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: Does the transfer of 1/7 of each property of a trust for seven children to each of 7 trusts result in a disposition within the meaning of 248(1) and if so, is such transfer a qualified disposition within the meaning of 107.4?
Position: Yes to both questions.
Reasons: The transfer will result in a change of beneficial ownership such that a disposition within the meaning of 248(1) will arise but 107.4(2) will deem there to be no change in beneficial ownership for the purpose of 107.4(1). As a result, the transfer will be subject to 107.4(3) provided that the other criteria listed in 107.4(1) are met.
XXXXXXXXXX 2002-018047
Attention: XXXXXXXXXX
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is 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, none of the issues contained in this advance income tax ruling are:
i) contained in earlier returns of the taxpayers or related persons;
ii) being considered by a tax service office and/or a tax centre in connection with a tax return previously filed by the taxpayers or related persons;
iii) under objection by the taxpayers or related persons;
iv) before the courts; or
v) the subject of a ruling previously issued by the Directorate to the taxpayers or related persons.
Definitions
In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (R.S.C. 1985, 5th supplement, c.1 as amended) (the "Act"), and the following terms have the meaning specified:
"Beneficiary" means the Children of the Settlor and the issue of the Children (the issue of any particular Child is only entitled to receive a distribution in the event of the death of a Child);
"Child" means any one of the seven children of the Settlor individually;
"Children" means the seven children of the Settlor who are XXXXXXXXXX (Child1), XXXXXXXXXX (Child2), XXXXXXXXXX (Child3), XXXXXXXXXX (Child4), XXXXXXXXXX (Child5), XXXXXXXXXX (Child6) and XXXXXXXXXX (Child7);
"Holdings" means XXXXXXXXXX, a corporation incorporated under the Business Corporations Act of XXXXXXXXXX. Holdings is a taxable Canadian corporation and a Canadian controlled private corporation that files its tax returns at the XXXXXXXXXX Taxation Centre. Its head office is XXXXXXXXXX, and is located within the area served by the XXXXXXXXXX Tax Services Office. Its business number is XXXXXXXXXX;
"New Trust1" means the XXXXXXXXXX and has Child1 as its named beneficiary;
"New Trust2" means the XXXXXXXXXX and has Child2 as its named beneficiary;
"New Trust3" means the XXXXXXXXXX and has Child3 as its named beneficiary;
"New Trust4" means the XXXXXXXXXX and has Child4 as its named beneficiary;
"New Trust5" means the XXXXXXXXXX and has Child5 as its named beneficiary;
"New Trust6" means the XXXXXXXXXX and has Child6 as its named beneficiary;
"New Trust7" means the XXXXXXXXXX and has Child7 as its named beneficiary;
"New Trust" means each of New Trust1, New Trust2, New Trust3, New Trust4, New Trust5, New Trust6 and New Trust7, either individually or collectively;
"Settlor" means XXXXXXXXXX, a resident of Canada;
"Trust" means the XXXXXXXXXX, an irrevocable inter-vivos trust resident in Canada. The Trust's address is XXXXXXXXXX, and its account number is XXXXXXXXXX.
"Trust Fund" means all the property owned by the Trust at a particular time, including the corpus of the trust and any income earned by the trust up to the particular time that has not been distributed to the Children;
"Trustees" means the trustees of the Trust. The initial Trustees of the Trust were XXXXXXXXXX. The current Trustees of the Trust are XXXXXXXXXX. The Trust and the Trustees are all resident in Canada; and
"New Trustees" means the trustees of each of the New Trusts and the initial New Trustees of each New Trust will be XXXXXXXXXX. All the New Trusts and the New Trustees are resident in Canada.
The tax services office and taxation centre for the Trust and each New Trust is the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Centre, respectively.
Our understanding of the facts and the proposed transaction is as follows:
Facts
1. The Settlor has seven children all of whom are currently over 18 years of age and are not under any legal disability. All of the existing Beneficiaries of the Trust are residents of Canada for income tax purposes.
2. On XXXXXXXXXX, the Settlor settled the Trust for the benefit of her Children by way of a $XXXXXXXXXX cash contribution. Under the terms of the Trust:
a. the Trust will be wound up on XXXXXXXXXX (the "Distribution Date"), and the Trust Fund will be distributed to or for the benefit of the Children in equal shares, except that if any of the Children is deceased at that time, the share of the Trust Fund to which the deceased Child would have been entitled had he or she survived will be distributed to the issue of that deceased Child in equal shares.
b. prior to the Distribution Date, the Trustees have the discretion to distribute or accumulate all or any part of the annual income of the Trust to or for the benefit of the Children provided that any income to be distributed in a year is distributed equally among the Children alive at the date of such distribution, and if any of the Children is deceased at that time, the share of the Trust Fund to which the deceased Child would have been entitled had he or she survived is to be distributed to the issue of that deceased Child in equal shares.
c. prior to the Distribution Date, the Trustees have the discretion to pay, transfer or apply the whole or any part of the Trust Fund to or for the benefit of the Children provided that any funds so distributed are distributed equally among the Children alive at the date of such distribution, and if any of the Children is deceased at that time, the share of the Trust Fund to which the deceased Child would have been entitled had he or she survived is to be distributed to the issue of that deceased Child in equal shares.
3. The Trust is a personal trust as defined in subsection 248(1).
4. The Trust subscribed for XXXXXXXXXX common shares of Holdings on XXXXXXXXXX. On XXXXXXXXXX of the common shares were sold to Holdings for cancellation and an additional XXXXXXXXXX common shares were sold to Holdings for cancellation on XXXXXXXXXX. On XXXXXXXXXX, Holdings split its common stock in the ratio of XXXXXXXXXX with the result that the Trust held XXXXXXXXXX common shares of Holdings after the stock split. On XXXXXXXXXX, the Trust exchanged the XXXXXXXXXX common shares for XXXXXXXXXX second preferred shares of Holdings as part of a reorganization of Holdings for the purpose of allowing key employees of Holdings and the group of companies affiliated with it to participate in the future growth of the group through their investing in new common shares of Holdings. The second preferred shares are non-voting, redeemable by Holdings and retractable at the option of the holder at $XXXXXXXXXX per share.
5. On XXXXXXXXXX, Holdings redeemed XXXXXXXXXX second preferred shares for a cash consideration of $XXXXXXXXXX. As a result of this redemption, the Trust's investment in Holdings has been reduced to XXXXXXXXXX second preferred shares of Holding and a non-interest bearing loan receivable from Holdings in the amount of $XXXXXXXXXX.
6. The main asset of the Trust is XXXXXXXXXX second preferred shares of Holdings. These shares have a redemption value, retraction value and fair market value of $XXXXXXXXXX per share. The aggregate adjusted cost base of the XXXXXXXXXX second preferred shares is $XXXXXXXXXX and the aggregate paid-up capital of such shares is $XXXXXXXXXX . In addition, the Trust holds a non-interest bearing loan receivable from Holdings in the amount of $XXXXXXXXXX.
7. Subject to the possibility of divestment in the event a Child dies before the final distribution of the Trust Fund, each Child has beneficial ownership in one-seventh (1/7) of the shares of Holdings and one-seventh (1/7) of the note receivable from Holdings that are held by the Trust immediately before the proposed transactions.
Proposed Transactions
8. The Trustees will resettle one-seventh (1/7) of its shares of Holdings and one-seventh (1/7) of the note receivable by it from Holdings upon each New Trust in accordance with the terms of the Trust as described in paragraph 2(c) above. The Trust will not receive any consideration as a result of the resettlements. The resettlements will take place simultaneously and the entire Trust Fund will be resettled on the New Trusts collectively. The resettlements will be completed on the same day and will result in the Trust ceasing to exist.
9. Each New Trust will be an irrevocable inter vivos trust and a personal trust. The terms of each New Trust will be substantially the same as the terms of the Trust except as follows:
a. Each New Trust will have one named beneficiary, being one of the seven Children, and contingent beneficiaries. In the event the named beneficiary of a New Trust dies before the date of any particular distribution of income or capital from that New Trust, the issue of that named beneficiary who are alive at that time will be entitled to receive the distribution in equal shares and in the event that none of the issue of the named beneficiary are alive at such time, the siblings of the named beneficiary (or if any sibling is deceased at that time, the issue of such sibling) will be entitled to receive the distribution on a per stirpes basis.
b. In the event that a trustee of the New Trust dies or resigns as trustee and the terms of the New Trust do not specify the replacement trustee for that particular trustee, the remaining trustees will appoint a replacement trustee rather than have such replacement trustee appointed by the accounting firm of the Trust. This simplifies the method by which replacement trustees are appointed if the need should arise.
10. Each Child will consent in writing to the resettlement of one-seventh (1/7) of the Trust Fund upon each New Trust and the Settlor of the Trust will acknowledge in writing that the resettlement is not alien to her intentions at the time she settled the Trust.
11. Immediately following the proposed transactions and subject to the possibility of divestment in the event a Child dies before the final distribution of the property from the New Trust, each Child will have 100% of the beneficial ownership in the shares of Holdings and the note receivable from Holdings that are held by the respective New Trust on behalf of that Child.
12. The value of each Child's beneficial ownership in the shares of Holdings and the note receivable from Holdings under New Trust immediately after the resettlement will be the same as the value of each Child's beneficial ownership in the shares of Holdings and the note receivable from Holdings under the Trust immediately before the resettlement.
Purpose of the Proposed Transactions
13. The purpose of the proposed transactions is to provide New Trustees with the ability to make decisions regarding the administration of the portion of the Trust Fund applicable to each of the Children, taking into account the separate circumstances of each Child, including their separate tax positions and financial needs. In addition, the proposed transactions will allow each New Trust to have different trustees from the other New Trusts in the future.
Rulings Given
Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as herein described, our advance income tax rulings are as follows:
A. Paragraph 107.4(2)(a) will apply to the transfer of property from the Trust to each of the New Trusts such that for the purpose of paragraph 107.4(1)(a) only, the transfers will not result in any change in the beneficial ownership of the Trust Fund.
B. The disposition will constitute a qualifying disposition as defined in subsection 107.4(1).
C. The provisions of subsection 107.4(3) will apply to the transfer of property from the Trust to each of the New Trusts.
D. Subsection 104(5.8) will apply and result in the application of subsection 104(4) to each of the New Trusts on the same date that subsection 104(4) would have applied to the Trust.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5, Advance Income Tax Rulings, and are binding on the Canada Customs and Revenue Agency (the "CCRA") provided the proposed transactions are completed within six months of the date of this letter.
Nothing in this advance income tax ruling should be construed as implying that the CCRA has agreed to or reviewed:
a) the value of each Child's beneficial ownership in the shares of Holdings and note receivable from Holdings for the purpose of paragraph 107.4(2)(a);
b) the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares referred to herein; or
c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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