2002 Ruling 2001-0111303 - Beneficiary added to discretionary 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 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. Would the addition of a beneficiary to a discretionary trust, as permitted under the terms of the trust, result in a resettlement of the trust property?

2. Would the addition of a beneficiary to a discretionary trust result in a disposition of any part of the existing beneficiaries' interest in that trust?

3. If yes to 2., what is the FMV of that interest?

Position:

1. No.

2. Yes, it would result it a partial disposition of the interest of each of the existing beneficiaries.

3. While not free from doubt, the value of each beneficiary's interest at a particular point in time would approximate a proportionate share of the FMV of trust property at that time.

Reasons:

1. The terms of the trust have provided for the addition of beneficiaries from the beginning such that the trustees' exercise of their right to add such a beneficiary does not create a new trust.

2. The addition of another beneficiary varies the rights of the existing beneficiaries such that they are considered to have disposed of a portion of their interest in the trust.

3. CCRA response to this question at the 1992 BC Conference of the CTF was that it was admittedly difficult to quantify the value of an interest in a discretionary trust. It would be unreasonable to conclude that the FMV of an interest is a discretionary trust holding property with significant value has no value simply because it is difficult to measure. In absence of any term of the trust that would direct the trustees to favour one beneficiary over another, the even handed principle would suggest that value of each beneficiary's interest was approximately equal. Where the facts support a finding that one beneficiary has a lesser chance of receiving a distribution from the trust than another beneficiary, it may be appropriate to discount the value of one interest and increase the value of another.

XXXXXXXXXX 2001-011130

Attention: XXXXXXXXXX

XXXXXXXXXX, 2002

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling in respect of the income tax consequences arising from the proposed transactions described below. We also acknowledge your correspondence of XXXXXXXXXX.

We understand that, to the best of your knowledge, and that of the taxpayers on whose behalf this ruling is requested, none of the issues contained in this advance income tax ruling are:

i) contained in earlier returns of the taxpayers or related persons;

ii) being considered by a tax service office and/or a tax centre in connection with a tax return previously filed by the taxpayers or related persons;

iii) under objection by the taxpayers or related persons;

iv) before the courts; or

v) the subject of a ruling previously issued by the Directorate to the taxpayers or related persons.

Definitions

In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (R.S.C. 1985, 5th supplement, c.1 as amended) (the "Act"), and the following terms have the meaning specified:

"Beneficiaries" means the beneficiaries of Subject Trust named in the trust settlement, being Mother (during the period prior to the transactions described in paragraph 6), Father and Son's Trust;

"Corporation" means XXXXXXXXXX, a corporation incorporated under the Canada Business Corporations Act;

"Father" means XXXXXXXXXX;

"Mother" means XXXXXXXXXX;

"Parentco" means XXXXXXXXXX, a corporation which owns XXXXXXXXXX% of the outstanding shares of Corporation and which was incorporated under the laws of the province of XXXXXXXXXX;

"SBC" means XXXXXXXXXX, a small business corporation, incorporated under the laws of the province of XXXXXXXXXX;

"Son's Trust" means the XXXXXXXXXX, an inter vivos trust settled by Mother on XXXXXXXXXX, and amended by a Deed of Variation dated XXXXXXXXXX, which was approved by Order of the Supreme Court of XXXXXXXXXX. The tax account number for Son's Trust is XXXXXXXXXX;

"Son" means XXXXXXXXXX; and

"Subject Trust" means the XXXXXXXXXX, an inter vivos discretionary trust settled by Corporation on XXXXXXXXXX, the current trustees of which are XXXXXXXXXX. Subject Trust currently owns all the outstanding shares of Parentco and SBC.

XXXXXXXXXX

Our understanding of the facts and the proposed transaction is as follows:

Facts

1. Son's Trust is a personal trust established principally for the benefit of Son. The trustees of Son's Trust are Father and Mother. The trustees of Son's Trust may pay any part of the income or capital of Son's Trust to Son from time to time as they deem advisable or necessary for the benefit of Son. The balance of Son's Trust's property will be distributed to Son on the date of final distribution. If Son dies before the date of final distribution, the property is to be held for any of his children who are alive at the time of his death. If there are no children of Son alive at the date of final distribution, the property of Son's Trust is to be distributed to Mother. If Mother is not alive at the date of final distribution, the property of Son's Trust is to be distributed to Father, or if he is also deceased at that time, to certain named siblings of Father and Mother. Son currently has no children.

2. The property of Son's Trust includes its interest in Subject Trust. The date of final distribution under Son's Trust was originally set for Son's XXXXXXXXXX. Son's Trust was amended to extend the date of final distribution to the earlier of XXXXXXXXXX, and a date to be determined by the trustees. The purpose of the amendment was to preserve Son's entitlement to income and capital under Son's Trust until such time as Son could be added as a beneficiary of Subject Trust.

3. Subject Trust is a personal trust established for the benefit of the Beneficiaries, and indirectly for the benefit of Son. Subject to certain limitations, the terms of Subject Trust may be amended by a written indenture signed by the settlor and all the trustees. In particular, no one other than a person related to a Beneficiary may be added as a beneficiary of the Subject Trust.

4. Son is related, within the meaning of subsection 251(2) of the Act and the context of Subject Trust, to two of the Beneficiaries and is dealing at non-arm's length with the other Beneficiary of Subject Trust.

5. The property of Subject Trust is substantially comprised of common shares in the capital of two small business corporations, SBC and Parentco. The value of the shares of SBC has risen substantially since the shares were acquired by Subject Trust.

6. Mother and Father are separated. Under the terms of the settlement of the rights arising out of their marriage, amounts owing by Subject Trust to Father have been assigned to Mother and Mother has surrendered all of her interest in Subject Trust.

Proposed Transactions

7. Subject Trust will be amended in accordance with the terms thereof to add Son as a discretionary beneficiary of Subject Trust.

8. In a series of transactions occurring independent of the proposed transaction described in paragraph 7 to which the requested rulings relate, Subject Trust plans to exchange the common shares of SBC for preferred shares of the SBC. SBC will then issue new common shares to two new trusts, one of which will be established principally for the benefit of Son and the other will be established for the principal benefit of Father and his current common-law partner. Subject Trust will make a distribution of one third of the preferred shares of SBC to Father in satisfaction of part of his capital interest in Subject Trust and Father will settle the preferred shares on the new trust for himself and his current common-law partner. Subject Trust will continue to hold the remaining two thirds of the preferred shares of SBC until a time not later than XXXXXXXXXX, when the trustees of Subject Trust will make a final distribution.

Purposes of Proposed Transactions

9. Subsection 75(2) applies in respect of the property initially settled on Son's Trust and any property substituted for such property while Mother is resident in Canada. As a result, subsection 107(2.1) and (4.1) would apply to any distribution of Son's Trust's property to Son in satisfaction of all or part of his capital interest in Son's Trust while Mother is alive. Son has an indirect beneficial interest in Subject Trust through his beneficial interest in Son's Trust. By adding Son as a direct beneficiary of Subject Trust, his interest in Subject Trust is preserved and property may be distributed to him in satisfaction of all or any part of his capital interest in Subject Trust pursuant to subsection 107(2) provided that he remains resident in Canada and subsection 75(2) has never applied to Subject Trust.

Rulings Given

Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as herein described, our advance income tax rulings are as follows:

A. The amendment to the terms of Subject Trust to add Son as a Beneficiary of Subject Trust will not, in and by itself, result in a disposition for income tax purposes of any property of Subject Trust.

B. The amendment to the terms of Subject Trust will not, in and by itself, result in the application of subsections 56(2) or 105(1).

Opinion Given

Notwithstanding the fact that the variation to Subject Trust will not, in and by itself, result in a disposition of any of the property of Subject Trust, it is our view that the variation will result in the disposition, within the meaning of subsection 248(1) of the Act, of a portion of each Beneficiary's interest in the Subject Trust at the time the variation is made.

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency (the CCRA) has agreed to any tax consequence related to the facts and proposed transactions other than those specifically described in the rulings, the application of subsection 75(2) to any property held by Subject Trust or has agreed to or reviewed the determination of the fair market value of any capital interest in Subject Trust. However, it is our view that the value of each Beneficiary's interest in Subject Trust at a particular point in time will approximate a proportionate share of the fair market value of the total of Subject Trust's property at that time.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5, Advance Income Tax Rulings, and is binding on the CCRA provided the proposed transactions are completed within six months of the date of this letter.

XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate