17 October 2000 External T.I. 2000-0039395 - last acquired control - alter ego trust

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:

i) whether a transfer to an alter ego trust, where the trustee is not related to the settlor would be considered non-arm's length for purposes of paragraph 88(1)(d.2)?

ii) does the vesting of new beneficiaries in an alter ego trust justify the application of paragraph 88(1)(d.3)?

Position:

i) Yes.

ii) No.

Reasons:

i) Proposed paragraph 251(1)(b) states that a taxpayer and a personal trust will be deemed not to deal at arm's length when the taxpayer is beneficially interested in the trust.

ii) The vesting of new beneficiaries does not result in an acquisition of control by the trust for purposes of paragraph 88(1)(d.3).

		2000-003939
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
Attention:  XXXXXXXXXX 

October 17, 2000

Dear Sirs:

Re: Paragraphs 88(1)(d.2) and 88(1)(d.3) of the Income Tax Act

We are writing in reply to your letter of July 17, 2000 wherein you requested our opinion regarding the application of paragraphs 88(1)(d.2) and 88(1)(d.3) of the Income Tax Act (the "Act") in a particular situation.

Specifically you have asked whether the initial transfer to an alter ego trust when the trustee was a person not related to the settlor would be considered an acquisition from a non-arm's length person for purposes of paragraph 88(1)(d.2) of the Act. In addition, you enquire whether the vesting in new beneficiaries of the trust triggers the creation of an interest in the assets and whether that indirect interest would justify the application of paragraph 88(1)(d.3) of the Act.

Our Comments

The Minister of Finance released draft legislation regarding alter ego trusts in a Notice of Ways and Means Motion tabled in the House of Commons on June 5, 2000. Essentially, an alter ego trust is one established after 1999 by a living individual who is at least 65 years of age where that individual is entitled to receive all the income of the trust arising before his or her death and no person except the individual may receive or otherwise obtain the use of any of the income or capital of the trust before the individual's death.

The Notice of Ways and Means Motion tabled in the House of Commons on June 5, 2000 also contained a proposed amendment to paragraph 251(1)(b) (the "Proposed Non-arm's Length Rule") which reads as follows:

"b) a taxpayer and a personal trust (other than a trust described in any of paragraphs ( a) to ( e.1) of the definition "trust" in subsection 108(1)) are deemed not to deal with each other at arm's length if the taxpayer, or any person not dealing at arm's length with the taxpayer, would be beneficially interested in the trust if subsection 248(25) were read without reference to subclauses 248(25)( b)(iii)(A)(II) to (IV); and ..."

Thus the Proposed Non-arm's Length Rule, if enacted as proposed, would apply to deem a beneficiary to deal at non-arm's length with a personal trust (other than a trust described in any of paragraphs ( a) to ( e.1) of the definition "trust" in subsection 108(1)). The rules would be applicable after December 23, 1998.

Since an alter ego trust can only be established after 1999, the Proposed Non-arm's Length Rule, if enacted as proposed, would likely apply to deem the beneficiary (in the case of an alter ego trust, the beneficiary is also the settlor) to deal at non-arm's length with the trust, and in our view, the initial transfer of property to an alter ego trust would be considered an acquisition from a non-arm's length person for purposes of paragraph 88(1)(d.2) of the Act, regardless of whether the trustee was a person who was not related to the settlor.

Paragraph 88(1)(d.3), as enacted on June 18, 1998, provides that, where at any time control of a corporation is last acquired by an acquirer because of an acquisition of shares of the capital stock of the corporation as a consequence of the death of an individual, the acquirer is deemed to have last acquired control of the corporation immediately after the death from a person who dealt at arm's length with the acquirer.

The courts have in the past concluded that control of the shares held by a trust rests with the trustees (see MNR v. Consolidated Holding Company Limited, 72 DTC 6007). Thus, in our view, vesting of new beneficiaries in the trust would not constitute an acquisition of control by the trust as a consequence of the death of the individual for purposes of paragraph 88(1)(d.3) of the Act.

We note, however, that if the terms of the alter ego trust provide for the distribution of the shares held by the trust to a beneficiary as a consequence of the death of the settlor, paragraph 88(1)(d.3) would apply provided the beneficiary acquired control of the corporation on the distribution. In this case, the beneficiary would be deemed to have acquired control immediately after the death of the settlor from a person who dealt at arm's length with the beneficiary.

Whether or not paragraph 88(1)(d.3) should be amended to deem the trustee(s) of an alter ego trust to have acquired shares from a person dealing at arm's length with the trustee(s) at the time of the beneficiary's death is within the purview of the Department of Finance.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch