2002 Ruling 2002-0136333 - 32-Year rule family 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: Implementation of various transactions (trust variations, trust to trust transfer, renouncement and surrendering of income and capital interests in the trusts, and distribution of trust properties to its beneficiaries) in order to distribute the trust properties prior to the 21-year deemed disposition date.

Position: The trust variations will not result in a resettlement of the trusts nor will they result in a disposition for the purposes of sections 106 and 107. The trust-to-trust transfer will not give rise to the application of subsection 75(2). Paragraphs 69(1)(b) and (c) will apply with respect to the trust-to-trust transfer. The beneficiaries who will renounce and surrender their trust interests will not be considered as having received any proceeds of disposition for the purposes of sections 38, 39, 106 or 107. Subsection 107(2) will apply with respect to the distribution of the trust properties to its beneficiaries. The transactions will not result in the trusts ceasing to be "personal trusts" within the meaning of subsection 248(1). Subsections 56(2), 105(1) and 246(1) will not be applied as a result of to the proposed transactions, in and by themselves. Subsection 245(2) will not apply with respect to the trust distributions to the Canadian resident beneficiaries other than the NSULCs. No ruling provided as to the application of subsection 245(2) with respect to the trust distributions to the NSULCs

Reasons: Similar to previous rulings.

XXXXXXXXXX 2002-013633

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This 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 (see the attached Schedule), none of the issues involved in this advance income tax ruling are:

(i) contained in earlier returns of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a tax return previously filed by the taxpayers or a related person;

(iii) under objection by the taxpayers or a related person;

(iv) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired, and

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

Definitions

In this letter, the following terms have the meaning specified:

(a) "Holdco D" means XXXXXXXXXX, a taxable Canadian corporation;

(b) "Holdco A" means XXXXXXXXXX, a taxable Canadian corporation;

(b.1) "Holdco 3" means XXXXXXXXXX, a taxable Canadian corporation;

(c) "ACB" means adjusted cost base as defined in section 54 of the Act;

(d) "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended as at the date hereof, and any reference to any Part, section, subsection, paragraph or subparagraph is a reference to the specified Part or provision of the Act;

(e) "Adult Contingent Beneficiaries" means the adult children of the Children;

(f) "Assignee" means any individual, trust, corporation or partnership that has acquired an interest under either or both of the Trusts by virtue of any of the Children or any Assignee having assigned, transferred or otherwise disposed of an interest under the Trusts to the Assignee, or to a subsequent Assignee, as applicable;

(g) "Attorney" means XXXXXXXXXX, in his capacity as attorney for Mrs. B. pursuant to a durable general power of attorney dated XXXXXXXXXX;

(h) "Beneficiaries" means Mrs. B, Child B, Child C, Holdco D as Assignee of Child D's interests in the Trusts and Holdco A as Assignee of Child A's interests in the Trusts, the Adult Contingent Beneficiaries, the Minor Contingent Beneficiaries and the Charities;

(i) "US CO" means XXXXXXXXXX, a corporation incorporated in the United States under the laws of XXXXXXXXXX;

(j) "capital property" has the meaning assigned by section 54 of the Act;

(k) "Charities" means XXXXXXXXXX;

(l) "Child A" means XXXXXXXXXX, the son of Mr. B and Mrs. B;

(m) "Child B" means XXXXXXXXXX, the son of Mr. B and Mrs. B;

(n) "Child C" means XXXXXXXXXX, the son of Mr. B and Mrs. B;

(o) "Child D" means XXXXXXXXXX, the daughter of Mr. B and Mrs. B;

(p) "Children" means Child A, Child B, Child C and Child D, collectively;

(q) "Court" means the XXXXXXXXXX;

(r) "Deemed Disposition Day" means, in respect of Trust #2, XXXXXXXXXX;

(s) "FMV" means fair market value, being that amount at which property would be transferred by a willing buyer to a willing seller, in an open and unrestricted market, between informed parties under no compulsion to act, as would be determined in accordance with the basic principles of valuation endorsed by the Canadian Institute of Chartered Business Valuators;

(t) "HOLDCO 2" means XXXXXXXXXX, a taxable Canadian corporation;

(u) "HOLDCO 1" means XXXXXXXXXX, a taxable Canadian corporation;

(v) "Minor Contingent Beneficiaries" means the minor children of the Children, including any unborn issue;

(w) "Mr. B" means the deceased, XXXXXXXXXX;

(x) "Mrs. B" means the deceased's wife, XXXXXXXXXX;

(y) "non-resident" has the meaning assigned by subsection 248(1) of the Act;

(z) "Option Agreement" means the Call Option Agreement dated XXXXXXXXXX, between Child A, Child B, Child C, the adult children of Child C, US CO, HOLDCO 1 and HOLDCO 2, as amended from time to time;

(aa) "Public Trustee" means the person appointed as Public Trustee pursuant to the Public Trustee Act, R.S.A. 2000, c. P-44;

(bb) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(cc) "Trust #1" means the XXXXXXXXXX settled by Mr. B pursuant to a settlement as evidenced by a deed of trust dated XXXXXXXXXX;

(dd) "Trust #2" means the XXXXXXXXXX settled by Mr. B pursuant to a settlement as evidenced by a deed of trust dated XXXXXXXXXX;

(ee) "Trustee" means XXXXXXXXXX, the sole trustee of Trust #1 and of Trust #2; and

(ff) "Trusts" means Trust #1 and Trust #2, collectively.

Our understanding of the relevant facts, proposed transactions and purposes thereof is as follows:

Facts

1. Trust #1 is resident in Canada and holds legal title to the following capital property:

XXXXXXXXXX.

2. Trust #1 terminates XXXXXXXXXX years "XXXXXXXXXX". During this time (the "Accumulation Period") and until the date which is XXXXXXXXXX years after the date of death of Mr. B (XXXXXXXXXX ), the Trustee has the power in his absolute discretion to accumulate any income derived from the capital and add such accumulated income to capital until the expiration of XXXXXXXXXX years from the date of death of Mr. B after which time the Trustee no longer has the power to accumulate income and thereafter all such income is required to be paid pursuant to the terms of the trust deed. It further provides that after this time and prior thereto, if the Trustee does not exercise his discretion to accumulate, Mrs. B is entitled to all the income of Trust #1 during her lifetime, and, upon her death, the capital and any income remaining therefrom is to be paid and transferred to the Children, or the survivor or survivors of them in equal shares per stirpes, provided that if any of the Children pre-decease Mrs. B leaving a child or children at his or her death, to transfer to such child or children (and if more than one in equal shares) the share of the capital and income to which his, her or their parent would have been entitled had he or she survived. There are provisions for a gift over to the Charities if there are no Children or children of the Children alive at the date of death or upon failure of any of the trusts for Minor Beneficiaries.

3. XXXXXXXXXX.

4. Trust #2 is resident in Canada and holds legal title to the following capital property:

XXXXXXXXXX.

5. Trust #2 was settled on XXXXXXXXXX, and terminates XXXXXXXXXX years "XXXXXXXXXX". During this time (the "Accumulation Period") and until the date which is XXXXXXXXXX years after the date of death of Mr. B (XXXXXXXXXX), the Trustee has the power in his absolute discretion to accumulate any income derived from the capital and add such accumulated income to capital until the expiration of XXXXXXXXXX years from the date of death of Mr. B after which time the Trustee no longer has the power to accumulate income and thereafter all such income is required to be paid pursuant to the terms of the trust deed. It further provides that after this time and prior thereto, if the Trustee does not exercise his discretion to accumulate, that Mrs. B is entitled to all of the income of Trust #2 during her lifetime, and, upon her death, the capital and any income remaining therefrom is to be paid and transferred to the Children, or the survivor or survivors of them in equal shares per stirpes, provided that if any of the Children pre-decease Mrs. B leaving a child or children at his or her death, to transfer to such child or children (and if more than one in equal shares) the share of the capital and income to which his, her or their parent would have been entitled had he or she survived. There are provisions for a gift over to the Charities if there are no Children or children of the Children alive at the date of death or upon failure of any of the trusts for Minor Beneficiaries.

