2004 Ruling 2002-0171521R3 - XXXXXXXXXX .-Transfer of rights to income

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.

Principal Issues:

1. Whether the transfer of property to a trust will result in the application of 56(4) or 75(2)?

2. Whether distributions of income by the trust to the Representative will be subject to 104(6) and (13)?

3. Whether distributions of capital by the trust will be subject to 107(2.1)?

Position:

1. 75(2) where the underlying property is transferred, else 56(4).

2. Yes.

3. Yes; however, if the Beneficiary is the Representative, 107(2) will apply.

Reasons:

1. The property that will generate most of the anticipated revenue will be transferred, but some rights to income will be transferred without a transfer of the underlying property.

2. Except to the extent it is deemed by 75(2) to be the Representative's income.

3. The trust will be a personal trust, and the Representative will be the only contributor of property to the trust. Accordingly, 107(4.1) will apply.

XXXXXXXXXX 						2002-017152

XXXXXXXXXX, 2004

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the XXXXXXXXXX (the "Representative")
and a trust which is to be created. We acknowledge our subsequent conversations, correspondence and emails as well as our meetings of XXXXXXXXXX
To the best of your knowledge and that of the Representative, none of the issues involved in this ruling is:

(i) in an earlier return of the Representative or a related person;

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

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

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

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

You provided a copy of the following documents:

Articles of Continuance and By-Laws of the Representative;
Agreement 1;
Agreement 2;
Agreement 3;
Agreement 4; and
Draft Trust Deed.

Selected Definitions

"Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof;

"XXXXXXXXXX Payments" are defined in Agreement 1;

"XXXXXXXXXX Property" means the property described in 14 below which the Representative will settle on the Trust;

"Agreement 1" means the XXXXXXXXXX described in 9 below;

XXXXXXXXXX;

XXXXXXXXXX;

"Agreement 4" means the assignment agreement described in 14 below;

"Agreement in Principle" (AIP) means the Agreement in Principle described in 8 below;

"Beneficiary" or "Beneficiaries" means a beneficiary or beneficiaries, respectively, of the Trust;

"Company 1" means XXXXXXXXXX;

"Company 2" means XXXXXXXXXX;

XXXXXXXXXX;

"Final Agreement" means the Final Agreement described in 3 below;

"Loan Agreement" means the loan agreement referred to in 13 below;

"Settlement Property" means the property described in 13 below which the Representative will settle on the Trust;

"XXXXXXXXXX Payments" are defined in Agreement 1;

"Trust" means the XXXXXXXXXX to be settled by the Representative as described in 12 below;

"Trust Deed" means the trust deed described in 12 below which will govern the Trust.

Facts

1. XXXXXXXXXX.

2. The Representative is a corporation XXXXXXXXXX.

3. The Representative is exempt from Part I tax under the Act by virtue of paragraph 149(1)(c) thereof. XXXXXXXXXX.

4. The objects of the Representative include the promotion and advancement of the general welfare, well-being, health and education of XXXXXXXXXX and the advancement and negotiation of the settlement of the land claims of XXXXXXXXXX.

5. Membership in the Representative is limited to XXXXXXXXXX.

6. The Representative is managed by a Board of XXXXXXXXXX.

7. As permitted by the objects in its Articles of Continuance, the Representative undertakes numerous and diverse activities on behalf of the Members. Most recently, the principal activities of the Representative include:

XXXXXXXXXX.

8. XXXXXXXXXX.

9. XXXXXXXXXX Agreement 1 contains terms and conditions which include:

(a) provision for payment of one or more amounts XXXXXXXXXX to the Representative, XXXXXXXXXX ; and

(b) XXXXXXXXXX.

10. XXXXXXXXXX.

11. XXXXXXXXXX.

Proposed Transactions

12. The Representative will settle a trust (the "Trust") upon terms and conditions set forth in a trust deed (the "Trust Deed") governed by the laws of the province of XXXXXXXXXX. The Beneficiaries of the Trust consist of (i) the Representative, (ii) XXXXXXXXXX, (iii) XXXXXXXXXX and (iv) Charitable Persons which, for purposes of the Trust Deed, are defined with specific reference to XXXXXXXXXX.

13. The Representative will settle upon the Trust:

(a) an amount of $XXXXXXXXXX; and

(b) XXXXXXXXXX ("Loan Agreement") made as of XXXXXXXXXX, including the right to repayment of the principal and all amounts of interest payable under the Loan Agreement made as of XXXXXXXXXX.

The properties to be so settled are referred to herein as the Settlement Property.

14. Pursuant to an assignment agreement ("Agreement 4"), the Representative will also contribute and settle upon the Trust:

(a) the rights under XXXXXXXXXX of Agreement 1 to receive XXXXXXXXXX Payments; and

(b) the rights under XXXXXXXXXX of Agreement 1 to receive XXXXXXXXXX Payments XXXXXXXXXX.

The rights to be so settled are referred to herein as the XXXXXXXXXX Property.

15. In accordance with the terms of the Trust Deed:

(a) Income of the Trust not otherwise paid or payable to another Beneficiary may be allocated to the Representative from time to time; and

(b) The Settlement Property and the XXXXXXXXXX Property may be distributed or revert to the Representative.

Purpose of the Proposed Transactions

16. XXXXXXXXXX. Amounts received by the Representative pursuant to Agreement 1 will be required to be used by the Representative, among other uses, for the purpose of XXXXXXXXXX.

17. The Settlement Property will be contributed to the Trust by the Representative in order to minimize the risk of future creditors, if any, of the Representative claiming against or recovering from such property in connection with causes of action arising in the course of the day-to-day operations of the Representative. The Representative regards any amounts which become payable to it under Agreement 1 as amounts held for the benefit of the XXXXXXXXXX. The settlement of the Settlement Property upon the Trust and the designation of separate classes of beneficiaries will prevent creditors of the Representative from interfering with such objectives.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. Income or loss from the Settlement Property or property substituted for the Settlement Property and any taxable capital gain or allowable capital loss from the disposition of the Settlement Property or property substituted for the Settlement Property will be deemed to be income or loss or taxable capital gain or allowable capital loss, as the case may be, of the Representative pursuant to subsection 75(2) of the Act;

B. Pursuant to subsection 56(4) of the Act, any XXXXXXXXXX Payment that becomes receivable by the Trust will be included in computing the income of the Representative for the period in the year of the Representative in which it becomes receivable and throughout which the Representative is resident in Canada;

C. Any income of the Trust (excluding income that is deemed pursuant to subsection 56(4) or 75(2) of the Act to be the Representative's income) that becomes payable in a taxation year to the Representative may be deducted pursuant to subsection 104(6) of the Act in computing the income of the Trust for the year and will be included pursuant to subsection 104(13) of the Act in computing the income of the Representative; and

D. A distribution of any property of the Trust to any Beneficiary in a taxation year, otherwise than in satisfaction of a right to income of the Trust:

(a) will be considered a disposition of all or part of the Beneficiary's capital interest in the Trust at such time;

(b) will be subject to subsection 107(2) of the Act if the property is Settlement Property or property substituted for Settlement Property, the Beneficiary is the Representative and no election is made under subsection 107(2.001) of the Act; (c) will be subject to subsection 107(2.1) of the Act if the ruling provided in (b) is not applicable; and

(d) if the property distributed is Canadian currency, will not result in a capital gain to the Trust.

The above 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, could have an effect on the rulings provided herein.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

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