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:
Whether subpararagraph 75(2)(a)(i) would apply because the settlor loaned money to the trust.
Whether subparagraph 75(2)(a)(ii) would apply to the particular situation.
Whether paragraph 75(2)(b) would apply to the particular situation.
Position:
Our position is that a genuine loan to a trust would not in and by itself be considered to result in the application of subsection 75(2) of the Act if the loan is outside and independent of the terms of the trust. Paragraph 3 of IT-260R provides comments on "genuine loan".
General comments. No position on the particular fact situation.
According to the facts given in the incoming letter, paragraph 75(2)(b) would not apply.
Reasons:
Subparagrah 75(2)(a)(ii) - Determination of the beneficiaries
When the person from whom the property was received by the trust cannot determine the identity of the beneficiaries but can only select the quantum of the property to be distributed to the beneficiaries which have already been identified by the trust documents, subparagraph 75(2)(a)(ii) is generally not considered applicable.
However, if the possibility to determine the quantum is such that it results in the possibility that the settlor/trustee may determine the beneficiaries to whom the property will pass, subparagraph 75(2)(a)(ii) could apply.
Subparagraph 75(2)(a)(ii) - The settlor is one of several trustees
In a situation where the settlor is one of a number of trustees, we would generally not consider that he has the power to determine to whom the property will pass if the trustees can only take action where there is unanimous agreement among.
Paragraph 75(2)(b)
In that particular situation, it is our view that the property is not held on condition that, during the lifetime (the existence) of the person, the property shall not be disposed of except with the person's consent or in accordance with the person's direction.
XXXXXXXXXX 2000-004250
Sylvie Labarre, CA
April 30, 2001
Dear Sir\Madam:
Re: Application of Subsection 75(2) of the Income Tax Act
We are writing in response to your letter of August 15, 2000 in which you requested a technical interpretation on the application of subsection 75(2) of the Income Tax Act (the "Act"). The application of this provision is relevant in determining the application of subsection 107(4.1) of the Act at the time of distribution of property of a trust on its wind-up. In summary, you describe the following situation.
Situation
A trust was settled by written indenture 15 years ago by W with the sum of $100. The beneficiaries of the trust were W's children who were all adults at the time of the creation of the trust. The original trustees were W, W's husband and W's mother. W's mother was replaced by W's son-in-law and W resigned such that there are now only two trustees, namely W's husband and W's son-in-law. W, the trustees and the beneficiaries are all resident in Canada. The terms of the trust do not provide for a minimum number of trustees.
The terms of the trust provide that the trustees have discretion to accumulate or distribute income among the children of W as they consider necessary, and the trust has in fact distributed all of its income and gains annually to the beneficiaries. Similar discretion is given to the trustees to distribute the capital of the trust to the children of W in such proportion as they decide at any time. The trustees' decisions must be unanimous however. W has loaned money to the trust for investment purposes and expenses, sometimes with interest, sometimes without interest. All amounts borrowed by the trust have been repaid. The trustees may wind-up the trust at any time and must do so before the 21st anniversary of the creation of the trust. The trustees want to distribute all of the property of the trust in equal amounts to the children of W.
It is your opinion that subsection 75(2) of the Act never had any application to this trust, and that accordingly the provisions of subsection 107(4.1) are not applicable. You ask us to confirm your interpretation.
As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. We are therefore not in a position to give a definitive response to your enquiry. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.
Loans made by the settlor
Our position is that a genuine loan to a trust would not in and by itself be considered to result in the application of subsection 75(2) of the Act if the loan is outside and independent of the terms of the trust. Paragraph 3 of IT-260R provides the following comment on "genuine loan":
No all-inclusive statement can be made as to when a loan can be considered to be "genuine", but a written and signed acknowledgement of the loan by the borrower and agreement to repay it within a reasonable time ordinarily is acceptable evidence that it was so. If, in addition, there is evidence that the borrower has given security for the loan, that interest on the loan has been paid, or that actual repayments have been made, it is accepted that the loan was genuine. The fact that no interest is required to be paid does not mean, in itself, that a genuine loan has not been made.
Subparagraph 75(2)(a)(ii) of the Act
It is a question of fact whether the person from whom property was transferred to a trust can determine to whom the property will pass. Where the beneficiaries under a trust are named in the trust indenture and cannot be modified (i.e., the person from whom the property was received by the trust cannot select additional beneficiaries after the creation of the trust), subparagraph 75(2)(a)(ii) is generally not considered applicable. This is true even though the person from whom the property was transferred to the trust may be able to determine the amount of the trust property that is to be distributed to beneficiaries already identified in the trust documents. However, subparagraph 75(2)(a)(ii) is worded broadly and there could be exceptions to this general position depending on the situation.
A definitive statement about the application or non application of subparagraph 75(2)(a)(ii) in any particular situation would require a review of all the facts and circumstances.
Paragraph 75(2)(b) of the Act
Our current position is that where a person contributes property to a trust and is one of two or more co-trustees acting in a fiduciary capacity in administering the trust property and there are no specific terms outlining how the trust property is to be dealt with, but rather the property is subject to the standard terms of the trust, paragraph 75(2)(b) may not be considered applicable. However, such determinations will only be made on a case by case basis following a review of all the facts and circumstances surrounding a particular situation.
We trust our comments will be of assistance to you. However, as indicated in paragraph 22 of Information Circular 70-6R4, this opinion is not a ruling and, accordingly, it is not binding on the Canada Customs and Revenue Agency.
Yours truly,
Alain Godin
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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