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: Whether the proposed variation of a trust would result: (1) in the creation of a new trust; (2) in the disposition of part of one of the beneficiaries' capital interest in the trust; and (3) in the conferral of a taxable benefit by the trust on any of the beneficiaries.
Position: (1) No; (2) Yes; the disposition will occur at fair market value pursuant to 69(1)(b); (3) No.
Reasons: Previous positions.
XXXXXXXXXX 2003-005438
XXXXXXXXXX , 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you request an Advance Income Tax Ruling on behalf of the above named taxpayers in respect of the income tax consequences arising from the proposed transactions described below. We also acknowledge the information provided in your subsequent correspondence and during our various telephone conversations (XXXXXXXXXX) in connection with your request.
The XXXXXXXXXX files its tax returns with the XXXXXXXXXX Taxation Center and its tax account number is XXXXXXXXXX. As for XXXXXXXXXX, who was born on XXXXXXXXXX, and lives in XXXXXXXXXX, he doesn't have a social insurance number nor has he ever filed an income tax return.
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 involved in the Ruling request:
(i) is in an earlier return of the taxpayers or a related person;
(ii) is being considered by a Tax Services Office or Taxation Center in connection with a previously filed tax return of the taxpayers or a related person;
(iii) is under objection by the taxpayers or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) is the subject of a Ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms used therein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX, mother of XXXXXXXXXX (the "Son"), settled XXXXXXXXXX (the "Trust") by deed of settlement dated XXXXXXXXXX. The trustees of the Trust are the spouse of the Son, XXXXXXXXXX (the "Spouse"), and XXXXXXXXXX (collectively, the "Trustees").
2. The Trust is an irrevocable discretionary family trust. The discretionary capital beneficiaries of the Trust are the Son, the Spouse, their children and the issue of their children. The discretionary income beneficiaries of the Trust are the children of the Son and the Spouse and their issue.
3. The Son and the Spouse have XXXXXXXXXX children, XXXXXXXXXX (the "Grandson"), XXXXXXXXXX (collectively, the "Children"). Each of the Children is alive and over the age of eighteen. The Grandson has XXXXXXXXXX children, XXXXXXXXXX (the "Great-Grandson"), XXXXXXXXXX.
4. Under the terms of the Trust, the Trustees are directed to hold the trust fund until the distribution date which is defined in the provisions of the Trust as the date of death of the survivor of the Son and the Spouse (the "Distribution Date"). Until the Distribution Date, the Trustees are authorized in their absolute discretion to pay all or part of the income of the Trust to one or more of the income beneficiaries in such proportions as the Trustees may determine to the exclusion of any one or more of the income beneficiaries. Until the Distribution Date, the Trustees are also authorized in their absolute discretion to pay all or part of the capital of the Trust to or for the benefit of one or more of the capital beneficiaries in such proportions as the Trustees may determine to the exclusion of any one or more of the capital beneficiaries. Upon the Distribution Date, the Trustees are required to divide the assets of the Trust then remaining into equal shares between the Children then alive, provided that any of the Children who has predeceased the Son and the Spouse leaving issue then alive shall be deemed to be alive for the purpose of such division. Each of the Children alive on the Distribution Date shall then receive one equal share of the trust fund. The issue of any of the Children then deceased shall receive one equal share of the trust fund to be paid to them in equal amounts per stirpes.
5. The assets of the Trust consist of an investment certificate in the amount of $XXXXXXXXXX, being the original settlement, and XXXXXXXXXX common shares of XXXXXXXXXX ("Canco"), a private holding company that owns shares in several operating companies XXXXXXXXXX. The XXXXXXXXXX common shares of Canco owned by the Trust have significant value.
6. The other shareholders of Canco are the Spouse, who owns XXXXXXXXXX Class C Shares having a fixed redemption value of $XXXXXXXXXX, and the Son, who owns XXXXXXXXXX Class B voting shares which provide him with voting control.
7. Following the creation of the Trust, the Great-Grandson has been diagnosed with XXXXXXXXXX. As a result, the Great-Grandson is not expected to be capable of managing his own affairs when he reaches the age of majority.
8. Under the provisions of the Trust, the Great-Grandson is a discretionary income and capital beneficiary of the Trust during his lifetime and also has a contingent XXXXXXXXXX interest in the capital of the Trust on the Distribution Date (the "Contingent Interest"). In order for the Contingent Interest to vest in favour of the Great-Grandson, the Grandson must predecease the Son and the Spouse and there must still be assets left in the Trust for distribution on the Distribution Date. In such event, the assets that would be distributed to the Great-Grandson on the Distribution Date would be XXXXXXXXXX of the investment certificate in the amount of $XXXXXXXXXX and XXXXXXXXXX of the common shares of Canco, assuming the Great-Grandson still has only two siblings on the Distribution Date and no capital assets have been distributed from the Trust prior to the Distribution Date.
