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: Application of paragraph 251(1)(b) where two personal trusts have a common beneficiary.
Position: The two personal trusts would be deemed to not deal at arm's length with each other under paragraph 251(1)(b) because of the existence of the common beneficiary.
Reasons: The law.
XXXXXXXXXX 2003-003860
September 30, 2003
Dear XXXXXXXXXX:
Re: Meaning of Arm's Length - Paragraph 251(1)(b)
This is in reply to your letter dated September 12, 2003 wherein you requested our comments with respect to the above provisions of the Act as they apply to four fact situations described in your letter.
In your letter you describe four situations wherein you maintain that two personal trusts ("Trust 1" and "Trust 2") would, but for the possible application of paragraph 251(1)(b) as discussed below, be persons who factually deal at arm's length with one another. In each of the four situations, you indicate that each of Trust 1 and Trust 2 has a common beneficiary (the "Common Beneficiary") who would, except for the application of paragraph 251(1)(b), be a person who factually deals at arm's length with each such trust.
You are concerned, however, that Trust 1 and Trust 2 may be deemed not to deal with each other at arm's length by paragraph 251(1)(b) solely because of the existence of the Common Beneficiary. Under paragraph 251(1)(b), Trust 1 (being the "taxpayer") and Trust 2 (the "personal trust") could be deemed not to deal with each other at arm's length because Trust 1 and the Common Beneficiary (being a person who is beneficially interested in Trust 2) are also deemed to not deal with each other at arm's length.
Notwithstanding the above, it is your view that paragraph 251(1)(b) should not operate to deem Trust 1 and Trust 2 to not deal with each other at arm's length as described above because the reference to the phrase "any person not dealing at arm's length with the taxpayer" in paragraph 251(1)(b) should not include any person not dealing at arm's length with the taxpayer solely by virtue of the deeming rule in this paragraph. In your view, in order for paragraph 251(1)(b) to require inclusion of such deemed non-arm's length relationships, it would be necessary to add the words "or any person deemed by this subsection not to be dealing at arm's length with the taxpayer" to paragraph 251(1)(b).
We are unable to confirm your views. Paragraph 251(1)(b) states that for the purposes of the Act:
a taxpayer and a personal trust (other than a trust described in any of paragraphs (a) to (e.1) of the definition "trust" in subsection 108(1)) are deemed not to deal with each other at arm's length if the taxpayer, or any person not dealing at arm's length with the taxpayer, would be beneficially interested in the trust if subsection 248(25) were read without reference to subclauses 248(25)(b)(iii)(A)(II) to (IV); (emphasis added)
Based on the above, the Common Beneficiary is a person who is "beneficially interested" in Trust 1 and Trust 2 and as such is considered to not deal at arm's length with either trust under paragraph 251(1)(b) for the purposes of the Act. Moreover, it is our view that Trust 1 and Trust 2 would also be deemed to not deal at arm's length with each other under paragraph 251(1)(b) because of the existence of the Common Beneficiary.
We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the CCRA.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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