2006 Ruling 2005-0143361R3 - split assets of 3 trusts into 5 separate trusts

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: A. Will 107.4 apply on the dividing of the assets of the original 3 trusts into each of 5 separate trusts for the benefit of 1 the 5 beneficiaries and their issue?

B. Will 104(5.8) apply to preserve the date on which the next deemed disposition under 104(4) will occur?

C. Will 75(2) apply? The other rulings involve routine issues. No ruling was requested in respect of the potential application of 104(2) by the Minister.

Position: A. & B Yes C&D. No

Reasons: A.. Substantially the same issues as in past ruling 2002-018047. The beneficial ownership of the property under the existing trusts is the same as under the new trusts as the terms of the trust are substantially the same, even though the property held on behalf of each of the 5 principal beneficiaries in the new trust will be separate from the property held on behalf of the other principal beneficiaries. The other conditions set out for a qualifying disposition are met.

B. As the date of creation of the new trusts is after the last deemed disposition date of the original trusts, the next deemed disposition date for the new trusts will be XXXXXXXXXX , provided that none of the anti-avoidance provisions in 104(4) are met, such as 104(4)(a.2) and (a.3) and (a.5).

C. Past rulings such as ruling D of 2002-013633: the issue is who contributes the property in a trust to trust transfer: the original settlor, in which case 75(2) does not apply; or the trustees of the existing trust, in which case 75(2) would apply if they remain the trustees of the new trust. To the extent that the doctrine of look-back cannot be used to support the proposition that it is the original testator who creates the new trusts, this would be a situation in which the reference to "trust" is a case where the context requires the reference to be a reference to the trust, and not the trustees, such that 75(2) does not apply.

XXXXXXXXXX 								2005-014336

Attention: XXXXXXXXXX

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Family Trusts for the benefit of XXXXXXXXXX and his issue
Advance Income Tax Ruling

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

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

• in an earlier return of your client or a related person,
• being considered by a tax services office or taxation center in connection with a previously filed tax return of your client or a related person,
• under objection by your client 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 your client or a related person.

You provided us with a copy of the following documents:

• copies of each of the original trust indentures for the XXXXXXXXXX; and
• a copy of the draft template and trust indenture to be used in creating each of the New Trusts.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

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:

"Assets" collectively means all of the assets of each of the Original Trusts;

"Beneficiary" means Father, the Children, the spouses of the Children and the issue of the Children (the issue of any particular Child are only entitled to receive a distribution in the event of the death of that Child before the final distribution date);

"Child 1" means XXXXXXXXXX, a child of Father;

"Child 2" means XXXXXXXXXX, a child of Father;

"Child 3" XXXXXXXXXX, a child of Father;

"Child 4" means XXXXXXXXXX, a child of Father;

"Child 5" means XXXXXXXXXX, a child of Father;

"Child" means any one of the five children of Father, individually;

"Children" means the five children of Father, collectively;

"Father" means XXXXXXXXXX, child of Grandfather;

"Grandfather" means XXXXXXXXXX, the settlor of each of the Original Trusts;

"New Trust 1" means the trust to be created for the benefit of Child 1 and the issue of Child 1;

"New Trust 2" means the trust to be created for the benefit of Child 2 and the issue of Child 2;

"New Trust 3" means the trust to be created for the benefit of Child 3 and the issue of Child 3;

"New Trust 4" means the trust to be created for the benefit of Child 4 and the issue of Child 4;

"New Trust 5" means the trust to be created for the benefit of Child 5 and the issue of Child 5;

"New Trusts" refers to the trusts created for the benefit of each of the Children, and their respective children, pursuant to the terms of the Proposed Arrangement, collectively;

"Original Trusts" refers to the Trust A, the Trust B and the Trust C, collectively;

"Proposed Arrangement" means the proposed arrangement under the Trustee Act to revoke the Original Trusts and to resettle five New Trusts;

"Transaction Date" means the effective date of the Proposed Arrangement which, in turn, will be the date that the Proposed Arrangement is approved by XXXXXXXXXX;

"Trust A" means the XXXXXXXXXX, the trust settled by Grandfather for the benefit of Father and his issue dated XXXXXXXXXX;

"Trust B" means the XXXXXXXXXX, the trust settled by Grandfather for the benefit of Father and his issue dated XXXXXXXXXX;

"Trust C" means the XXXXXXXXXX, the trust settled by Grandfather for the benefit of Father and his issue dated XXXXXXXXXX;

"Trustee Act" means the Trustee Act¸ XXXXXXXXXX; and

"Trustees" means the current trustees of Trust A, Trust B and Trust C individually and collectively.

The relevant Taxation Services Office for the Original Trusts is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX Centre. The tax account numbers for Trust A is XXXXXXXXXX, for Trust B is XXXXXXXXXX, and for Trust C is XXXXXXXXXX.