Proposed Transaction
9. It is proposed to vary the terms of the Trust in accordance with the terms of an arrangement approved and consented to by or on behalf of the Trustees and all persons having, directly or indirectly, any interest, vested or contingent, under the Trust (the "Arrangement"). The Arrangement will require approval of the XXXXXXXXXX. All of the adult beneficiaries of the Trust will consent to the Arrangement.
10. Under the terms of the Arrangement, clause XXXXXXXXXX of the deed of settlement of the Trust will be deleted and new provisions substituted therefore which will deal specifically with the Great-Grandson in the event that his father, the Grandson, predeceases the Son and the Spouse and is therefore not alive on the Distribution Date.
11. The terms of the Trust will be varied to provide that in the event the Grandson predeceases the Son and the Spouse, then the Great-Grandson will be deemed to have predeceased his father, the Grandson, for the purposes of distributing an equal share of the trust fund among the issue of the Grandson upon the Distribution Date. As the Great-Grandson will be deemed to have predeceased his father in these circumstances, his Contingent Interest will not vest and he shall have no right to receive a per stirpes distribution of the assets of the Trust then remaining. However, the Arrangement will provide that such exclusion of the Great-Grandson as a contingent capital beneficiary will have effect only if a testamentary trust of not less than $XXXXXXXXXX is established for the benefit of the Great-Grandson upon the death of the survivor of the Son and the Spouse. The existing will of the Spouse does provide for the establishment of such a testamentary trust for the benefit of the Great-Grandson in the amount of $XXXXXXXXXX.
12. The Arrangement also provides a failsafe mechanism in the event that a testamentary trust is not established for the Great-Grandson upon the death of the survivor of the Son and the Spouse. If for whatever reason such a testamentary trust is not established, then the Great-Grandson would remain entitled to his share of the trust fund upon the Distribution Date, but the said share would be transferred to XXXXXXXXXX, as trustees, to hold in trust for the Great-Grandson (the "Great-Grandson Trust"). Under the Great-Grandson Trust, the Great-Grandson would be the sole discretionary income and capital beneficiary. At such time as all income would have to be distributed from the Great-Grandson Trust under the Accumulations Act, any income not paid in any year to the Great-Grandson would be paid to his children, if any, and if he has no children, then to the remaining issue of the Grandson. Upon the death of the Great-Grandson, the assets of the Great-Grandson Trust would be divided equally among the children of the Great-Grandson, if any, or if he has no children then alive, then to the remaining issue of the Grandson then alive.
13. The proposed transaction will have no impact on any outstanding tax liabilities of the Trust or of the Great-Grandson since the Trust and the Great-Grandson do not currently have any outstanding tax liabilities.
Purpose of the Proposed Transaction
14. The purpose of the proposed transaction is to provide a testamentary trust for the Great-Grandson in the principal amount of $XXXXXXXXXX, as detailed in the Arrangement, in lieu of the existing Contingent Interest now held by the Great-Grandson in the Trust upon the Distribution Date.
15. The replacement of the Great-Grandson's Contingent Interest with a testamentary trust created under the will of the Spouse is intended to provide a secure and certain fund to provide for the future needs of the Great-Grandson. The testamentary trust, when established, will be administered and invested to provide a steady income stream to meet the medical and personal care needs of the Great-Grandson. This approach is considered to be a more responsible approach to ensure a secure future for the Great-Grandson. In contrast, if the Contingent Interest held by the Great-Grandson in the Trust was to vest on the Distribution Date, there is no certainty that the assets of the Trust to which he would be entitled would provide the income stream required to provide for his care. Furthermore, the Great-Grandson is not expected to be capable of managing his own affairs, which would include ownership of a XXXXXXXXXX interest in Canco.
Rulings given
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. The proposed variation of the Trust, in and by itself, will not result in the creation of a new trust or in a resettlement of the Trust, nor will it result, in and by itself, in a disposition for income tax purposes of any property of the Trust.
B. The proposed variation of the Trust will not result in the conferral of a taxable benefit by the Trust on any of the beneficiaries of the Trust.
C. In accordance with paragraph 69(1)(b) of the Act, the proposed variation will result in the disposition at fair market value of the Great-Grandson's Contingent Interest in favor of his XXXXXXXXXX brothers, XXXXXXXXXX.
Nothing in this Advance Income Tax Ruling should be construed as implying that we are ruling on:
a) 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
b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the Rulings given above.
The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Section Manager
For Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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