11 July 2002 External T.I. 2001-0114045 - 75(2) and an 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 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. Does 75(2) apply to all alter ego trusts?

2. Who reports the deemed gain or loss on the death of the settlor of an alter ego trust to which 75(2) applies?

3. When 75(2) applies to an alter ego trust, what are the trusts reporting requirements?

Position: 1. No 2. The trust. 3. The conditions for filing a T3 are set out on page 10 of the T3 Guide. An affirmative answer to question 1 on schedule 9 will identify a T3 information slip which includes an amount that is attributed to the settlor-beneficiary.

Reasons: 1. 72(2) will only apply where the settlor is a capital beneficiary or the trustee has a power of capital encroachment; however, 104(13) will normally require all amounts not attributed under 75(2) to be included in the settlor's income.

2. The deemed disposition occurs after the death of the settlor such that 75(2) doesn't apply and there is no practical reason to make the gain payable to the residual beneficiary since 104(6) denies the trust a deduction in respect of any such amount that is payable to the residual beneficiary.

3. A T3 will normally be required even if the income is attributed to the settlor. The instructions to schedule 9 require a note identifying the amounts attributed to the settlor.

XXXXXXXXXX 	2001-011404
		Annemarie Humenuk
July 11,2002

Dear XXXXXXXXXX:

Re: Filing requirements for a trust Application of Subsection 75(2) to Alter Ego Trusts

This is in reply to your letter of November 27, 2001, concerning the filing requirements applicable to an alter ego trust or a joint spousal or common-law partner trust to which subsection 75(2) applies. 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.

You ask us to confirm your understanding that subsection 75(2) will apply to all alter ego and joint spousal or common-law partner trusts. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in the recently revised Information Circular 70-6R5. The following comments are therefore of a general nature only.

It is a question of fact as to whether property is held by a trust under either of the conditions described in paragraph 75(2)(a) or (b). The fact that a trust will only qualify as an alter ego trust if the settlor is entitled to all the income of the trust that arises before his or her death as required by subparagraph 73(1.01)(c)(ii) does not necessarily mean the property contributed by the settlor, or property substituted for it, can possibly revert to the settlor. Similarly, the requirement that either the settlor, the settlor's spouse or common-law partner or a combination of both must be entitled to all the income earned by a joint spousal or common-law partner trust during their respective lifetimes does not necessarily mean that the property contributed by the settlor, or property substituted for it, may revert to the settlor. However, where, for example, the settlor of an alter ego trust or a joint spousal or common-law partner trust is a capital beneficiary of the trust, subparagraph 75(2) will apply during the period in which the settlor is resident in Canada.

On the other hand, any portion of the income of an alter ego trust that is not attributed to the settlor under subsection 75(2) would generally be included in the settlor's income under subsection 104(13) since the terms of an alter ego trust require that such amounts be payable to the settlor. When all or part of the income of a joint spousal or common-law partner trust is payable to the settlor's spouse, the amount of income as determined under subsection 74.3(1) will be included in the settlor's income under either subsection 74.1(1) or 74.2(1) in addition to any amount included in the settlor's income under subsection 104(13).

You also asked which taxpayer includes in income, the gain or loss arising on the deemed disposition of the trust property under paragraph 104(4)(a) upon the death of the settlor of an alter ego trust. Any capital gain realized on the deemed disposition of the trust's property under 104(4)(a) is taxable to the trust. This is because the deemed disposition under paragraph 104(4)(a) occurs at the end of the day on which the settlor dies such that subsection 75(2) does not apply to such gain or loss. If the gain is payable to the residual beneficiary in the year such that it would be included in the beneficiary's income under subsection 104(13) despite the trust's inability to claim a deduction under subsection 104(6) for the amount so payable, the trust may be entitled to make a designation under subsection 104(13.2) to cause the amount to be excluded from the beneficiary's income.

The balance of your questions relate to the reporting requirements for a trust to which subsection 75(2) applies. As stated in paragraph 10 of IT-369R, Attribution of Trust Income to Settlor, when the income of a trust is attributed to the person who contributed the property to the trust under subsection 75(2), that amount is normally excluded from the amount included under subsection 104(13) in the income of the beneficiary to whom it was paid or payable in the year and from the income of the trust where it was not paid or payable to a beneficiary in that year. However, any income earned on the attributed income is not attributed to the contributor under subsection 75(2) and would therefore be taxable to the trust to the extent that it is not paid or payable to any or all beneficiaries of the trust pursuant to subsection 104(13) or the subject of a preferred beneficiary election pursuant to subsection 104(14).

A trust is required to file a T3 tax return when it satisfies any of the conditions set out on page 10 of the 2001 T3 Guide. Despite the comments in paragraph 10 of IT-369R, one or more of these conditions may be met when income is attributed to the settlor under subsection 75(2). For example, when an amount of income from property held by the trust in excess of $100 is payable to a single beneficiary, including the settlor, the trust is required to file a T3 return regardless of whether or not the amount is attributable to the settlor under subsection 75(2). In order to ensure that the income is excluded from the computation of the trust's income, a T3 information slip should be prepared for the settlor and a statement showing the amount of income attributed to the settlor under subsection 75(2) should be submitted with schedule 9 of the T3 tax return as required when the response to question 3 of Part A is in the affirmative.

Finally, you asked us to address the question of how a trustee is to report a disposition of property on a T3 tax return when the taxable capital gain or allowable capital loss resulting from that disposition is attributed to the settlor under subsection 75(2) such that it is not included in the income of the trust. As with other income that is attributed to the settlor, a T3 information slip should be prepared for the settlor and a statement showing the amount of any taxable capital gain or allowable capital loss attributed to the settlor under subsection 75(2) should be submitted with schedule 9 of the T3 tax return. As a result of the allocation of the taxable capital gain or allowable capital loss to the settlor, the deduction on line 47 of the T3 tax return will ensure that the gain or loss is not included in the trust's income.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

Yours truly,

T. Murphy
Manager
Trusts Section
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

c.c. Edwin Williams
Pensions and Trusts Section
Processing Division
IRPPD
873 Tower C, 25 McArthur Road, Vanier

c.c. Dave Barabash
Specialty Publications Section
Client Services Directorate
2nd Floor, 2733 Lancaster Road, Ottawa