2006 Ruling 2006-0191431R3 - merging of 3 identical family 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: 1. Does 75(2) apply on a trust to trust transfer solely by reason that some of the trustees of the transferor trust may form some of the trustees of the transferee trust (assuming that no other reason exists which would cause 75(2) to apply)?

2. Will 107.4 apply on the merging of the assets of the original 3 trusts into 1 single trust where the terms of all 3 trusts are virtually identical?

Position: 1. No 2. 107.4(2)(a) applies to ensure that there is no change in beneficial ownership such that the transfer is a qualifying disposition.

Reasons: 1. Past rulings such as ruling D of 2002-0136336: 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. See also 2005-014336

2. Previous rulings dealt with the splitting of assets of one or more trusts into separate trusts for each beneficiary of the original trust or trusts. Rulings were given on the basis that no change in beneficial ownership occurred (and that the other conditions in 107.4 were met). In the present case, the proposal is to merge 3 trusts that have virtually identical terms and under which each beneficiary has an identical interest. The 2 differences identified between the terms of the various trusts were so insignificant as to arguably not result in any change of beneficial ownership. In addition, the transfers will meet the criteria in 107.4(2)(a) such that there is deemed to be no change in beneficial ownership

XXXXXXXXXX 								2006-019143

Attention: XXXXXXXXXX

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
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 trust agreements for Trust A, Trust B and Trust C. 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:

"Child" means any of Child1, Child2, Child3 or Child4 individually;

"Child1" means XXXXXXXXXX;

"Child2" means XXXXXXXXXX;

"Child3" means XXXXXXXXXX;

"Child4" means XXXXXXXXXX;

"Children" means Child1, Child2, Child3 or Child4 collectively;

"Distribution Date" of any subtrust established with any part of the capital of Trust A means the earlier of the date on which a grandchild or remoter issue of Settlor attains the age of XXXXXXXXXX , or the date which is XXXXXXXXXX years after the death of the Settlor and all the Children and the XXXXXXXXXX adult children of Child1, and in respect of any subtrust established with any part of the capital of Trust B means the earlier of the date on which a grandchild or remoter issue of the Surviving Spouse attains the age of XXXXXXXXXX, or the date which is XXXXXXXXXX years after the death of the Surviving Spouse and all the Children and the XXXXXXXXXX adult children of Child1, and in respect of any subtrust established with any part of the capital of Trust C means the earlier of the date on which a grandchild or remoter issue of the Settlor attains the age of XXXXXXXXXX, or the date which is XXXXXXXXXX years less a day after the death of the Child that is the parent or grandparent of that grandchild or remoter issue;

"Professional Trustee" means XXXXXXXXXX, a Canadian resident company licensed to carry on business in Canada as a trust company;

"Resettlement Power" in respect of a Trust means the power to appoint or resettle the property of the Trust to other settlements;

"Settlor" means XXXXXXXXXX, the settlor of Trust C who died on XXXXXXXXXX;

"Surviving Spouse" means XXXXXXXXXX, the surviving spouse of Settlor;

"Trust A" means the XXXXXXXXXX, an inter vivos personal trust established by Settlor on XXXXXXXXXX, as more fully described in paragraphs 6 to 8 below;

"Trust B" means the XXXXXXXXXX, an inter vivos personal trust settled by Surviving Spouse on XXXXXXXXXX, as more fully described in paragraphs 9 to 11 below;

"Trust C" means the XXXXXXXXXX, an inter vivos personal trust settled by Settlor on XXXXXXXXXX, as more fully described in paragraphs 12 to 15 below; and

"Trust" means any of Trust A, Trust B or Trust C, individually or collectively as appropriate in the context.

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

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

Facts

1. The Children are all adults and represent all of the children of the Surviving Spouse and Settlor.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

4. XXXXXXXXXX.

5. XXXXXXXXXX.

6. On XXXXXXXXXX, the Settlor established Trust A. The dispositive provisions of Trust A as set out in the trust agreement are as follows:

(a) The initial property settled on Trust A and all property subsequently contributed to Trust A is to be divided into as many equal shares as there shall be the Children living at the time of the particular contribution. Each share is to be held in trust for a Child for whom it was set aside and also for the issue of such child of Settlor.

(b) During the life of the Child, the trustees of Trust A are directed to divide all of the income earned from a Child's share among the Child and his or her issue then living as the trustees of Trust A in their discretion decide at that time. The trustees of Trust A are not permitted to accumulate income. The trustees of Trust A are authorized to make payments out of the capital of a Child's share to the Child to provide for emergencies such as illness or accident or for their education.

(c) Upon the death of a Child, the capital of the Child's share is to be divided in equal shares per stirpes among the surviving issue of that Child. If the Child is not survived by any issue, the capital of the Child's share is to be divided upon his or her death in equal shares per stirpes among the issue of Settlor then living.