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

Facts

1. At all relevant times during his life, Grandfather was a resident of XXXXXXXXXX. Grandfather is now deceased. Grandfather had three children, one of whom was Father. Grandfather settled three trusts for the benefit of each of his three children and their respective issue on XXXXXXXXXX respectively for a total of nine trusts.

2. Three of these trusts, Trust A, Trust B, and Trust C, were established for the benefit of Father and his issue.

3. Father is now deceased and is survived by his spouse and five Children. All the Children reside in Canada.

4. The terms and provisions of the Original Trusts have not been varied nor amended since their creation, with the exception of periodic changes in the identity of the Trustees. Under the provisions of the Original Trusts, Father was the primary income and capital beneficiary of the Original Trusts.

5. After Father's death, his surviving spouse was entitled, as his consort, to receive income from the Original Trusts after his death. Pursuant to a property settlement agreement, she has disclaimed any interest that she may have had in the Original Trusts.

6. After the surviving spouse of Father disclaimed her interest in the Original Trusts, the relevant terms of the Original Trusts that are common among them can be summarized as follows:

a) the Trustees have the discretion to distribute or accumulate all or any part of the annual income of the Original Trust to or for the benefit of the Children provided that any income to be distributed in a year is distributed equally among the Children alive at the date of such distribution, and if any of the Children is deceased at that time, the share of the property of the Original Trusts to which the deceased Child would have been entitled had he or she survived is to be distributed to his or her spouse or, in the event that no such spouse exists, to be distributed to or for the benefit of the issue of that deceased Child in equal shares;

b) the Trustees have the discretion to pay, transfer or apply the whole or any part of the capital of the Original Trust to or for the benefit of the Children provided that any funds so distributed are distributed equally among the Children alive at the date of such distribution, and if any of the Children is deceased at that time, the share of the property of the Original Trusts to which the deceased Child would have been entitled had he or she survived is, subject to the right of the surviving spouse to receive any distributions of income from the Original Trust as the Trustees may make in their discretion, to be distributed to the issue of that deceased Child in equal shares;

c) after the death of the last of the Children, the Original Trust will be wound up and the Assets will be distributed to or for the benefit of the issue of the Children in equal shares;

d) if, at the date of the termination of the Original Trusts, any Child is under the age of XXXXXXXXXX (in the case of the Trust A) or under the age of XXXXXXXXXX (in the case of the Trust B and the Trust C), that Child's share will continue to be held in trust for the benefit of such Child until the Child attains the age specified under the terms of the Original Trust. In the case of the Trust B and the Trust C such share shall be distributed in full to such beneficiary when he or she reaches the age of XXXXXXXXXX years or such a date that the beneficiary has a child, whichever event occurs earlier. In the case of the Trust A, only half the share shall be distributed at age XXXXXXXXXX and the remainder of the share shall be distributed at age XXXXXXXXXX; and

e) if, at the date of the termination of the Original Trusts, none of the five Children have left any surviving issue alive at that time, the property remaining in that Original Trust will be added in equal proportions to the trust property of the trust created for each of Father's sister and brother at the same time the particular Original Trust was created.

7. The Original Trusts do not contain a variation clause and do not contain powers that allow the trust property to be resettled on new or different trusts.

8. The current trustees of Trust A are XXXXXXXXXX, and the current trustees of Trust B are XXXXXXXXXX and the current trustee of Trust C is XXXXXXXXXX.

9. XXXXXXXXXX are residents of the Province of XXXXXXXXXX.

10. XXXXXXXXXX exercises its functions as trustee from its XXXXXXXXXX office.

11. The Assets consist primarily of portfolio investments. They currently have a fair market value of approximately $XXXXXXXXXX and are capable of division into five equal parts.

12. The Assets of the Original Trusts are recorded on the books of XXXXXXXXXX maintained XXXXXXXXXX.

13. Each of the Original Trusts was subject to the application of the provisions of subsection 104(4) on XXXXXXXXXX.

14. Each Original Trust is a "personal trust" as defined in subsection 248(1).

15. Subject to the possibility of divestment in the event a Child dies before the final distribution of the property of the Original Trusts, immediately before the proposed transactions each Child has beneficial ownership in one-fifth (1/5) of each of the following properties:

XXXXXXXXXX.

Proposed Transactions

16. The Trustees will make an application to XXXXXXXXXX under the provisions of section 42 of the Trustee Act for the revocation and resettlement of the Original Trusts. This application will seek approval of the Proposed Arrangement.

17. The Proposed Arrangement will be entered into between the Trustees, the five Children, their respective spouses, and any adult issue of the Children. The XXXXXXXXXX will be asked to consent on behalf of all other interested parties.

18. Under the Proposed Arrangement, the original Trustees of each Original Trust will resettle one-fifth (1/5) of each of the properties described in paragraph 16 above on each New Trust in accordance with the terms of the New Trust as described in paragraph 20 below. The Original Trusts will not receive any consideration as a result of the resettlements. The resettlements will take place simultaneously and the entire property of the Original Trusts will be resettled on the New Trusts.

