2007 Ruling 2006-0182881R3 - Gift of equitable interest in a 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: Whether the gift of an equitable interest in a testamentary spousal trust qualifies as a gift by will for the purposes of subsection 118.1(5).

Position: Yes.

Reasons: Based on the terms of the will, the conditions set out in IT-226R are met.

XXXXXXXXXX 							2006-018288

XXXXXXXXXX , 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

You advise that to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the ruling request:

i. is in an earlier return of the taxpayer or a related person;
ii. is being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayer or a related person;
iii. is under objection by the taxpayer 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 to the taxpayer by the Directorate.

Unless otherwise stated, all references to a statute are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the relevant definitions, facts, proposed transactions and their purposes is set out below.

DEFINITIONS

a) "Corporation" means XXXXXXXXXX,

b) "CRA" means the Canada Revenue Agency,

c) "Deceased" means the late XXXXXXXXXX,

d) "Estate" means the estate of the Deceased,

e) "Executors" means the Spouse and XXXXXXXXXX in their capacity as executors of the Estate,

f) "Foundation" means the XXXXXXXXXX,

g) "Primary Estate" means all property of the Deceased excluding those that form part of the Secondary Estate,

h) "Primary Will" means the last Will and Testament of the Deceased dated XXXXXXXXXX (as amended by XXXXXXXXXX) dealing with the assets which form part of the Primary Estate,

i) "Secondary Estate" means property of the Deceased as described in 11 below,

j) "Secondary Will" means the last Will and Testament of the Deceased dated XXXXXXXXXX dealing with the assets which form part of the Secondary Estate,

k) "Shares" means the common shares of the Corporation,

l) "Spouse" means XXXXXXXXXX,

m) "Trust 1" means the testamentary trust directed to be established with the assets remaining of the Secondary Estate for the benefit of the Surviving Spouse pursuant to the terms of clause XXXXXXXXXX of the Secondary Will,

n) "Trust 2" means the testamentary trust directed to be established with all stocks owned by the Deceased at the date of his death which are listed on any stock exchange in Canada or the United States for the benefit of the Spouse pursuant to the terms of clause XXXXXXXXXX of the Primary Will,

o) "Trust 3" means the testamentary trust directed to be established with the residue of the Estate for the benefit of the Spouse and the Foundation pursuant to the terms of clause XXXXXXXXXX of the Primary Will,

p) "Trusts" means Trust 1, Trust 2 and Trust 3, collectively, and

q) "Trustees" means the Spouse and XXXXXXXXXX in their capacity as trustees of Trust 1, Trust 2 and Trust 3.

FACTS

1) The Deceased was an individual resident in Canada prior to his death on XXXXXXXXXX.

2) The Spouse is a resident of Canada. She was born on XXXXXXXXXX.

3) The Estate's fiscal and taxation year-end is XXXXXXXXXX.

4) The Executors are both residents of Canada.

5) The Trustees are both residents of Canada.

6) The Foundation is a non-share capital corporation and its registered office is located in XXXXXXXXXX. It is a "private foundation" within the meaning of subsection 149.1(1) and its charitable registration number is XXXXXXXXXX.

7) The Corporation is a private corporation, a Canadian-controlled private corporation and a taxable Canadian corporation. Its registered office is located in XXXXXXXXXX and its business number is XXXXXXXXXX. The Corporation's taxation year-end is XXXXXXXXXX. It is served by the XXXXXXXXXX Tax Services Office and it files its tax returns with the XXXXXXXXXX Tax Centre.

8) The Corporation's authorized share capital consists of XXXXXXXXXX Shares and XXXXXXXXXX preference shares with a par value of $XXXXXXXXXX each. As of XXXXXXXXXX Shares were issued and outstanding.

9) The Deceased was the sole shareholder of the Corporation. You advise that the Shares were held by him as capital property for the purposes of the Act.

10) The assets of the Estate include the Shares and since the Deceased passed away on XXXXXXXXXX, the Shares are owned by the Estate. You advise that the Shares are capital property to the Estate for the purposes of the Act.

11) As of the date of death, the sole assets of the Secondary Estate were the Shares and a shareholder loan receivable from the Corporation of $XXXXXXXXXX. The shareholder loan receivable has been used to satisfy liabilities of the Estate.

