12 November 2002 External T.I. 2002-0129675 - Is a power of appointment subject to 70(5)

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: How is a general power of appointment treated upon the death of the donee of the power?

Position: Although a power of appointment is generally not considered property, a power of appointment that can be exercised in favour of the donee would likely result in the donee holding an interest in a trust within the meaning of 248(25) such that 70(5) would apply to deem the donee to realize a disposition of such an interest upon his\her death.

Reasons: In 1976 CTF 744-762, Cullity distinguishes a power of appointment from property and concludes that a power of appointment is not itself subject to 70(5) because it is not property. In the English case, Melville et al. v IRC, the court held that a power of appointment was property within the extended meaning applicable to England's Inheritance Tax in that it confers on the donee a right that is capable of producing value. The law in question provided that the holder of a power of appointment over property other than settled property is to be treated as the beneficial owner of the property. Under 248(25)(b) of the ITA, an interest in a trust includes appointees under a power of appointment over the trust property; thus to the extent that the holder of a power of appointment can appoint the property to himself\herself, such a person has an interest in the trust, the value of which will be affected by the terms of the power of appointment.

XXXXXXXXXX 	2002-012967
		Annemarie Humenuk
November 12, 2002

Dear XXXXXXXXXX:

Re: Powers of Appointment

This is in reply to your letter of March 13, 2002, concerning the tax consequences arising on the death of an individual who holds a general power of appointment over property held in a testamentary trust.

You describe the situation in which an individual (the "holder") is granted a general power of appointment over the property held in a testamentary trust and the individual can exercise that power to the exclusion of any other person entitled to a residual capital interest in the testamentary trust. You ask how the power of appointment is to be valued for the purpose of subsection 70(5) upon the death of the holder of the power of appointment. In addition, you ask how the holder's cost of such property is to be determined. Finally, where the terms of the power of appointment allow the holder to transfer the power to another person, you ask whether subsection 70(6) will apply if the power of appointment is transferred to a spousal trust.

As explained in Information Circular 70-6R5, Advance Income Tax Rulings, it is not our practice to comment on proposed transactions except by way of an advance income tax ruling. When the enquiry relates to a transaction that is completed, the enquiry should be addressed to the relevant tax services office. In addition, your final question is based on the premise that the power of appointment is transferable by the holder to another person. You have not provided an explanation of the donor's possible intent in attaching such an unusual feature to the power of appointment or an analysis of whether such a power would be accepted as valid by the courts. Nevertheless, we offer the following general comments which may be of assistance to you.

For the purpose of our response, we have assumed that the power is not held in a fiduciary capacity. As stated in Oosterhoff's Text Commentary & Cases on Trusts, an instrument which purports to grant a power of appointment may be construed as creating a discretionary trust, a power of appointment or an outright gift. The use of the word trust, power or gift in the instrument which sets out the conditions under which the purported power can be exercised is not conclusive. The courts will construe the nature of the purported power based on the intention of the settlor as determined based on the facts. While the existence of a gift over in default of the holder's exercise of the power of appointment would be indicative of a power of appointment, a provision which allowed the purported holder of the power to transfer the rights associated with the power to another person would be indicative of an outright gift. Thus, in the final example given, it would seem likely that the original donor would have conferred an outright gift on the holder of the property over which the purported power was given. The adjusted cost base and proceeds of disposition of such property to the holder would be determined in the normal manner.

A power of appointment, on the other hand, is generally not considered to be property in itself, and thus is generally not subject to the deemed disposition rules in subsection 70(5). However, a power of appointment in respect of property held by a trust may affect the value of any interest in that trust that is held by the person who holds the power of appointment. Where the power of appointment can be exercised in favour of the holder but the holder doesn't otherwise hold an interest in the trust, the holder would likely be considered to have a beneficial interest in the trust under subsection 248(25). The valuation of an interest in a trust involves an analysis of all the relevant information and the exercise of judgement in determining the appropriate method of valuing such an interest. As a result, the CCRA is unable to provide or confirm the validity of any particular valuation used in the determination of the fair market value of any particular property. The cost of a holder's capital interest in the trust is determined under subsection 107(1.1).

As requested, we enclose a copy of your letter dated March 1, 2002.

We trust our comments will be of assistance.

Yours truly,

T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
Enclosure
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