10 June 2002 External T.I. 2002-0118255 - Application of 75(2)

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) of the Income Tax Act applies in three different scenarios.

Position: General comments

Reasons: Question of fact

XXXXXXXXXX 								2002-011825
	Éric Allard-Pouliot
June 10, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request : Subsection 75(2)

This is in reply to your facsimile of January 14, 2002, requesting our opinion as to whether subsection 75(2) of the Income Tax Act (the "Act") would apply in three hypothetical scenarios.

Your request appears to relate to either a proposed or completed transaction. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance to you.

Scenario 1

"A", a person resident in Canada, settles an apartment building to a trust whereby "B" is appointed as the trustee to hold the property in trust for the benefit of "C". According to the terms of the trust, "A" may, at any time, exercise the right to use or occupy a vacant unit in the building on a rent-free basis.

Question 1

Does the Canada Customs and Revenue Agency (the "CCRA") consider that the property acquired by the trust may "revert", within the meaning of subparagraph 75(2)(a)(i) of the Act, to "A" even though the apartment building which is the subject property received by the trust from "A" cannot be returned to "A" but "A" merely maintains the discretion to exercise a limited right to use or occupy a vacant unit?

Comments

Generally, subparagraph 75(2)(a)(i) of the Act applies when the terms of the trust are such that there is a possibility, however remote, that the person from whom the trust received the property may reacquire the property. It is a question of fact as to whether the condition provided in subparagraph 75(2)(a)(i) of the Act is met in any given situation.

In this scenario, although it does not seem like there is a possibility that "A" will ever reacquire the apartment building, it is to be noted that the right to use the apartment building provided to "A" under the terms of the trust would constitute a "capital interest" in the trust within the meaning of subsection 108(1) of the Act which could, in certain circumstances, lead to the application of subparagraph 75(2)(a)(i) of the Act. However, no conclusion as to the application of subparagraph 75(2)(a)(i) of the Act in this scenario can be drawn without having looked at the terms of the trust and without additional information regarding "A" and the apartment building.

Question 2

If question 1 is answered affirmatively, is all rental income from the apartment building attributable to and taxable in the hands of "A"? If not, what will be attributed to and taxed in the hands of "A"?

Comments

Assuming that subsection 75(2) of the Act did apply with respect to the apartment building, then any income or loss from the apartment building and any taxable capital gain or loss from its disposition would be attributed to "A".

Question 3

Assuming that subsection 75(2) of the Act is applicable to Scenario 1, would the CCRA also tax "A" under subsection 105(1) of the Act with respect to the benefit conferred by the trust on "A" to occupy the vacant unit of the apartment building rent free?

Comments

The application of subsection 75(2) of the Act does not prevent the application of subsection 105(1). In fact, in this scenario, both subsections would apply to different amounts. Should subsection 105(1) of the Act apply, then the value of the benefit conferred to "A" by the trust, i.e. the value of the rent that should have been paid by "A" for the unit, would have to be included in computing the income of "A", but since the value of this benefit would not form part of the income of the trust from the apartment building, the value of this benefit would not be attributed pursuant to subsection 75(2) of the Act.

Although it is a question of fact as to whether a benefit has been conferred by a trust in any given situation, it is the CCRA's position that the use of trust property by a beneficiary of the trust constitutes a benefit for the purpose of subsection 105(1) of the Act. However, as provided in Issue No. 11 of the Income Tax Technical News, in the case of personal-use property owned by a trust, the CCRA will generally not assess a benefit for the use of that property. In this regard, personal-use property of a trust will, in accordance with section 54 of the Act, include property (such as homes, cottages, boats, cars, etc.) owned primarily for the personal use or enjoyment of a beneficiary of the trust or any person related to the beneficiary.

Having regards to the fact of this scenario, since the apartment building could not be said to constitute a personal-use property within the meaning of section 54 of the Act, the value of the benefit conferred to "A", i.e. the amount of rent that should have been paid by "A" for the unit, would have to be included in computing his income pursuant to subsection 105(1) of the Act.

Question 4

Would the answers to the foregoing questions change with respect to the application of subsection 75(2) of the Act if "A" pays fair market rent for the occupation of the vacant unit in the apartment building?

Comments

The fact that "A" pays fair market rent for the occupation of the vacant unit in the apartment building would have no impact as to the application of subsection 75(2) of the Act. As mentioned in previous technical interpretations, subsection 75(2) of the Act might apply notwithstanding the fact that the property is transferred to the trust at fair market value or that the person from whom the property was received by the trust has the right to reacquire it at its fair market value (see documents # F 9330085, E 9218450 and E 2000-0012557 and APFF 1994 Round Table, Question 24).

Scenario 2A

"A", an individual resident in Canada, settles property (e.g., a house) into a trust and appoints "B" as the trustee to hold the property in trust for the benefit of "C". Under the terms of the trust, "A" has the contingent right to reacquire the property. Shortly after the creation of the trust, "A" renounces the right and the terms of the trust are varied and amended to remove that provision so that "A" has no interest in the property.

Question 5

Ignoring other tax consequences that may arise from varying the trust, will subsection 75(2) cease to apply to the amended trust such that no income/loss or capital gain or loss regarding the property will be attributed to "A" under the amended trust?

Comments

The CCRA's position in this regard is that upon the variation of the trust becoming effective, subsection 75(2) would cease to apply to the amended trust and no income/loss or capital gain or loss regarding the property would be attributed to "A" following the variation of the trust (assuming that the property is not held by the trust under one or more of the conditions described in subparagraph 75(2)(a)(ii) or paragraph 75(2)(b) of the Act).

Scenario 2B

The facts are the same as Scenario 2A, except that under the terms of the trust, "A"'s ability to reacquire the property may only be renounced if "A" delivers to the trustee a written notice of renouncement waiving such right. Upon receipt of such notice, the property can never go back to "A".

Question 6

Will income or capital gain be attributable to "A" after the renouncement is made?

Comments

As previously mentioned, it is a question of fact as to whether the condition provided in subparagraph 75(2)(a)(i) of the Act is met in any given situation, i.e. whether it could be said that under the terms of the trust the property could revert to the person from whom it was received by the trust. Therefore, we are not prepared to comment on the application of subparagraph 75(2)(a)(i) of the Act in this scenario without having looked at the terms of the trust.

Question 7

If the above question is answered negatively, will the renouncement by "A" of the right to receive property cure the denial of an otherwise available rollover of capital property of the trust to "C" under subsection 107(4.1) of the Act?

Comments

The renouncement by "A" of his right to reacquire the property would not result in subsection 107(2) of the Act being applicable to any subsequent distribution of the trust property to "C". Even if we could conclude that subsection 75(2) of the Act no longer applies following the renouncement by "A" of his right to reacquire the property, subsections 107(2.1) and (4.1) of the Act would still apply to any distribution of the trust property to "C". Once it is determined that subsection 75(2) has applied at any time in respect of any property of the trust, any subsequent distribution of the trust property to "C" will be subject to subsection 107(2.1) of the Act, as opposed to subsection 107(2), unless "A" is no longer alive at the time of the distribution. In other words, subsection 107(4.1) of the Act does not require that subsection 75(2) be applicable at the time of the distribution but only that it was applicable at any time in respect of any property of the trust (see documents # E 2001-0067955 and E 2001-00955511).

Scenario 3

A corporation resident in Canada ("Canco") issues shares to a trust under which Canco is neither a trustee nor a beneficiary. The features of the share include a right to receive dividends and provide Canco with the right to redeem the shares. Further, under the terms of the trust, in certain circumstances, Canco has the ability to reacquire the shares issued to the trust.

Question 8

Does the issuance of the shares by Canco constitute property "received" by the trust within the meaning of subparagraph 75(2)(a)(i) of the Act?

Comments

As provided in paragraph 1 of Interpretation Bulletin IT-369R, "subsection 75(2) does not depend upon a "loan" or "transfer" of property, but upon the fact that property is "held" by the trust under one or more of the conditions described" in paragraphs 75(2)(a) or (b).

Question 9

Given the terms of the trust which provide that Canco has the right to buy back the shares, would such a buy-back constitute a "reversion" of the property to Canco within the meaning of subparagraph 75(2)(a)(i) of the Act?

Comments

We are not prepared to comment on this question without having looked at all the facts, and more particularly to the terms of the trust and the statutes of Canco. However, we would be pleased to consider this question in the context of an advance income tax ruling request should you decide to proceed with such a request.

Question 10

Does Canco's right to redeem the share under the terms of the shares constitute a possible "reversion" of the property to Canco within the meaning of subparagraph 75(2)(a)(i) of the Act?

Comments

We are not prepared to comment on this question without having looked at all the facts, and more particularly to the terms of the trust and the statutes of Canco. However, we would be pleased to consider this question in the context of an advance income tax ruling request should you decide to proceed with such a request.

Question 11

Assuming any of Questions 8, 9 or 10 is answered affirmatively, if a dividend is paid on the shares issued to the trust, would the dividend be attributed to and taxed in the hands of Canco?

Comments

Pursuant to subsection 75(2) of the Act, any income from a property which is held by a trust under one or more of the conditions described in paragraphs 75(2)(a) or (b) is deemed to be income of the person from whom the property was received by the trust. It is also provided in subsection 82(2) of the Act that where by reason of subsection 75(2) there is included in computing a taxpayer's income for a taxation year a dividend received by another person, the dividend shall be deemed to have been received by the taxpayer for the purposes of the Act.

Question 12

Assuming any of Questions 8, 9 or 10 is answered affirmatively, if shares issued to the trust are redeemed and there is a corresponding deemed dividend, would the deemed dividend be attributed to and taxed in the hands of Canco?

Comments

Pursuant to subsection 75(2) of the Act, any income, including deemed dividends, from a property which is held by a trust under one or more of the conditions described in paragraphs 75(2)(a) or (b) is deemed to be income of the person from whom the property was received by the trust (see document # 73808).

Question 13

Assuming any of Questions 11 or 12 is answered affirmatively, would the inter-corporate dividend rules under section 112 of the Act apply, thus allowing Canco to deduct the dividends or deemed dividends deemed to be received by Canco under subsection 75(2) of the Act?

Comments

As previously mentioned, subsection 82(2) of the Act provides that dividends received by one taxpayer but included under certain attribution rules, such as subsection 75(2) of the Act, in computing the income of another taxpayer are treated as having been received by the other taxpayer for all purposes of the Act, including for the purposes of section 112.

The above comments are an expression of opinion only and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R4. We trust that the foregoing will be of assistance to you.

Alain Godin, Manager
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch