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: Does 75(2) apply when the settlor or contributor is the sole trustee of an irrevocable non-discretionary trust with no power to add beneficiaries and the settlor or contributor is not a beneficiary of the trust?
Position: Yes
Reasons: As the sole trustee of the trust, the trust property cannot be disposed of without the settlor's consent or direction. As a result, the condition in 75(2)(b) is applicable to the property contributed by the settlor or contributor. If the conditions which cause 75(2) to apply cease to apply at some future time, such as when the settlor resigns as trustee, 75(2) will cease to apply; however, 107(4.1) will still apply to any distributions to beneficiaries.
XXXXXXXXXX 2001-011042
Annemarie Humenuk
Attention: XXXXXXXXXX
June 20, 2002
Dear XXXXXXXXXX:
Re: Attribution of Income where the Settlor is the Sole Trustee
This is in reply to your letter of November 6, 2001, concerning the application of subsections 75(2) and 107(4.1) where the settlor of a trust is the sole trustee. We apologize for the delay in our response.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
Your question relates to the scenario in which a settlor is the sole trustee of a personal trust. The settlor has the power to appoint a substitute trustee if he resigns as trustee, but in the event he fails to do so and is unable to act as trustee, his spouse would become the trustee. While the settlor does not have the power under the terms of the trust to add beneficiaries to the trust, the settlor, as trustee, is in a position to determine the amount of income or capital to be paid to any particular beneficiary. For the purpose of this question, it can be assumed that the settlor is not a beneficiary of the trust and there are no circumstances under which any of the trust's property could revert to the settlor. You ask whether subsection 75(2) applies to the income earned by the trust on the property transferred to the trust by the settlor such that subsection 107(4.1) would apply to any subsequent distribution of that property to the beneficiaries.
The particular circumstances outlined in your letter appear to relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, it is not our practice to comment on a proposed transaction involving a specific taxpayer, except by way of an advance income tax ruling. When the transaction related to the enquiry is completed, the enquiry should be addressed to the relevant tax services office. However, we offer the following general comments that may be of assistance to you.
Where the settlor is the sole trustee of the trust, none of the trust's property can be disposed of without the settlor's consent or direction. As a result of the settlor's direct control over the property transferred to the trust, it is our view that property transferred to trust by the settlor is held on the condition described in paragraph 75(2)(b) such that subsection 75(2) would apply.
However, if the conditions which result in the application of subsection 75(2) cease to exist at any time, for example when the settlor resigns his position as sole trustee, then the attribution rules under subsection 75(2) will also cease to apply at that time. However, as you pointed out, subsection 107(4.1) will apply to any subsequent distribution of that property or any substituted property to a person other than the person who transferred the property to the trust. We understand from our conversations with you (XXXXXXXXXX\Humenuk) that you have contacted the Department of Finance directly with your concerns about the application of subsection 107(4.1) to trusts created before 1989.
As indicated in paragraph 22 of Information Circular 70-6R5, this opinion is not an advance income tax ruling and consequently, is not binding on the Canada Customs and Revenue Agency. We trust our comments have clarified our position in this matter.
T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
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