12) In summary, the terms of clause XXXXXXXXXX of the Primary Will and clause XXXXXXXXXX of the Secondary Will provide that the Spouse is entitled to receive all of the net income that arises from Trust 1 and Trust 2 before her death with a precatory direction that she receive a minimum annual net income of $XXXXXXXXXX from Trust 1, Trust 2 and Trust 3 collectively. No person except the Spouse may, before her death, receive or otherwise obtain the use of any of the income of Trust 1 or Trust 2. If Trust 1 and Trust 2 are insufficient to provide for the minimum annual net income, a payment will be made out of the annual net income of Trust 3 of an amount equal to the lesser of the amount of the deficiency and the amount of the annual net income of Trust 3. If the annual net income of Trust 3 is not sufficient to satisfy the deficiency, no payment can be made out of the capital of any of the Trusts to satisfy such deficiency. While any annual net income from Trust 3 which is not paid to the Spouse to satisfy a deficiency, may in such year be paid to the Spouse or the Foundation in the Trustees' absolute discretion, the Deceased's wish was that XXXXXXXXXX% of the annual net income from Trust 3 be paid to the Foundation in each year. Any annual net income not paid to the Spouse or the Foundation is directed to be accumulated and added to the capital, provided that after XXXXXXXXXX years from XXXXXXXXXX, any such annual net income is directed to be paid to the Foundation.

13) Clause XXXXXXXXXX of the Primary Will and clause XXXXXXXXXX of the Secondary Will further provide that during the Spouse's lifetime the Trustees will not make any payment out of the capital of Trust 1, Trust 2 or Trust 3 to the Spouse or any other person. No person, including the Spouse, may receive any of the capital of Trust 1 or Trust 2.

14) Clause XXXXXXXXXX of the Secondary Will provides that on the death of the Spouse the residue of Trust 1 is directed to be paid to the Foundation for the general purposes of the Foundation. Clause XXXXXXXXXX of the Primary Will provides that on the death of the Spouse the residue of Trust 2 and Trust 3 is directed to be paid to the Foundation, if it is in existence, to form part of its capital. If the Foundation is not in existence, the residue is directed to be divided among one or more charitable organizations or foundations as the Trustees in their absolute discretion decide.

15) The direction to transfer the residue of Trust 1 to the Foundation on the Spouse's death is irrevocable, not subject to any discretion on the part of the Trustees and was voluntarily made by the Deceased with no expectation of benefit to the Deceased or a person designated by the Deceased. There are no conditions attached to the foregoing transfer to be satisfied by the Foundation.

16) The Executors have filed the Deceased's return of income for the year of his death (the "Terminal Return"). In the Terminal Return, the Executors reported the proceeds of disposition for all assets comprised in the Primary Estate and the Secondary Estate including, for greater certainty, the Shares to be vested in Trust 1, to be equal to their fair market value immediately before the Deceased's death.

PROPOSED TRANSACTIONS

17) Not later than XXXXXXXXXX months from the Deceased's death, the Executors will transfer the Shares to the Trustees in order to vest the Shares indefeasibly in Trust 1.

18) The Executors will provide the Foundation with a copy of the Secondary Will and will advise the Foundation in writing of its equitable interest in Trust 1 and the value of its equitable interest in Trust 1.

PURPOSE OF PROPOSED TRANSACTIONS

19) The purpose of the proposed transactions is to implement the terms of the Secondary Will to make a gift of the equitable interest in Trust 1 to the Foundation.

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, we confirm that:

A. Pursuant to subsection 118.1(5), the gift of the equitable interest in Trust 1 to the Foundation will, for the purposes of section 118.1, be deemed to have been made by the Deceased immediately before he died and, accordingly, provided the Foundation is a registered charity the fair market value of that gift to the Foundation will be included, subject to subsection 118.1(4), in determining the total charitable gifts of the Deceased for the XXXXXXXXXX taxation year if an official receipt containing prescribed information is filed as required by subsection 118.1(2).

B. The equitable interest in Trust 1 is not a non-qualifying security of the Deceased as defined in subsection 118.1(18).

C. Provided that the Deceased's legal representative has elected under subsection 70(6.2) in respect of the transfer of the Shares by the Estate to Trust 1, the transfer of the Shares will be governed by the provisions of subsection 70(5) such that:

a. the Deceased will be deemed, pursuant to paragraph 70(5)(a), to have disposed of such Shares immediately before his death and to have received proceeds of disposition equal to their fair market value immediately before his death; and

b. Trust 1 will be deemed, pursuant to paragraph 70(5)(b) to have acquired such Shares for an amount equal to the same amount.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

XXXXXXXXXX
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch