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. does the variation cause a disposition of trust property?
2. Will Mrs A be considered to have received fmv proceeds where income interest is released with no direction & for no consideration?
3. Does 56(2), 105(1) or 246(1) apply?
4. Is 107(2) applicable on the distribution of property to capital beneficiaries?
Position:
1. no; 2. no; 3. no; 4. no
Reasons:
1. See IT-385R2 & previous rulings;
2. previous position maintained;
3. previous positions applicable;
4. trust is a spousal trust-107(4) not 107(2) is applicable
XXXXXXXXXX 2005-011301
XXXXXXXXXX , 2005
Dear XXXXXXXXXX
Re: Advance Income Tax Ruling
XXXXXXXXXX
We are writing in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above noted estate, trust and beneficiaries under the trust in respect of the income tax consequences arising out of the proposed transactions described below.
We understand that, to the best of your knowledge, none of the issues involved in this ruling request are:
a) in an earlier return of the taxpayer or a related person;
b) being considered by a tax services office and/or a taxation centre in connection with a tax return previously filed by the taxpayer or a related person
c) under objection by the taxpayer or a related person;
d) before the courts; or
e) the subject of a ruling previously issued by this Directorate to the taxpayer or a related person.
In this letter, unless otherwise indicated, 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:
a) "Business X" means XXXXXXXXXX.
b) "Mr. A" means XXXXXXXXXX.
c) "Mrs. A" means XXXXXXXXXX.
d) "Property X" means the property municipally described as XXXXXXXXXX.
e) "Surviving Children" means XXXXXXXXXX.
f) "Trustees" mean XXXXXXXXXX.
g) "Will" means the last Will of Mr. A dated XXXXXXXXXX.
The names and addresses of the taxpayers who are parties to this ruling request, as well as the tax services office or tax centre where their returns are filed, are listed in Schedule A.
Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:
Facts
1. Mr. A died on XXXXXXXXXX, survived by a spouse, Mrs. A, and the XXXXXXXXXX adult Surviving Children. None of the Surviving Children were dependant on the deceased or mentally or physically unable to earn a livelihood surviving him.
2. Probate of the Will was granted XXXXXXXXXX.
3. Clause 5(B) of the Will created a spousal trust (the "Trust"). All assets relating to Business X including Property X were transferred to the Trust according to the terms of the Will. The net income of Business X, or if Business X is sold, income from investment of the net proceeds of the sale, is to be paid to Mrs. A during her lifetime. There is no provision to pay any of the capital of the Trust to Mrs. A. The Trust provides that upon the death of Mrs. A, the business or the net sale proceeds if the business has been sold, is to be divided equally among the Surviving Children. If any of the Surviving Children have predeceased Mrs. A., his or her share shall be divided equally among his or her children who survive the predeceased and Clause 3(E) of the Will provides that the share of a grandchild is to be held in trust to age 25.
4. The Trust is resident in Canada. The Surviving Children are all adults.
5. Property X was sold XXXXXXXXXX and the net sale proceeds were $XXXXXXXXXX, producing a taxable capital gain of $XXXXXXXXXX.
6. Tax of $XXXXXXXXXX was paid on the gain from the sale on XXXXXXXXXX. All the income from the sale of Business X (net of taxes paid by the Trust) and from the investment of the sale proceeds of Business X has been paid to Mrs. A. Mrs. A has paid tax on this income.
7. The current capital value of the Trust is $XXXXXXXXXX and is invested in money market mutual funds, earning interest (all of which has been paid out to Mrs. A), but no capital gains.
Proposed Transactions
8. Mrs. A will execute a Deed of Disclaimer to release and surrender her interest in the Trust for no consideration. She will not direct in any manner who is entitled to receive future payments from the Trust not due and payable at the time her release and surrender is executed.
9. Upon receipt of the Deed of Disclaimer, the Surviving Children will apply to the Court of the Queen's Bench of Alberta to vary the terms of the Trust pursuant to the Trustee Act of Alberta, to terminate the Trust early and divide and distribute the capital assets of the Trust equally amongst themselves.
10. To protect the potential interest of grandchildren who would have inherited if one of the Surviving Children had died during the lifetime of Mrs. A, an insurance policy on the life of Mrs. A for the current value of the monies held in the Trust will be purchased. The policy will provide that the proceeds are payable to the Surviving Children in equal shares, and if, at that time, any of the Surviving Children have predeceased Mrs. A, his or her share of the insurance will be divided among and paid to his or her children equally. The beneficiary designations will be irrevocable.
11. The Trust property will be distributed equally among the Surviving Children.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to vary the terms of the Trust in order to terminate the Trust. The sole income beneficiary, Mrs. A, no longer wishes to receive income from the Trust, hence the proposed transactions would accelerate the realization of the Surviving Children's interests.
Rulings Given
Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as herein described, our advance income tax rulings are as follows:
A. The variation of the Trust to permit the distribution of the Trust property to the Surviving Children, if so approved by the Court will not, in and by itself, result in a disposition as defined in section 248 of the Act of any property of the Trust for income tax purposes or of any beneficiary's interest in the Trust for the purposes of section 106 or 107 of the Act.
B. Mrs. A will not be considered to have received any proceeds of disposition for the purpose of subsection 106(2) of the Act as a result of executing her release and surrender as described in 8 above.
C. The distribution of Trust property to the Surviving Children as described in 11 above will be subject to the provisions of subsection 107(4) of the Act.
D. The act of consenting to the variation in the Trust will not, in and by itself, result in the application of subsections 56(2), 105(1) or 246(1) of the Act.
E. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of Rulings A to D above as a result of the proposed transactions described herein.
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.
These 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 the proposed transactions are completed within XXXXXXXXXX of the date of this letter.
Yours truly,
XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
Schedule A
XXXXXXXXXX
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