2004 Ruling 2004-0074051R3 - variation of a grantor 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.

Principal Issues: 1. Do 56(2) or 105(1) apply as a result of the variation?

2. Are the amendments significant enough to cause the Trust to be a new trust?

3. Do the changes in the beneficial interests of any of the contingent beneficiaries, particularly, any diminishment of such interests, result in a disposition of any part of the contingent beneficiaries interest in the Trust?

4. Are the adult beneficiaries related, and thus dealing at non-arm's length with, the minor beneficiaries and mother\settlor?

Position: 1. No 2. No. 3. No. 4. Yes.

Reasons: 1. 2003-002169C

2. The terms of the trust have provided for variation of the trust at the discretion of the settlors from the beginning such that the proposed variation does not alter the terms of the trust in any substantial way (even if the change is significant in respect of any of the contingent beneficiaries).

3. The settlors' intent in making the variation is not to alter the value of the net interest of any group of beneficiaries (other than the Foundation) but rather to alter the manner in which each group of children's share is computed following the death of father. No beneficiaries are being added to the trust and the variation only makes minor adjustments to the manner and timing of those future distributions. The purpose of the variation related to the children is give the adult beneficiaries access to a fixed portion of the residue on a more timely basis. The variation can and is being made without the consent of any of the contingent beneficiaries.

4. They share a common father but have different mothers. 251(6) defines persons connected by blood as including a person who is a brother or sister of the other. As stated in 9429945, a half-brother is related to his half-sister by blood. This is further confirmed by the Oxford concise dictionary which defines brother to include males who have the same parents or parent. Thus, while it is common to refer to such persons as half-brother or step-brother, they are still related by blood.

XXXXXXXXXX 2004-007405

Attention: XXXXXXXXXX

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you request an advance income tax ruling in respect of the above-noted trust. We also acknowledge your correspondence of XXXXXXXXXX.

To the best of your knowledge and that of your clients, none of the issues involved in the ruling request is:

? in an earlier return of the trust, the beneficiaries of the trust or a related person,
? being considered by a tax services office or taxation center in connection with a previously filed tax return of the trust, the beneficiaries of the trust or a related person,
? under objection by the trust, the beneficiaries of the trust or a related person,
? before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or
? the subject of a ruling previously considered by the Directorate in respect of the trust, the beneficiaries of the trust or a related person.

You provided us with a copy of the following documents:

? the Trust Deed and six subsequent amendments; and
? a draft of the Trust Deed as it will read following the proposed amendment.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"), and the following terms have the meanings specified:

"Adult Beneficiaries" means XXXXXXXXXX, the XXXXXXXXXX adult children of Mr. X from his first marriage;

"Beneficiaries" means the beneficiaries of the Trust named in the trust indenture, being Mr. X, Mrs. X, Adult Beneficiaries, spouses of the Adult Beneficiaries, Minor Beneficiaries and the Foundation;

"Foundation" means the XXXXXXXXXX;

"Minor Beneficiaries" means XXXXXXXXXX, each a minor, who are the children of Mr. X and Mrs. X;

"Mr. X" means XXXXXXXXXX, one of the settlors of the Trust;

"Mrs. X" means XXXXXXXXXX, one of the settlors of the Trust;

"Trust Deed" means the trust indenture created XXXXXXXXXX as amended from time to time; and

"Trustees" means Mr. X and Mrs. X.

The relevant Taxation Services Office for the Mr. X and Mrs. X is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX Taxation Centre. The relevant Taxation Services Office for the Trust is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX.

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

Facts

1. The Trust is a personal trust that was settled by Mr. X and Mrs. X on XXXXXXXXXX when they were resident in the U.S. Mr. X and Mrs. X are U.S. citizens. The Trust was designed to achieve the testamentary objectives of Mr. X and Mrs. X, including planning for U.S. estate and gift taxes. The Trust holds a significant portion of Mr. X and Mrs. X's assets. Any assets included in the estate of either Mr. X or Mrs. X (other than each one's respective interest in the Trust), are to be transferred to the Trust pursuant to their respective wills.

2. Mr. X and Mrs. X became residents of Canada on XXXXXXXXXX but remain U.S. citizens. Mr. X has also become a Canadian citizen. The Minor Beneficiaries are Canadian residents. The Adult Beneficiaries are U.S. residents and citizens.

3. The Trust became resident in Canada on XXXXXXXXXX. Immediately before the Trust became resident in Canada, the Trust was deemed to have disposed of all of its assets at fair market value under paragraph 128.1(1)(b) as no assets held in the Trust at that time were property described in subparagraph 128.1(1)(b)(i) to (iii). On XXXXXXXXXX, the fifth amendment to the Trust altered the amount that the Adult Beneficiaries and the Minor Beneficiaries would receive from the residue of the Trust to XXXXXXXXXX of the residue and XXXXXXXXXX of the residue respectively. Mrs. X has not adopted the XXXXXXXXXX adult children. Mr. X, Mrs. X, the Adult Beneficiaries and the Minor Beneficiaries are related to each other under subsection 251(2). Neither the adult children nor the minor children deal at arm's length with the Trust pursuant to paragraph 251(1)(b).

4. While they are both alive, Mr. X and Mrs. X have the ability to revoke or vary the Trust pursuant to Articles XXXXXXXXXX of the Trust Deed. Subsection 75(2) applies to the Trust such that all income of the Trust is attributable to Mr. X. The income and capital gains earned by the Trust since Mr. X became a resident of Canada has been included in personal income tax return of Mr. X for the year in which such income was earned.

5. On XXXXXXXXXX, the Trust Deed was amended in accordance with the terms of the sixth amendment. The sixth amendment corrected some minor typographical errors contained in the earlier versions.

Proposed Transactions

6. The Trust will be amended as permitted in Article XXXXXXXXXX of the Trust Deed. The three main proposed amendments are as follows:

(A) The entitlement of the Adult Beneficiaries' share of the residue is to be amended from XXXXXXXXXX to a lump sum equal to a maximum of up to $XXXXXXXXXX (to be divided equally between the XXXXXXXXXX Adult Beneficiaries). In addition, the timing of the right to the funds will be accelerated to arise on the death of Mr. X whether he is the first or second to die.

(B) The specific bequest of $XXXXXXXXXX to the Foundation is to be removed.

(C) The successor trustee of the Trust, upon the occurrence of any of the events described in XXXXXXXXXX of the Trust Deed, such as the resignation or death of both of the Trustees, will be XXXXXXXXXX, a resident of Canada, rather than a resident of the U.S. The remaining amendments are administrative in nature as they reallocate funds between the different subtrusts primarily for U.S. estate tax purposes.

Purpose of the Proposed Transactions

7. The purpose of the amendment is to better meet the intentions of Mr. X and Mrs. X to adequately provide for all XXXXXXXXXX children. Mr. X and Mrs. X wish to allow the Adult Beneficiaries to have access to their portion of the residue on a timelier basis. In addition, by giving the Adult Beneficiaries a fixed amount rather than a share of the residue of the Trust, the Adult Beneficiaries will be better able to plan their own affairs. There is no underlying income tax reason for the proposed variation to the Trust. Mr. X and Mrs. X have decided to make a personal gift to the Foundation from their own funds rather than giving the Foundation a share of the residue of the Trust. However, such a gift is not being given in exchange for the Foundation's current interest in the Trust.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The proposed variation of the Trust described in paragraph 6 above, 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 Adult Beneficiaries will not be considered to have received any proceeds of disposition for the purposes of sections 38, 39, or 107 of the Act as a result of the proposed variation of the Trust described in paragraph 6 above.

C. The proposed variation of the Trust will not result in the conferral of a taxable benefit under subsection 56(2) or 105(1) on any of the beneficiaries of the Trust.

Nothing in this advance income tax ruling should be construed as implying that the Canada Revenue Agency is ruling on:

a) the fair market value or adjusted cost base of any property 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 above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency provided that amendments to the Trust Deed as described in paragraph 6 above, are completed within six months of the date of this letter.

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