3 April 2003 External T.I. 2003-0181465 - FMV of an interest in a discretionary trust

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 CCRA accept that value of an interest in a discretionary trust is nil because it is difficult to determine?

Position: No

Reasons: CCRA response to this question at the 1992 BC Conference of the CTF was that it was admittedly difficult to quantify the value of an interest in a discretionary trust. It would be unreasonable to conclude that the FMV of an interest is a discretionary trust holding property with significant value has no value simply because it is difficult to measure. In absence of any term of the trust that would direct the trustees to favour one beneficiary over another, the even handed principle would suggest that value of each beneficiary's interest was approximately equal. Where the facts support a finding that one beneficiary has a lesser chance of receiving a distribution from the trust than another beneficiary, it may be appropriate to discount the value of one interest and increase the value of another.

XXXXXXXXXX  	2003-018146
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

April 3, 2003

Dear XXXXXXXXXX:

Re: Value of an Interest in a Discretionary Trust

This is in reply to your letter of December 30, 2002, in which you ask whether our views on the fair market value of an interest in a discretionary trust have recently changed. In addition, you ask whether the Canada Customs and Revenue Agency would be willing to provide an advance income tax ruling in respect of the fair market value of an interest in a discretionary trust.

At the round table discussion held at the 1992 BC Tax Conference, we were asked whether we agreed that the fair market value of an interest in a discretionary trust would be nil. While we did not agree that the value would be nil, we did acknowledge that the value would be very difficult to determine. The difficulty in establishing the value of an interest in a discretionary trust was acknowledged in the case of Sagl v. Sagl (1997- 31 RFL 4th 405). In that case, it was held that a reasonable approach would be to value the interest as if the trust assets were fully distributed equally among all the contingent beneficiaries on the valuation date. In our view, this would be a reasonable approach to take in many cases involving the valuation of an interest in a discretionary trust. However, where the terms and conditions of the trust are such that this approach does not yield an appropriate result, it may be necessary to apply a discount factor in recognition of the uncertainty caused by any condition precedent or condition subsequent that could affect the value of the beneficiary's interest in the trust. As with business equity valuations, the valuator must use reasonable judgment and objectivity in the selection and analysis of the relevant facts of each valuation.

As stated in paragraph 15(f) of Information Circular 70-6R5, Advance Income Tax Rulings, we are unable to rule on matters involving the determination of the fair market value of property. We would, however, in the context of an advance income tax ruling request, be prepared to offer general comments as we did in the advance income tax ruling (2001-011130) referred to in your letter on whether a particular approach appears to be reasonable in the circumstances.

We trust our comments have clarified our position on this matter.

Theresa Murphy
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 3 -