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: What are the consequences of a beneficiary assuming a debt as a condition of receiving property from the trust?
Position: The amount of debt assumed will generally be an eligible offset used in calculating the beneficiary's proceeds of disposition of a part (or all) of the capital interest. The amount of the debt is an amount payable for property acquired for the purpose of 20(1)(c) and the assumption of debt will not taint the trust's status as a personal trust.
Reasons: The definition of eligible offset is found in 108(1). While it is a question of fact as to whether the interest payable by the beneficiary is deductible under 20(1)(c), the debt is assumed as a condition of acquiring the property. With respect to the personal trust issue, a beneficiary generally acquires no additional interest in the trust as a result of a capital distribution.
XXXXXXXXXX 2002-015604
Annemarie Humenuk
Attention: XXXXXXXXXX
April 30, 2003
Dear XXXXXXXXXX:
Re: Distribution of Property from a Trust
This is in reply to the letter of August 6, 2002 from your office, in which we were asked to comment on the tax consequences arising when the beneficiary of a trust is required to assume a debt as a condition of receiving a distribution of property from a trust. We apologize for the delay in our response.
All statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
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 70-6R5, Advance Income Tax Rulings. When the transaction related to the enquiry is completed, the enquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency (the "CCRA").
In the situation you describe, a personal trust borrows a sum of money from an individual who is neither a contributor nor a beneficiary of the trust, but who deals at non-arm's length with both the beneficiary of the trust and the trust. The loan is governed by a written loan agreement and bears a rate of interest in excess of the prescribed rate set out in paragraph 4301(1)(a) of the Regulations for the period in which the loan is made.
The trust uses the borrowed funds to acquire shares of a taxable Canadian corporation and provides the individual with a security interest in the shares such that the shares cannot be transferred without that individual's consent. The trust plans to make a distribution of the shares to the beneficiary of the trust on the condition that the beneficiary assumes the remaining indebtedness owing on the loan. The individual, beneficiary and trust are all resident in Canada.
1. You asked whether the assumption of the debt by the beneficiary constitutes a "contribution" to the trust such that the trust would lose its status as a personal trust when the shares are distributed to the beneficiary.
Assuming that the beneficiary's interest in the trust was established under the terms of the trust as set out in the original trust deed, it would seem unlikely that the beneficiary would acquire any additional interest in the trust as a result of the assumption of the debt and as a result, the assumption of the debt would not, in and of itself, be considered to be consideration payable for a beneficial interest in the trust. Thus, the distribution would not, in and by itself, cause the trust to lose its status as a personal trust.
2. When the conditions of application described in subsection 107(2) are met in respect of a property distributed by a trust, the proceeds of disposition to the trust and the cost to the beneficiary, as determined under paragraphs 107(2)(a) and (b) respectively, are deemed to be equal to the cost amount of the property to the trust immediately before the disposition. You asked whether this would still be true when the beneficiary is required to assume a debt, such as a mortgage on real property or a secured debt attached to personal property, as a condition of receiving the property.
The amount of any debt that the beneficiary is required to assume as a condition of receiving a distribution will fall within the definition of an eligible offset as defined in subsection 108(1) where it can reasonably be considered to be applicable to property so distributed. The amount of any eligible offset is not used in calculating the trust's proceeds of disposition in respect of that property or the beneficiary's cost of acquisition but it is used in determining the beneficiary's proceeds of disposition of the portion of the capital interest disposed of as a result of the distribution. However, the beneficiary will not normally realize any capital gain as a result of the disposition of any part of the capital interest in a personal trust because the adjusted cost base of the interest as determined under paragraph 107(1)(a) will normally equal the proceeds of disposition of that interest. Note that paragraph 107(1)(a) only applies for the purpose of computing a capital gain from the disposition of all or part of the capital interest of a trust.
3. You asked whether the amount of the debt assumed by the beneficiary as a condition of the distribution can be considered to be an "amount payable for property" for the purposes of subparagraph 20(1)(c)(ii) such that the interest payable by the beneficiary in respect of the debt would be deductible under paragraph 20(1)(c) where the property distributed from the trust is used by the beneficiary for the purpose of gaining or producing income.
In our view, the amount of the debt assumed as a condition of receiving the distribution of shares would constitute an amount payable for such shares for the purpose of subparagraph 20(1)(c)(ii). However, the determination of whether the interest payable by the beneficiary would be deductible by the beneficiary depends on the facts and circumstances of the particular situation.
We hope that these comments are of assistance to you.
Theresa Murphy
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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