6. The Trusts are "inter vivos trusts" as defined in subsection 108(1) of the Act and "personal trusts" as defined in subsection 248(1).

7. XXXXXXXXXX.

8. XXXXXXXXXX.

9. Child A is currently a resident of the United States XXXXXXXXXX.

10. Child B is currently a resident of Canada. XXXXXXXXXX.

11. Child C is currently a resident of Canada. XXXXXXXXXX.

12. Child D is currently a resident of the United States XXXXXXXXXX.

13. Mr. B died on XXXXXXXXXX.

14 Mrs. B is currently XXXXXXXXXX years of age and is in very poor health; she does not have capacity to manage her affairs but is represented by the Attorney.

15. XXXXXXXXXX.

16. XXXXXXXXXX.

17. HOLDCO 1 is a company continued under the XXXXXXXXXX and has a XXXXXXXXXX taxation year. The shareholders of HOLDCO 1 are as follows:

XXXXXXXXXX.

18. US CO wholly owns Holdco D.

19. XXXXXXXXXX.

20. HOLDCO 2 is a corporation incorporated under the XXXXXXXXXX and has a XXXXXXXXXX taxation year. The shareholders of HOLDCO 2 are as follows:

XXXXXXXXXX

XXXXXXXXXX

21. HOLDCO 2 owns the following principal assets:

XXXXXXXXXX.

22. Child A manages the business operations carried out by XXXXXXXXXX and Child B has a significant interest therein.

23. Pursuant to the Option Agreement, US CO has an irrevocable option to acquire all of Child C's and his adult children's interests in HOLDCO 1 and HOLDCO 2, including any interests in HOLDCO 1 and HOLDCO 2 held personally or currently held by Trust #1 or Trust #2 which may be distributable to Child C or to his adult children. The purchase price under the Option Agreement depends on when the option is exercised, but, at the time the Option Agreement was negotiated, the initial purchase price was intended to reflect the then current FMV of Child C's and his adult children's interests subject to the option.

24. On XXXXXXXXXX, Child D disposed of her interests in HOLDCO 1 and HOLDCO 2, including all legal and beneficial interests of Child D in and to her interests in HOLDCO 1 and HOLDCO 2 held by Trust #1 and Trust #2, to US CO pursuant to an option agreement entered into between US CO and Child D in XXXXXXXXXX. With respect to this transfer, Child D obtained a certificate under section 116 of the Act indicating that the sale to US CO was exempt from tax in Canada pursuant to the Canada-United States Tax Convention, (1980). Effective XXXXXXXXXX, US CO transferred all of the interests acquired from Child D to Holdco D in exchange for common shares of Holdco D. US CO obtained a certificate under section 116 of the Act indicating that no tax was payable in respect of the transfer to Holdco D.

25. On XXXXXXXXXX, Child A transferred his interests in Trust #1 and Trust #2 to Holdco A in exchange for common shares of Holdco A. With respect to these transfers, the required certificates under section 116 of the Act were obtained indicating that no tax was payable.

Proposed transactions

26. By way of an application to the Court, the terms of Trust #1 will be varied in order to allow the Trustee to encroach on the capital of Trust #1 and to terminate Trust #1 prior to the end of the Accumulation Period.

27. By way of an application to the Court, the terms of Trust #2 will be varied in order to allow the Trustee to encroach on the capital of Trust #2, to distribute the properties of Trust #2 prior to the Deemed Distribution Day and to terminate Trust #2 prior to the end of the Accumulation Period, and to amend Clause 4(i) of Trust #2's deed of trust, the distribution clause, as follows (the amendments are shown in italics):

"XXXXXXXXXX;"

28. Each of the Beneficiaries' entitlement to capital in Trust #1 and Trust #2 will remain unchanged after the proposed variations described herein in paragraphs 26 and 27.

29. The Court orders to be issued in order to implement the variations described herein in paragraphs 26 and 27 will state that the variations will not effect a revocation or resettlement of the Trusts and will not result in a disposition of any Beneficiary's interest in the Trusts.

30. The consent of all of: 1) the Attorney on behalf of Mrs. B; 2) the Adult Contingent Beneficiaries; 3) the Public Trustee on behalf of the Minor Contingent Beneficiaries; and 4) the Charities will be obtained in conjunction with the variation order applications described herein in paragraphs 26 and 27.

31. XXXXXXXXXX.

32. The Attorney will execute, on Mrs. B's behalf, a renunciation to release and surrender her contingent interest in Trust #1 for no consideration. The Attorney, on Mrs. B's behalf, will not direct in any manner who is entitled to receive the benefits under Trust #1. The text of the operative part of the renunciation will be:

"XXXXXXXXXX."

33. The Attorney will execute, on Mrs. B's behalf, a renunciation to release and surrender her contingent interest in Trust #2 for no consideration. The Attorney, on Mrs. B's behalf, will not direct in any manner who is entitled to receive the benefits under Trust #2. The text of the operative part of the renunciation will be:

"XXXXXXXXXX."

34. Approval of the Court will be obtained in respect of the renunciations described herein in paragraphs 32 and 33 since the Attorney is the same person as the Trustee.

35. Once the preceding proposed transactions are completed, all of the properties of Trust #1 will be transferred to Trust #2 and Trust #1 will be wound up and cease to exist.

36. Since the Beneficiaries of Trust #1 are identical to the Beneficiaries of Trust #2 and the proportionate interest of each of the Beneficiaries is the same under Trust #1 as under Trust #2, the consolidation of the assets of the Trusts into Trust #2 will not change the sharing ratio between the Beneficiaries.

37. Subsequent to the transfer described in paragraph 35, the properties of Trust #2 will consist of the following assets:

XXXXXXXXXX.

38. Subsequent to the transfer described herein in paragraph 35, Child C will disclaim, renounce and surrender that portion of his interest in Trust #2 such that the FMV of all assets distributed to Child C under Trust #2 will be equal to the difference between the aggregate purchase price under the Option Agreement less the FMV of the shares of HOLDCO 2 and HOLDCO 1 that Child C already owns personally. Child C will execute the disclaimer, renunciation and surrender for no consideration.

He will not direct in any manner who is entitled to receive the benefits under Trust #2. The text of the operative part of the disclaimer, renunciation and surrender will be:

"XXXXXXXXXX."

39. Each of the adult children of Child C will similarly disclaim, renounce and surrender their contingent interest in Trust #2 and the Court will similarly disclaim, renounce and surrender the contingent interest of XXXXXXXXXX of Child C, on XXXXXXXXXX behalf, in Trust #2. The Court order and the concurrence of the Public Trustee will make it clear that any interest that might arise in XXXXXXXXXX of Child C is also disclaimed.

40. Prior to the Deemed Disposition Day, the Trustee of Trust #2 will distribute specified assets from the combined property of Trust #2 to Child C in satisfaction

of his capital interest such that Child C will receive: (a) all of the property that was previously transferred from Trust #1 to Trust #2; and (b) HOLDCO 1 shares to equal his aggregate entitlement to the combined property of Trust #2 after the disclaimer, renunciation and surrender described herein in paragraph 38.

41. Prior to the Deemed Disposition Day, and assuming that all of the Children are alive, after the distribution described herein in paragraph 40, the Trustee of Trust #2 will distribute the remaining property of Trust #2 to each of Holdco D, Holdco A and Child B. Each of Holdco D, Holdco A and Child B will receive assets with a FMV equal to one-third of the remaining property of Trust #2. Child B will receive all of the remaining shares of HOLDCO 2 plus such additional shares of HOLDCO 1 as are required to ensure the aggregate FMV of the HOLDCO 2 and HOLDCO 1 shares he receives is equal to his one-third interest in the remaining property of Trust #2. Holdco D and Holdco A will receive only shares of HOLDCO 1 in respect of their one-third interests in the remaining property of Trust #2.

42. Trust #2 will be wound up and cease to exist following the distributions described herein in paragraphs 40 and 41.

43. Subsequent to the distribution described herein in paragraph 40, Child C will sell all of the property he receives on such distribution and his shares of HOLDCO 1 and HOLDCO 2 owned personally pursuant to the terms of the Option Agreement.

44. Prior to the completion of all of the proposed transactions, the various consents and Court orders referred to in paragraphs 26, 27, 29, 30, 34 and 39 will be obtained.

Purpose of the proposed transactions

45. The purpose of the proposed transactions is to ensure that there will be no deemed disposition of the properties of Trust #2 on the Deemed Disposition Day pursuant to subsection 104(4) of the Act.

46. The purpose of combining all of the assets of Trust #1 and Trust #2 prior to the distribution out of Trust #2 is to facilitate the streaming of specific assets to the Children based on their interest in and involvement with HOLDCO 2 and HOLDCO 1 and to facilitate the buy-out of Child C's interests in these companies pursuant to the Option Agreement after the distribution described herein in paragraph 40. Child C and Child D are not active in any of the companies; Child A is primarily responsible for the operations of HOLDCO 1 and its subsidiaries and Child B is primarily responsible for the operations of HOLDCO 2 and its main subsidiary, XXXXXXXXXX.

Rulings given

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

A. Neither the variations of Trust #1 and Trust #2 described herein in paragraphs 26 and 27, if so approved by the Court as is contemplated in paragraph 29, nor the consent of the Beneficiaries to such variations, will, in and by themselves, result in a disposition for income tax purposes of any property of the Trusts or of any Beneficiary's interest in the Trusts for the purposes of sections 106 and 107 of the Act.

B. The variations of Trust #1 and Trust #2 described herein in paragraphs 26 and 27, if so approved by the Court as is contemplated in paragraph 29, will not, in and by themselves, result in a resettlement of either Trust #1 or Trust #2.

C. Mrs. B, Child C, the adult children of Child C and XXXXXXXXXX of Child C will not be considered to have received any proceeds of disposition for the purposes of sections 38, 39, 106 or 107 of the Act as a result of executing or, in the case of XXXXXXXXXX of Child C, by the Court ordering on XXXXXXXXXX behalf, the renunciations, disclaimers and surrenders described above in paragraphs 32, 33, 38 and 39.

D. The transfer of all of the properties of Trust #1 to Trust #2 as contemplated herein in paragraph 35, will not, in and by itself, give rise to the application of subsection 75(2) of the Act.

E. The provisions of subparagraph 69(1)(b)(iii) and paragraph 69(1)(c) of the Act will apply with respect to the transfer of the properties of Trust #1 to Trust #2 as contemplated in paragraph 35 herein.

F. Subsection 107(2) of the Act will apply to the distribution of the assets of Trust #2 to Holdco D, Holdco A, Child B and Child C as contemplated herein in paragraphs 40 and 41.

G. Assuming that the proceeds of disposition received by Child C as a result of the disposition contemplated herein in paragraph 43 are not less than the FMV of the properties so disposed by Child C, the provisions of paragraph 69(1)(b) of the Act will not apply in respect of the proposed transaction described herein in paragraph 43.

H. The proposed transactions will not, in and by themselves, cause the Trusts to fail to meet the definition of a "personal trust" as defined in subsection 248(1) of the Act.

I. The provisions of subsections 56(2), 105(1) and 246(1) of the Act will not be applied as a result of the proposed transactions, in and by themselves.

J. The provisions of subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed and the rulings given in A to E and G to I above.

K. The provisions of subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed and the ruling given in F above, but only as it relates to Child B and Child C.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed within six months of the date of the present letter. These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

Nothing in this advance income tax ruling should be construed as implying that we are ruling on:

a) the FMV or ACB of any property referred to herein, or the paid-up capital of any shares referred to herein; or

b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

In particular, given that the taxpayers have withdrawn their ruling request as to whether subsection 245(2) of the Act would apply to re-determine the tax consequences relative to the distribution of the assets of Trust #2 to Holdco D and Holdco A as contemplated herein in paragraph 41, we note that no ruling is provided on this issue.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

XXXXXXXXXX