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. Does subsection 107(2) apply to a specific scenario?107(2)
Position: 1. Yes
Reasons: 1. provided election under 107(2.001), 107(2.002) or 107(4) to 107(5) is not applicable; 107(2) will apply as amts are being paid out of original trust in satisfaction of beneficiaries (new trusts) capital interests
2000-003378
XXXXXXXXXX Lena Holloway
613-957-2104
November 2, 2001
Dear XXXXXXXXXX:
Re: Technical Interpretation - Subsection 107(2)
This is in reply to your letter of June 23, 2000 wherein you requested our comments on the tax consequences of a specific hypothetical situation concerning the distribution of property from a discretionary trust and the application of subsection 107(2) of the Income Tax Act (Canada) (the "Act"). We apologize for the delay in replying to your letter.
The hypothetical facts presented in your letter follow:
1. A discretionary trust (the "Trust") is established by Settlor.
2. The beneficiaries (the "Beneficiaries") of the Trust are Settlor's grandchildren.
3. The Trust declaration provides that the trustees of the Trust may, in their discretion distribute the capital of the trust to each of the Beneficiaries or to trusts, the beneficiaries of which are the Beneficiaries.
4. Several trusts (the "New Trusts") will be created, the sole beneficiary of each of which is one of the Beneficiaries.
5. The trustees of the Trust will exercise their discretion under the Trust and distribute the assets of the Trust among each of the New Trusts.
It is your opinion that subsection 107(2) of the Act will apply to the distribution of property by the Trusts to each of the New Trusts because:
(a) the Trust is a personal trust;
(b) the Trust has distributed property to the New Trusts, which are beneficiaries of the Trust (as defined in subsection 108(1) of the Act); and(c) there has been a disposition by the New Trusts of their respective capital interests in the Trust, both under general principles and as defined in paragraph (d) of the definition of "disposition" in subsection 248(1) of the Act.
Although a technical interpretation was requested, the scenario presented appears to be an actual fact situation. We provide assurance with respect to actual proposed transactions only by way of advance income tax rulings. If however this situation involves 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 applicable to the fact scenario described. All references to sections or components thereof are to the Act.
Subsection 107(2) provides a series of rules which apply when a personal or prescribed trust distributes its assets in complete or partial satisfaction of a capital beneficiary's interest. That is, subsection 107(2) will apply in circumstances where there is a distribution that constitutes a disposition of a capital interest in a trust and subsections 107(2.001), 107(2.002), and 107(4) to 107(5) do not otherwise apply. Paragraph (d) of the definition of disposition in subsection 248(1) provides that a disposition includes a payment that can reasonably be considered to have been made because of the taxpayer's capital interest in the trust, except where paragraph (h) or (i) of that same definition apply. Paragraph (h) has no application in your scenario as the Trust is a personal trust. Paragraph (i) is also not applicable as the distribution from the original trust is not out of the income of the trust nor is it in respect of an amount designated under subsection 104(20). Lastly paragraph (f) which describes an exclusion from the definition of disposition would not be applicable as the transferee New Trusts would be receiving the property in satisfaction of their rights as beneficiaries under the transferor Trust.
We agree with your interpretation that subsection 107(2) would apply to the hypothetical scenario outlined above provided of course that subsections 107(2.001), 107(2.002), and 107(4) to 107(5) are not otherwise applicable.
We trust our comments will be of assistance.
Yours truly,
T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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