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: Whether subsection 75(2) applies to four hypothetical situations involving trusts.
Position: General comments
Reasons: Wording of subsection 75(2) of the Income Tax Act.
XXXXXXXXXX 2002-011653
Carole Benoit
February 19, 2002
Dear XXXXXXXXXX:
Re: Subsection 75(2) and Distributions Arising as a Consequence of the Terms
of a Will________________________________________________________
This is in reply to your letter dated December 10, 2001, in which you requested our opinion regarding the above-noted subject. More particularly, you requested a technical interpretation on the application of subsection 75(2) of the Income Tax Act (the "Act") to four hypothetical situations.
In each of the hypothetical situations, the taxpayer transfers property to a trust for which he is neither a trustee, nor a beneficiary and for which the terms are as follows:
Scenario 1
The taxpayer's spouse, during her lifetime, is the sole beneficiary of the trust.
Following the spouse's death, individuals, other than the taxpayer, are the beneficiaries of the trust.
Following the spouse's and all other beneficiaries' death, the assets of the Trust are to be distributed in accordance with the terms of the spouse's will.
Scenario 2
The taxpayer's spouse, during her lifetime, is the sole beneficiary of the trust.
No other beneficiaries are named under the terms of the trust.
Following the spouse's death, the assets of the trust are to be distributed in accordance with the terms of the spouse's will.
Scenario 3
The taxpayer's spouse, during her lifetime, is the sole beneficiary of the trust.
Following the spouse's death, individuals, other than the taxpayer, are the beneficiaries of the trust.
Following the spouse's and all other beneficiaries' death, the assets of the trust are to be distributed in accordance with the terms of the taxpayer's will.
Scenario 4
The taxpayer's spouse, during her lifetime, is the sole beneficiary of the trust.
No other beneficiaries are named under the terms of the trust.
Following the spouse's death, the assets of the trust are to be distributed in accordance with the terms of the taxpayer's will.
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 Information Circular 70-6R4 dated January 29, 2001. The following comments are, therefore of a general nature only.
Our general position concerning the application of subsection 75(2) of the Act is outlined in Interpretation Bulletin IT-369R, as amended by special release dated June 24, 1994. As indicated in paragraph 3 of IT-369R, pursuant to subsection 75(2) of the Act, there will be attribution to the person from whom property was directly or indirectly received if the terms of the trust are such that the property:
(a) may revert to that person;
(b) may be distributed to beneficiaries to be determined by that person at a time after the trust was created; or
(c) may only be disposed of with the consent of, or at the direction of, that person while alive.
Subsection 75(2) may apply to any income from, or any gain or loss from the disposition of, property received from a person who, by the exercise of a power of appointment, may determine the beneficiaries to whom that property may pass. It may also apply where the property may revert to the person from whom it was received as a consequence of the death of the last of all other beneficiaries under the trust.
If the terms of the trust are such that there is a possibility, however remote, that the person may reacquire the property (or property substituted for that property) then subsection 75(2) of the Act would apply. This would include a situation where the terms of the trust provide that the person may reacquire the property as a consequence of the death of the last of all other beneficiaries under the trust. It would also include a situation where the person is a contingent beneficiary in the event of the death of the last of all other beneficiaries and the property may revert to the person by virtue of the terms of the trust. However, where the property may revert to the person by operation of law only, e.g., a total failure of the trust for lack of beneficiaries, and not pursuant to any condition under the trust indenture, it is our opinion that such a situation would not normally constitute a reversion contemplated by subparagraph 75(2)(a)(i) of the Act.
With respect to the first two scenarios, in the event that the taxpayer outlives his spouse and all other beneficiaries of the trust in scenario 1 and his spouse in scenario 2, the possibility exists, however remote, that the trust property may revert, return or come back to him as a consequence of the death of the last of all other beneficiaries under the trust and consequently, subsection 75(2) would apply because the condition found at subparagraph 75(2)(a)(i) would be satisfied.
With respect to the third and fourth scenarios, in the event that the taxpayer outlives his spouse and all other beneficiaries of the trust in scenario 3 and his spouse in scenario 4, it is our position that by retaining a general power of distribution exercisable by will with respect to the trust property, the taxpayer has retained the possibility to determine to whom the property will pass after the creation of the trust and thereby the condition found at subparagraph 75(2)(a)(ii) will be satisfied.
As indicated in paragraph 22 of Information Circular 70-6R4, 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 are of assistance to you.
Yours truly,
Alain Godin, Manager
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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