25 April 2003 External T.I. 2002-0162855 - Powers of Appointment

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 Act applies, with respect to a person who transferred property to a trust, where a trust indenture confers a power of appointment that gives the donee of the power, the right to appoint any person as a capital beneficiary of the trust?

Position: Yes.

Reasons: There is a possibility that the transferor be appointed as a capital beneficiary.

XXXXXXXXXX 								2002-016285
	Pascal Tétrault
April 25, 2003

Dear XXXXXXXXXX:

Re: Subsection 75(2) and Distribution Arising as a Consequences of a Will

This is in reply to your letter of September 9, 2002, seeking the interpretation of the Canada Customs and Revenue Agency regarding subsection 75(2) of the Income Tax Act (the Act). Your query is related to your previous letter of April 12, 2002, for which our position is found in our letter of July 22, 2002 (document number 2002-013920).

You state that the factual scenario in our letter of July 22, 2002 is not what you had in mind. More specifically, your situation involves a taxpayer transferring property to a trust where, under the terms of the trust indenture, the taxpayer's spouse is given a power of appointment exercisable through the spouse's will. Accordingly, the spouse would determine the beneficiaries who will share in the assets of the trust at the spouse's death and the proportion in which they would share. The assets of the trust would not become the assets of the spouse's estate. Rather, the assets of the trust are distributed to the persons chosen by the spouse through the exercise of the power of appointment given to him or her, as the case may be, in the trust indenture.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this 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 can submit all relevant facts and documentation to the appropriate Tax Services Office for their views. Nevertheless, we are prepared to offer the following general comments, which we hope will be of assistance.

We generally consider that subsection 75(2) of the Act applies, with respect to a person who transferred property to a trust, where a trust indenture confers a power of appointment that gives the donee of the power, the right to appoint any person as a capital beneficiary of the trust. In these circumstances, the person who transferred the property to the trust could be appointed as a capital beneficiary.

Subsection 75(2) of the Act states in part:

Where, by a trust created in any manner whatever since 1934, property is held on condition

(a) that it or property substituted therefor may

(i) revert to the person from whom the property or property for which it was substituted was directly or indirectly received (in this subsection referred to as "the person"),

[...]

The word "may" implies that the subsection applies even though there is only a possibility that the property reverts to the transferor. We would like to stress that the condition found in subparagraph 75(2)(a)(i) of the Act does not refer to the notion of control or certainty in order to be met. Accordingly, where the donee of the power may appoint the transferor as a capital beneficiary of the trust, there is a possibility that the property transferred to the trust reverts to the transferor. Therefore, the factual situation submitted would fall within the ambit of subsection 75(2) of the Act. However, where the terms of the power prevents the donee of the power from appointing the transferor, subparagraph 75(2)(a)(i) of the Act would not be applicable because the property could not return to the transferor through the operation of the trust.

Yours truly,

Alain Godin
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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