19. The terms of each New Trust will be substantially the same as the terms of the Original Trusts except as follows:

a) Each New Trust will have one named beneficiary, being one of the five Children, and will have several contingent beneficiaries, being the spouse of that Child and the issue of that Child. In the event that the Child who is a beneficiary of a particular New Trust dies before the date of any particular distribution of income or capital from that New Trust, the trustee of the New Trust will have the discretion to pay any portion of the net income of the New Trust to the surviving spouse of that Child or add it to the capital of the New Trust, in the same manner as the Trustees currently have with respect to distributions to a Child under the Original Trusts. Upon the death of the Child, or if the Child has a spouse at the time of his or her death, upon the later of that spouse's remarriage or death, the property of the New Trust will be distributed to the issue of the Child who are alive at that time in equal shares per stirpes. In the event that none of the issue of the Child are alive at such time, the trustees of the remaining New Trusts settled for the siblings of the Child will be entitled to receive an equal distribution and should any New Trust have to ceased to exist at that time, the beneficiaries of the New Trust that has ceased to exist shall share, in accordance with their respective interests in that New Trust at the time it ceased to exist, in the proportion that they would have been entitled to receive from the trustees of the New Trust had it been in existence.

b) In the event that a trustee of the New Trust dies or resigns as trustee and the terms of the New Trust do not specify the replacement trustee for that particular trustee, the remaining trustees will appoint a replacement trustee rather than have such replacement trustee appointed by the accounting firm of the Trust. This simplifies the method by which replacement trustees are appointed if the need should arise.

20. Immediately following the proposed transactions and subject to the possibility of divestment in the event a Child dies before the final distribution of the property from the New Trust, each Child will have 100% of the beneficial ownership in each of the Assets held by the respective New Trust on behalf of that Child.

21. The value of each Child's beneficial ownership in each Asset held by the New Trust immediately after the resettlement will be the same as the value of each Child's beneficial ownership in each Asset held by any of the Original Trusts immediately before the resettlement.

22. Immediately following the proposed transactions, the rights of any other contingent beneficiary, including the spouse of the Child, the issue of the Child, the New Trusts or the trusts established by the Grandfather for the brother and sister of the Father will be the same as under the Original Trusts.

23. The Trustees will file final income tax returns for the Original Trusts within XXXXXXXXXX days of the date of the transfer from the Original Trusts to the New Trusts. Upon receipt of confirming notices of assessment, the Trustees will request clearance certificates for distribution purposes pursuant to subsection 159(2).

Purpose of the Proposed Transactions

24. The Trustees believe that it is in the interests of all of the beneficiaries of the Original Trusts to separate the property of the Original Trusts into the five New Trusts because:

a) it will permit separation of the financial interests of each of the Children and their issue from those of their siblings and their siblings' issue;

b) it will allow each of the Children, through their respective New Trusts, to pursue their own investment strategies, reflective of their respective risk tolerances and will help to insulate the other Children and their issue from adverse investment experience in one or more trusts; and

c) it will allow each of the Children to respond more appropriately to the individual needs and opportunities of their respective children.

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. Paragraph 107.4(2)(a) will apply to the transfer of Assets from each of the Original Trusts to each of the New Trusts such that for the purposes of paragraph 107.4(1)(a), the transfers will not result in any change in the beneficial ownership of the Assets of the Original Trusts which are transferred to the New Trusts.

B. The transfer of the Assets held by each of the Original Trusts to each of the New Trusts will constitute a "qualifying disposition" as described in subsection 107.4(1).

C. The provisions of subsection 107.4(3) will apply to the transfer of Assets held by each of the Original Trusts to each of the New Trusts and to the beneficiaries.

D. Subsection 104(5.8) will apply and result in the application of subsection 104(4) to each of the New Trusts on the same date that subsection 104(4) would have applied to the Original Trusts.

E. The Proposed Transactions will not, in and by themselves, result in the application of the provisions of subsection 105(1).

F. The Proposed Transactions will not, in and of themselves, cause subsection 75(2) to apply to attribute to any person, any of the income or loss and any taxable capital gain or allowable capital loss from Assets transferred to the New Trusts and property substituted therefore.

G. The proposed transactions will not, in and by themselves, cause the New Trusts to fail to meet the definition of "personal trust" in subsection 248(1).

H. Subsection 245(2) will not be applied to redetermine the tax consequences of the rulings given above solely as a result of the proposed transactions described in this ruling.

Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those described in the ruling given. In particular, the Canada Revenue Agency has not reviewed nor made a determination in respect of the application of subsection 104(2) to the three Original Trusts or the five New Trusts. 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 CRA provided that Proposed Arrangement is completed within six months of the date of this letter. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act.

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