2003 Ruling 2003-002169C - Variation and 21 year rule

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: Proposed transactions aimed at transferring the accrued value of the assets owned by a trust to some beneficiaries by making capital distributions prior to the 21 year deemed disposition date set by 104(4). The transactions involve the variation of the trust to permit the encroachment of capital for the benefit of certain beneficiaries, the transfer of assets to newly created corporations, the transfer of preferred shares of those corporations to some beneficiaries and the setting aside of assets for the benefit of the contingent beneficiaries.

The rulings requested are:

A. There will not be a resettlement of the trust or a disposition of the shares held in the trust as a result of the variation of the trust.

B. The distribution of the preferred shares of the new companies to the beneficiaries in partial satisfaction of their capital interests in the trust will take place on a tax deferred basis pursuant to section 107(2) of the Act.

C. There will not be a disposition of the income or capital interests of any beneficiary of the trust as a result of the variation of the will for purposes of subsections 106(2) and 107(1) and the definition of "disposition" in subsection 248(1) of the Act.

D. Subsections 56(2), 105(1) and 246(1) of the Act will not be applicable solely as a consequence of the proposed transactions.

E. Section 245 will not be applicable to redetermine the tax consequences set out in the rulings provided above.

Position: The rulings are granted.

Reasons:     Consistent with rulings previously issued.
XXXXXXXXXX 						2003-002169

Attention: XXXXXXXXXX

XXXXXXXXXX, 2003

Re: Advance Income Tax Ruling
Proposed Variation of Will of the Late XXXXXXXXXX

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 out of the proposed transactions described below. We also acknowledge our telephone conversations and correspondence concerning your request.

We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:

(a) in an earlier return of the taxpayers or related persons;

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;

(c) under objection by the taxpayers or related persons;

(d) before the courts; or

(e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons.

In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended, the "Act"), and the following terms have the meanings specified:

(a) "ACB" means the adjusted cost base determined according to the provisions of the Act;

(b) "Child A" means XXXXXXXXXX, the daughter of the Deceased;

(c) "CCPC" means Canadian-controlled private corporation and has the meaning assigned by subsection 125(7);

(d) "Deceased" means XXXXXXXXXX;

(e) "FMV" means the fair market value;

(f) "Grandchild B" means XXXXXXXXXX, the son of Child A and brother of Grandchild C;

(g) "Grandchild C" means XXXXXXXXXX, the daughter of Child A and sister of Grandchild B;

(h) "Shares" means common shares of XXXXXXXXXX;

(i) "Spouse Trust" means the trust created pursuant to the Will for the benefit of the Widow and on the Widow's death, for Child A and the issue of Child A. Minutes of Settlement dated XXXXXXXXXX , confirm that the only beneficiaries entitled to the Spouse Trust at the death of Child A are the issue of Child A in equal shares per stirpes. XXXXXXXXXX.

(j) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(k) "Trustee" means XXXXXXXXXX, appointed as sole trustee on XXXXXXXXXX;

(l) "Widow" means XXXXXXXXXX, the wife of the Deceased; and

(m) "Will" means the last will and testament of the Deceased dated XXXXXXXXXX.

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

FACTS

1. The tax account number of the Spouse Trust is XXXXXXXXXX and it files its tax returns at the XXXXXXXXXX .

2. The Deceased died on XXXXXXXXXX .

3. The Spouse Trust is a trust described in subsection 70(6), a testamentary trust as defined in subsection 108(1), and a personal trust as defined in subsection 248(1). The assets of the Spouse Trust have always consisted solely of the Shares. Initially, XXXXXXXXXX Shares were held. Due to stock splits, the Spouse Trust now holds XXXXXXXXXX Shares. Pursuant to the terms of the Spouse Trust, the Widow is to receive all of the income from the Shares during her lifetime and on the Widow's death, the Shares are to be held "intact" and all of the income from the Shares is to be paid to Child A for her lifetime. At Child A's death, the Shares are to be divided equally between Grandchild C and Grandchild B. If either Grandchild C or Grandchild B predecease Child A, then his or her share is to be divided equally per stirpes among the deceased beneficiary's own issue.

4. The Widow died XXXXXXXXXX and is survived by Child A, Grandchild C and Grandchild B. The Widow's death triggered a deemed disposition of the Shares at the then fair market value of $XXXXXXXXXX . The Spouse Trust paid all of the tax owing in respect of the accrued capital gain upon the deemed disposition.

5. The FMV of the Shares as at XXXXXXXXXX was $XXXXXXXXXX . The ACB of the Shares is $XXXXXXXXXX . The Spouse Trust has accrued a significant capital gain in respect of the Shares which will be triggered on XXXXXXXXXX due to the application of subsection 104(4) if the Spouse Trust holds the Shares at the end of that day.

6. Each of Child A, Grandchild C and Grandchild B and the Spouse Trust are residents of Canada for purposes of the Act.

PROPOSED TRANSACTIONS

7. The Trustee will make an application under the Variation of Trusts Act (XXXXXXXXXX ) to vary the terms of the Spouse Trust (the "Variation") to provide for the following:

a. adding administrative powers which will enable the Trustee to implement the proposed transactions described in paragraphs 8 to 20 below;
b. authorizing a capital encroachment to permit the distributions described in paragraphs 13, 19 and 20 below;
c. providing that $XXXXXXXXXX will be divided equally per capita among the following persons who survive Child A: the grandchildren and great-grandchildren of the Deceased who are minors at the date of the Variation and any grandchildren and great-grandchildren of the Deceased who are born after the date of the Variation and on or before the death of Child A;

d. adding a provision to the Spouse Trust requiring the Trustee to vote the Special Voting Shares and Common Shares of Holdco 1 and Holdco 2 in such a way to ensure that all net income generated from the investment assets held by Holdco 1 and Holdco 2 is distributed to the Spouse Trust and to Child A as the sole income beneficiary of the Spouse Trust, while Child A is alive; and

e. adding an administrative power to the Spouse Trust to permit the Trustee to sell some Shares in order to diversify the investments of the Spouse Trust as well as permitting the Trustees to vote the shares of Holdco 1 and Holdco 2 in such way as to cause them to sell some Shares in order to diversify their investments.

All adult beneficiaries and the Court, on behalf of the minor and unborn beneficiaries, will consent to the Variation.

8. The Trustee will incorporate 2 new companies, Holdco 1 and Holdco 2 under the
Business Corporations Act (XXXXXXXXXX ) the authorized share capital of which will consist of:

a. Special Voting Shares: XXXXXXXXXX votes per share, redeemable and retractable for $XXXXXXXXXX per share, no right to dividends;

b. Common Shares: voting (XXXXXXXXXX ), fully participating on liquidation, dissolution or winding-up, discretionary right to dividends;

c. Class A Special Shares: non-voting, no right to dividends, redeemable and retractable for $XXXXXXXXXX per share, priority on liquidation, dissolution or winding-up over the Special Voting Shares, the Class B Special Shares and Common Shares and any other shares ranking junior to the Class A Special Shares; and
d. Class B Special Shares: non-voting, no right to dividends, redeemable and retractable for $XXXXXXXXXX per share, priority on liquidation over the Common Shares and any other shares ranking junior to the Class B Special Shares but the Class B Special Shares will rank junior to the Class A Special Shares and the Special Voting Shares on any liquidation, dissolution or winding-up.

The share provisions of Holdco 2 will be identical.

9. The Trustee will subscribe for the following shares in both Holdco 1 and Holdco 2:

XXXXXXXXXX Special Voting Shares for an aggregate share subscription price of $XXXXXXXXXX and XXXXXXXXXX Common Shares for an aggregate share subscription of $XXXXXXXXXX .

10. The Trustee will transfer the property acquired as a result of the exercise of the administrative power described in subparagraph 7e) above and its remaining Shares (the "Property") to Holdco 1 and Holdco 2 as follows:

a) The Trustee will transfer to Holdco 1 half of the Property in exchange for that number of Class B Special Shares which in the aggregate will have a redemption value equal to the fair market value of the Property transferred to Holdco 1 less the ACB of the Property transferred to Holdco 1, and a demand non-interest bearing promissory note with a principal amount equal to the ACB of the Property transferred to Holdco 1 ("PNote 1"). The transfer will take place pursuant to section 85. The Trustee and Holdco 1 will jointly elect in prescribed form and manner under section 85 and within the prescribed time to deem the aggregate proceeds of disposition to be equal to the ACB of the Property transferred to Holdco 1. A nominal ACB and paid-up capital ("PUC") of $XXXXXXXXXX will be allocated to the Class B Special Shares of Holdco 1 issued to the Trustee.

b) The Trustee will transfer the remaining Property to Holdco 2 in exchange for that

number of Class B Special Shares which in the aggregate will have a redemption value equal to the fair market value of the Property transferred to Holdco 2 less the ACB of the Property transferred to Holdco 2, and a demand non-interest bearing promissory note with a principal amount equal to the ACB of the Property transferred to Holdco 2 ("PNote 2"). The transfer will take place pursuant to section 85. The Trustee and Holdco 2 will jointly elect in prescribed form and manner under section 85 and within the prescribed time to deem the aggregate proceeds of disposition to be equal to the ACB of the Property transferred to Holdco 2. A nominal ACB and PUC of $XXXXXXXXXX will be allocated to the Class B Special Shares of Holdco 2 issued to the Trustee.

11. The Trustee will subscribe for Class A Special Shares of Holdco 1 having a redemption value equal to the ACB of the Property transferred to Holdco 1 at a

subscription price equal to that amount and will satisfy payment of the subscription price by entering into an agreement with Holdco 1 to set off mutual debts whereby the debt owing by Holdco 1 to the Trustee as evidenced by PNote 1 will be offset against the debt owing by the Trustee to Holdco 1 in respect of the subscription price for the Class A Special Shares. PNote 1 will be cancelled. The ACB and PUC of the Spouse Trust's Class A Special Shares of Holdco 1 will be equal to their subscription price.

12. The Trustee will subscribe for Class A Special Shares of Holdco 2 having a
redemption value equal to the ACB of the Property transferred to Holdco 2 at a

subscription price equal to that amount and will satisfy payment of the subscription price by entering into an agreement with Holdco 2 to set off mutual debts whereby the debt owing by Holdco 2 to the Trustee as evidenced by PNote 2 will be offset against the debt owing by the Trustee to Holdco 2 in respect of the subscription price for the Class A Special Shares. PNote 2 will be cancelled. The ACB and PUC of the Spouse Trust's Class A Special Shares of Holdco 2 will be equal to their subscription price.

13. The Trustee will distribute all of the Class B Special Shares of Holdco 1 to

Grandchild C and all of the Class B Special Shares of Holdco 2 to Grandchild B in partial satisfaction of their capital interests in the Spouse Trust. As a condition of the distribution to Grandchild C of the Class B Special Shares of Holdco 1, the Trustee will require Grandchild C and Holdco 1 to enter into a shareholders agreement with the Trustee which will prohibit Grandchild C from retracting her Class B Special Shares unless and until a Disposition Event occurs. A Disposition Event will be defined in the shareholders agreement to be any disposition by the Spouse Trust of any Common Shares of Holdco 1 otherwise than as a result of a disposition to Holdco 1 pursuant to paragraph 17 below. Likewise, as a condition of the distribution by the Trustee to Grandchild B of the Class B Special Shares of Holdco 2, the Trustee will require Grandchild B and Holdco 2 to enter into a similar shareholders agreement prohibiting Grandchild B from exercising his right to retract the Class B Special Shares unless and until a Disposition Event occurs.

14. After the shareholders agreements among the Trustee, Grandchild C, Grandchild B
and Holdco 1 and Holdco 2 are entered into and the distribution of the Class B Special Shares of Holdco 1 is made to Grandchild C and the distribution of the Class B Special Shares of Holdco 2 is made to Grandchild B, the Trustee will continue to hold the following shares in each of Holdco 1 and Holdco 2: XXXXXXXXXX Special Voting Shares with ACB and PUC of $XXXXXXXXXX in aggregate, XXXXXXXXXX Common Shares with ACB and PUC of $XXXXXXXXXX , and Class A Special Shares with ACB and PUC equal to their subscription price.

15. At Child A's death, the Spouse Trust will redeem XXXXXXXXXX Class A Special Shares

of each of Holdco 1 and Holdco 2 and divide the redemption proceeds of $XXXXXXXXXX equally per capita among the following persons who survive Child A: the grandchildren and great-grandchildren of the Deceased who are minors at the date of the Variation and any grandchildren and great-grandchildren of the Deceased who are born after the date of the Variation and on or before the death of Child A. Assuming that the value of Holdco 1 is equal to the value of Holdco 2, the Special Voting Shares, Common Shares and the remaining Class A Special Shares of Holdco 1 will be distributed to Grandchild C if she is alive at Child A's death. If

Grandchild C predeceases Child A, such shares will be distributed to Grandchild C's issue equally per stirpes who are living at Child A's death. The Special Voting Shares, Common Shares and the remaining Class A Special Shares of Holdco 2 will be distributed to Grandchild B if he is alive at Child A's death. If Grandchild B predeceases Child A, such shares will be distributed to Grandchild B's issue equally per stirpes who are living at Child A's death. If the value of Holdco 1 is not equal to the value of Holdco 2, the Trustee will distribute the shares of Holdco 1 and Holdco 2 in a manner that will ensure Grandchild C and Grandchild B (or their issue if either has predeceased Child A) receive shares of equal value. Once all of the shares of Holdco 1 and Holdco 2 are distributed to the beneficiaries of the Spouse Trust, the restriction on retracting the Class B Special Shares of Holdco 1 and Holdco 2 pursuant to the shareholders agreements will terminate.

16. It is intended that the transactions described in paragraphs 7 through 14 above will be implemented as soon as possible after this ruling request is granted. If the value of the Common Shares of Holdco 1 and Holdco 2 increases between the date on which they are issued to the Spouse Trust as described in paragraph 9 above and XXXXXXXXXX , the Spouse Trust will enter into the transactions described in paragraphs 17 to 20 below just prior to XXXXXXXXXX .

17. The Trustee will exchange its XXXXXXXXXX Common Shares of Holdco 1 for that number of Class B Special Shares which in the aggregate will have a redemption value equal to the fair market value of these XXXXXXXXXX Common Shares of Holdco 1 when the exchange is made. The Class B shares issued on the exchange will be allocated a nominal PUC, namely $XXXXXXXXXX . The exchange of shares will take place pursuant to subsection 51(1), such that there will be deemed to be no disposition and the cost, ACB and PUC of class B Special Shares received on that exchange will be determined according to that provision.

18. The Trustee will subscribe for XXXXXXXXXX Common Shares of Holdco 1 at a subscription price of $XXXXXXXXXX and will satisfy payment of the subscription price by paying cash.

19. The Spouse Trust will distribute all of the Class B Special Shares of Holdco 1 to Grandchild C and the Class B Special Shares will be subject to the shareholders agreement and the restriction on retraction unless and until a Disposition Event occurs.

20. The Spouse Trust will enter into identical transactions as described in paragraphs 17 to 19 above with respect to Holdco 2 and Grandchild B.

PURPOSE OF THE PROPOSED TRANSACTIONS

21. The purposes of the proposed transactions are the following:

a. To permit a distribution by the Spouse Trust prior to XXXXXXXXXX of all capital assets with accrued capital gains on a tax deferred basis in order to avoid the deemed disposition under subsection 104(4);

b. To permit the Spouse Trust to retain maximum value of assets while ensuring that all of the assets with accrued capital gains are distributed to the beneficiaries;

c. To permit the Spouse Trust to retain the income from and control over the Shares or any other investments into which the Shares may be converted during Child A's lifetime;

d. To maintain the integrity of the Will by structuring the distribution to ensure Child A continues to receive all of the dividend income generated by the Shares or any other investments into which the Shares may be converted and that Grandchild C and Grandchild B cannot access the value of the Shares until Child A's death; and
e. To permit the Spouse Trust to retain the right to benefit from all future growth in the value of the Shares or any other investments into which the Shares may be converted from the date the proposed transactions are completed until final distribution takes place at the death of Child A.

RULINGS GIVEN

Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof, the proposed transactions are carried out as herein described, and the Variation is approved by the XXXXXXXXXX , our advance income tax rulings are as follows:

A. The Variation will not in and by itself result in a resettlement of the Spouse Trust or a disposition, as defined in subsection 248(1), of the Shares held by the Spouse Trust.

B. The Variation will not in and by itself result in a disposition of the income or capital interests of any beneficiary of the Spouse Trust for purposes of subsections 106(2) and 107(1) and the definition of "disposition" in subsection 248(1).

C. Subject to subsection 107(2.001), subsection 107(2) will apply to the distribution of the Class B Special Shares of Holdco 1 to Grandchild C and the distribution of Class B Special Shares of Holdco 2 to Grandchild B in partial satisfaction of their capital interests in the Spouse Trust as described in paragraph 13 above.

D. Subsections 56(2), 105(1) and 246(1) will not be applicable solely as a consequence of the proposed transactions.

E. Section 245 will not be applicable to redetermine the tax consequences set out in the rulings provided above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions with the exception of those in paragraphs 17 to 20 above are completed before XXXXXXXXXX .

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.

Comments

Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:

a. the determination of the FMV, ACB or PUC of any property referred to in this
letter; or
b. any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.

We do not rule on the transactions described in paragraphs 17 to 20 due to their contingent nature. However, given the current state of the law, it is our opinion that the rulings provided above would be applicable to those transactions.

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