11 September 2006 Roundtable, 2006-0185601C6 - 2006 STEP Conference -Question 17

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 bare trust is not recognized for the purpose of the Act because subsection 104(1) of the Act profides that, in situations where the trustee can reasonably be considered to act as agent for all the beneficiaries in respect of all dealings with the trust property and the trust is not a trust described in any of paragraphs (a) to (e.1) of the definition "trust" in subsection 108(1), the arrangement is not considered to be a trust for all but a few purposes of the Act. When an individual transfers property to a bare trust, no disposition is recognized because there is no change in beneficial ownership. However, paragraph (b)(v) of the definition of "disposition" in subsection 248(1) of the Act has the effect of creating a disposition when the trustee of a bare trust ceases to act as such in respect of the trust property. One interpretation of this provision would result in a disposition whenever a bare trustee distributes the property back to the sole beneficiary of the turst who is also the sole contributor to the trust. Can you comment on this?

Position: No disposition arises on the distribution of the trust's property to the contributor who is the beneficiary of the bare trust.

Reasons: Since paragraph (e) of the definition is not one of the provisions for which a bare trust is considered to be a trust, the exceptions in paragraph (e) will not apply to the distribution of the bare trust's property to the contributor-beneficiary. Since there is no change in the beneficial ownership as a result of the distribution, paragraph (e) will apply and the distribution will not result in a disposition. If a trusee ceases to act as agent for all the beneficiaries in respect of all dealings with the trust property without a distribution to the beneficiary, subparagraph (b)(v) will operate to ensure that a disposition arises at the time. Also, a disposition will arise at any time when there is any change in beneficial ownership that is not covered by the exception in paragraph (e) of the definition of disposition (such as the transfer of property from one person to a bare trust for another person.

2006 STEP Round Table
Q.17 Distribution of Property from a Bare Trust

A bare trust is not recognized for the purpose of the Act because subsection 104(1) of the Act provides that, in situations where the trustee can reasonably be considered to act as agent for all the beneficiaries in respect of all dealings with the trust property and the trust is not a trust described in any of paragraphs (a) to (e.1) of the definition "trust" in subsection 108(1), the arrangement is not considered to be a trust for all but a few purposes of the Act. When an individual transfers property to a bare trust, no disposition is recognized because there is no change in beneficial ownership. However, paragraph (b)(v) of the definition of "disposition" in subsection 248(1) of the Act has the effect of creating a disposition when the trustee of a bare trust ceases to act as such in respect of the trust property. One interpretation of this provision would result in a disposition whenever a bare trustee distributes the property back to the sole beneficiary of the trust who is also the sole contributor to the trust. Can you comment on this?

Response

The short answer is that there is no disposition in the situation you describe because of paragraph (e) of the definition of disposition in subsection 248(1) of the Act. A more complete explanation of our analysis is available in CRA document 2006-0174831E5.

In general terms, subsection 104(1) of the Act provides that, in situations where the trustee can reasonably be considered to act as agent for all the beneficiaries in respect of all dealings with the trust property and the trust is not a trust described in any of paragraphs (a) to (e.1) of the definition "trust" in subsection 108(1) of the Act, the arrangement is not considered to be a trust for all but a few purposes of the Act. For the purpose of our response, we will refer to this trust as a bare trust.

Subparagraph (b)(v) of the definition of "disposition" in subsection 248(1) of the Act provides that for the purposes of the Act, a disposition includes an event by which a trustee of such a trust ceases to act as agent for any of the beneficiaries in respect of any dealing with the trust property.

While a "disposition" as defined in subsection 248(1) of the Act includes the transactions and events described in paragraphs (a) to (d) of that definition, it does not include the transactions and events described in paragraphs (e) to (m) of that definition. Since paragraph (e) of the definition of "disposition" is not one of the provisions for which a bare trust is considered to be a trust, the transfer of property by a person to a bare trust under which that person is the sole beneficiary or the transfer of that property back to that person from such a trust would not result in a disposition for the purposes of the Act.

If, however, the nature of the trustee's role with respect to the trust property held on behalf of a beneficiary changes such that subparagraph (b)(v) of the definition of disposition in subsection 248(1) of the Act applies but the trustee retains the trust property (i.e., the trustee takes on the active duties of being a trustee), paragraph (e) would not apply as no actual transfer has taken place. In such a situation involving a beneficiary who is also the settlor of the trust, the beneficiary\settlor would recognize a disposition of the property to the trust at that time, even though the actual transfer to the trustee occurred at an earlier time.

Note that while a bare trust can be established for someone other than the settlor, the transfer of property from the settlor to such a bare trust would result in a change of beneficial ownership and thus the settlor would be required to recognize the gain or loss arising from the disposition of property at that time.