsection 70(9) given that the trust terms provided that:

(a) the property would be automatically transferred to the child upon reaching a certain age;

(b) upon the occurrence of the child's death before that age, the property would be transferred to the beneficiaries of the child; and

(c) all income of the trust is payable to the child.

2. Given, the same scenario outlined in 1. above, however set up in favour of a minor grandchild, would our response to question 1 differ?

3. If the terms of the trust provided that the property continue to be held in trust upon the death of the child or grandchild and also provided that the property be held until the successive beneficiaries reach a certain age (at which point the property would be distributed) would such a trust qualify for rollover treatment under subsection 70(9)?

4. Could the farm property be held by the trust until the child reaches age 40?

5. Is a rollover to a great-grandchild acceptable given that the definition of child includes the child of a child's child?

6. Would the rollover be available if the farm property were transferred to a trust for a "child" who is already at the age of majority and upon the child reaching a specific age, the trust would transfer the farm property to him or her?

7. Would the rollover be available if the property were transferred to one trust with two (or more) beneficiaries, and upon the youngest reaching the stated age, the farm property would be transferred to the beneficiaries, each as to an undivided and equal interest in the property?

8. Would a rollover be available where the farm property is transferred to a trust with the "children" of the testator as the named class of beneficiary but the decision as to who will actually take the property is left to the trustees' discretion?

9. Would the tax consequences of a trust as described in question 8 above be any different where the trustee is:

(a) a child who is also a beneficiary of the trust;

(b) a child who is not a beneficiary of the trust;

(c) a person related to the testator other than a child; or

(d) a person unrelated to the testator?

10. Where property is transferred to an inter vivos trust under subsection 73(3) would the answers to the above questions change?

Our Comments

The reply to many of the questions posed in your letter can be found in IT-449R Meaning of "Vested Indefeasibly". Our comments to each of the situations outlined above follow:

1. The first situation outlined above mirrors the example given in subparagraph 8(c) of IT-449R. That paragraph states:

"(c) Pursuant to the terms of a taxpayer's will, farm land is directed to be held in a trust for the benefit of the taxpayer's child, to be distributed to the child when the child reaches a specified age and, if the child should die before that age, to be distributed to the child's estate.

The Department considers that the property vests indefeasibly in the child at the time of the taxpayer's death. Whether the child on attaining the age of majority could demand the conveyance of the land even though the specified age had not been attained, will depend upon provincial law. If the taxpayer's will had provided that the land would be distributed to other persons, for example the taxpayer's grandchildren, if the child should die before attaining the specified age, the land would not vest indefeasibly in the child until the child attained the specified age."

Therefore in the first situation above, if item 1(b) was a specific term of the will such that the child had no say in who was to receive the property in the event he died before attaining the specified age, the rollover under subsection 70(9) would not be available. If, on the other hand, the terms of the testator's will were such that, in the event that the child were to die before attaining the specified age, the property would devolve to the child's estate the transfer of farm property to a child could be achieved without tax consequence under subsection 70(9).

2. If scenario 1 were set up in favour of a minor grandchild as opposed to a child our response would be the same as the one given above. Paragraph 1 of IT-349R3, Intergenerational Transfers of Farm Property on Death, provides that:

The definition of "child" in subsection 70(10) and the description in subsection 252(1) expand the usual meaning of child to include:

(a) a child of the taxpayer whether born within or outside marriage;

(b) spouse of a child;

(c) a child of the taxpayer's spouse ("step-child");

(d) an adopted child;

(e) a grandchild;

(f) a great-grandchild; and

(g) a person adopted-in-fact.

3. As the property will not have vested indefeasibly in the child or grandchild/successive beneficiary as described in scenario 3, such a trust would not qualify for rollover treatment under subsection 70(9).

4. There is no reason under the Canadian Income Tax Act and Regulations (R.S.C. 1985, 5th supplement, c.1 as amended) that the property could not be held until the child reaches the age of 40.

5. The rollover to a great-grandchild would be acceptable (see response to question 2 above).

6. A rollover would be available under subsection 70(9) in scenario 6 described above provided the conditions in our response to scenario 1 were met.

7. A rollover would be available under subsection 70(9) in scenario 7 described above provided the conditions in our response to scenario 1 were met.

8. While each child would have a contingent interest in the trust described scenario 8, it could not be said that the farm property in question has actually vested indefeasibly in any one child. Paragraph 1 of IT-449R states:

"In the Department's view a property vests indefeasibly in a spouse or child of the deceased when such a person obtains a right to absolute ownership of that property in such a manner that such right cannot be defeated by any future event, even though that person may not be entitled to the immediate enjoyment of all the benefits arising from that right. Where property is held in trust for the benefit of one or more persons it is the Department's view that such property normally vests indefeasibly in the trust and not in a beneficiary thereof (emphasis mine). However, where the Department is satisfied that a property is held in trust solely to carry out the terms of a will under which the ultimate and absolute ownership of that property is bequeathed to a particular individual and the trust arrangement is such that the individual's ownership rights cannot be defeated by any future event and no other person has any right whatsoever to an immediate or future benefit from that property or that trust, (emphasis mine) the property will be considered to vest indefeasibly in that individual."

The trustees' discretion to select the children to whom the property will pass prevents the property from vesting indefeasibly in the children.

9. The response to question 8 above would be the same regardless of whether the trustee is:

(a) a child who is also a beneficiary of the trust;

(b) a child who is not a beneficiary of the trust;

(c) a person related to the testator other than a child; or

(d) a person unrelated to the testator.

10. Paragraph 13 of IT-268R4 outlines our position on the use of a trust and subsection 73(3). Where all the conditions set out in that paragraph are not met, the subsection 73(3) rollover would not be available. Paragraph 13 is reproduced below:

Trusts for Minors

13. A parent may transfer property described in subsection 73(3) (see 2 above) or 73(4) (see 14 below) to a trust solely for the benefit of his or her minor child. However, for property transferred to such a trust to qualify for a rollover under either of those subsections the following additional conditions must be met:

(a) the trust must be irrevocable;

(b) the terms of the trust must provide for the property to be held in trust for the exclusive benefit of the child and there must not be any trust provision which could have the effect of depriving the child of any rights as the beneficial owner of the property; and

(b) the terms of the trust must provide for the distribution of the property to the child absolutely upon reaching a certain age and for the distribution of that property to the child's estate upon the child's death before that age.

Subsection 73(3) contemplates an outright inter vivos transfer of property to a child, not to a trust on the child's behalf. The Agency has taken the administrative position in the paragraph quoted above that it will allow an inter vivos transfer to a trust only where the child is a minor. The same administrative position is not given with respect to adult children where an outright transfer could otherwise be made.

We trust our comments will be of assistance to you.

Yours truly,

T. Murphy, Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch