16 January 2002 External T.I. 2001-0108275 - QUALIFIED DISPOSITIONS

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:

Rulings opinion E2000-0032685 discussed the draft version of section 107.4 of the Act, as set out in the notice of ways and means motion of June 5, 2000, ("the motion") which introduced rules providing for tax-deferred "qualified dispositions" of property under certain circumstances. Section 107.4, as enacted, differs somewhat from the draft provisions set out in the motion. We are asked whether the comments in opinion E2000-0032685 would be equally applicable to the enacted legislation as it was to the draft version.

Position:

The comments in opinion E2000-0032685 are limited to the motion and do not apply to the enacted legislation.

Reasons:

The draft provisions set out in the motion limit qualifying dispositions to certain dispositions not resulting in a change in beneficial ownership of property, except in cases where trust beneficiaries retain their proportionate interest in "each particular property" of the trust. Section 107.4, as enacted, deems there to be no change in beneficial ownership where the value of a beneficiary's interest in a property, or in a group of two of more identical properties, is the same both before and after the disposition.

XXXXXXXXXX                                      2001-010827
R. Maley
January 16, 2002

Dear XXXXXXXXXX:

Re: 107.4(2) of the Income Tax Act

This is in reply to your letter of October 25, 2001 in which you request our comments on new subsection 107.4(2) of the Income Tax Act ("the Act") and ask whether the comments set out in Rulings opinion E2000-0032685 still represent the CCRA's views on that subsection.

Rulings opinion E2000-0032685 discussed the draft version of section 107.4 of the Act, as set out in the notice of ways and means motion of June 5, 2000, and concluded, among other things, that the deeming rule in paragraph 107.4(2)(a) would likely have narrow application. You have noted that the Department of Finance made several changes to that draft before enacting the final version of subsection 107.4(2). You have confirmed by telephone (XXXXXXXXXX/Maley) that you are interested in knowing whether, given those changes, it is the CCRA's view that the enacted paragraph 107.4(2)(a) would have a similarly narrow application as would have the draft version, had it been enacted.

Written confirmation of the tax implications in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Draft section 107.4, as set out in the notice of ways and means motion of June 5, defined a "qualifying disposition" as including only dispositions that would not result in a change in the beneficial ownership of the property transferred. Proposed paragraph 107.4(2)(a) of that draft provided that, under certain circumstances, a change in beneficial ownership would be deemed to not have occurred. Those circumstances would be those involving transfers of trust property occurring within a period that did not exceed one day and in which the transferor trust would receive no consideration for the disposition. Generally, in those circumstances there would be deemed to be no change of beneficial ownership if "as a consequence of the disposition, the beneficial ownership at the beginning of the period of each beneficiary under the transferor trust in each particular property of the transferor trust is the same as the beneficiary's beneficial ownership at the end of the period in the particular property that relates to the beneficiary's combined interest in the transferor trust and in the other trust or trusts".

In opinion E2000-0032685, we expressed the view that draft paragraph 107.4(2)(a) would likely have very narrow application, as subparagraph (a)(ii) of that provision referred specifically to "each particular property" and not to classes of identical properties. Thus, the deeming rule would not apply to a disposition unless it resulted in each particular trust property being divided between the transferee trusts. In this regard, it may be noted that a single share is a property for the purposes of the Act.

Paragraph 107.4(2)(a), as enacted, reads as follows:

(2) For the purpose of paragraph (1)(a),

(a) except where paragraph (b) applies, where a trust (in this paragraph and subsection (2.1) referred to as the "transferor trust"), in a period that does not exceed one day, disposes of one or more properties in the period to one or more other trusts, there is deemed to be no resulting change in the beneficial ownership of those properties if

(i) the transferor trust receives no consideration for the disposition, and

(ii) as a consequence of the disposition, the value of each beneficiary's beneficial ownership at the beginning of the period under the transferor trust in each particular property of the transferor trust (or group of two or more properties of the transferor trust that are identical to each other) is the same as the value of the beneficiary's beneficial ownership at the end of the period under the transferor trust and the other trust or trusts in each particular property (or in property that was immediately before the disposition included in the group of identical properties referred to above); (emphasis added).

Given the changes noted in italics, our view is that paragraph 107.4(2)(a) would have a broader application than did the draft version set out in the notice of ways and means motion of June 5, 2000, as the enacted version would deem a division of a group of identical trust properties in a manner that reflects the beneficial interests therein to not result in a change in beneficial ownership of those properties for the purposes of subsection 107.4(1).

Section 107.4, as enacted, also includes subsection 107.4(2.1) which applies, in some circumstances, to trusts holding identical shares which cannot be divided evenly in accordance with the existing beneficial interests i.e., where a division of the group of shares proportionately among those beneficially entitled would result in fractional interests in particular shares.

In view of the differences between section 107.4, as enacted, and the notice of ways and means motion dated June 5, 2000, the comments in opinion E2000-0032685 should be limited to the notice of ways and means motion upon which they were based.

While the foregoing comments are not binding on the Canada Customs and Revenue Agency, we trust that they are helpful.

F. Lee Workman
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings Directorate