(d) If a grandchild or remoter issue of Settlor becomes entitled to any part of the capital of Trust A before he or she has attained the age of XXXXXXXXXX years, the trustees of Trust A are directed to resettle such capital on a subtrust for that grandchild or remoter issue. The trustees of Trust A will be the trustees of any subtrust so established and they are directed to invest the capital and to pay or apply all or so much of the income derived therefrom as they in their uncontrolled discretion deem necessary or advisable to or for the benefit of such grandchild or remoter issue until the Distribution Date of the subtrust. Any income not paid out to such grandchild or remoter issue in any year is to be accumulated and dealt with as part of the capital of the subtrust. Upon the Distribution Date of the subtrust the capital held in trust for the grandchild or remoter issue is to be paid to him or her. If the grandchild or remoter issue dies prior to this date, the capital held in trust for him or her is to be divided among the surviving issue of that grandchild or remoter issue in equal shares per stirpes. The trustees of any such subtrust are authorized to make payments out of the capital held for a grandchild or remoter issue of Settlor to provide for emergencies such as illness or accident or for their education.

7. The original trustees of Trust A were the Surviving Spouse and Professional Trustee. Child4 was appointed a trustee by Deed on XXXXXXXXXX. Child1, Child2 and Child3 were appointed as trustees of Trust A on XXXXXXXXXX. Child4 resigned as trustee of Trust A on XXXXXXXXXX. The current trustees of Trust A are the Surviving Spouse, Professional Trustee, Child1, Child2 and Child3. The terms of Trust A require a majority decision of the trustees for all decisions concerning trust property.

8. All of the Children were born prior to the establishment of Trust A and are all currently alive. The current fair market value of the property held by the Trust A is approximately $XXXXXXXXXX .

9. On XXXXXXXXXX, the Surviving Spouse settled Trust B. The dispositive provisions of Trust B are identical to the dispositive provisions of Trust A, except that the beneficiaries of Trust B, who are identical to the beneficiaries of Trust A, are described with reference to the Surviving Spouse rather than with reference to the Settlor. In particular, the dispositive provisions of Trust B provide as follows:

(a) The initial property settled on the Trust B and all property subsequently contributed to the Trust B is to be divided into as many equal shares as there shall be children of the Surviving Spouse living at the time of the particular contribution. Each share is to be held in trust for the child of the Surviving Spouse for whom it was set aside and also for the issue of such child of the Surviving Spouse.

(b) During the life of the Child, the trustees are directed to divide all of the income earned from a Child's share among the Child and his or her issue then living as the trustees of Trust B in their discretion decide at that time. The trustees of Trust B are not permitted to accumulate income. The trustees of Trust B are authorized to make payments out of the capital of a Child's share to the Child to provide for emergencies such as illness or accident or for their education.

(c) Upon the death of a Child, the capital of the Child's share is to be divided in equal shares per stirpes among the surviving issue of the Child. If a Child is not survived by issue, the capital of the Child's share is to be divided upon his or her death in equal shares per stirpes among the issue of the Surviving Spouse then living.

(d) If a grandchild or remoter issue of the Surviving Spouse becomes entitled to any part of the capital of the Trust B before he or she has attained the age of thirty years, the trustees of Trust B are directed to resettle such capital on a subtrust for that grandchild or remoter issue. The trustees of Trust B will be the trustees of any subtrust so established and they are directed to invest the capital and to pay or apply all or so much of the income derived therefrom as they in their uncontrolled discretion deem necessary or advisable to or for the benefit of such grandchild or remoter issue until the Distribution Date of the subtrust. Any income not paid out to such grandchild or remoter issue in any year is to be accumulated and dealt with as part of the capital of the subtrust. Upon the Distribution Date of the subtrust the capital held in trust for him or her is to be paid to the grandchild or remoter issue. If the grandchild or remoter issue dies prior to this date, the capital held in trust for him or her is to be divided among the surviving issue of that grandchild or remoter issue in equal shares per stirpes. The trustees of any such subtrust are authorized to make payments out of the capital held for a grandchild or remoter issue of the Surviving Spouse to provide for emergencies such as illness or accident or for their education.

10. The original trustees of Trust B were Settlor, Child4 and Professional Trustee. Child1, Child2 and Child3 were appointed trustees of Trust B on XXXXXXXXXX. Child4 resigned as trustee of Trust B by a deed executed on XXXXXXXXXX. The current trustees of Trust B are Child1, Child2, Child3 and Professional Trustee. The terms of Trust B require a majority decision of the trustees for all decisions concerning trust property.

11. All of the Children were born prior to the establishment of Trust B and are all currently alive. The current fair market value of the property held by the trustees of Trust B under the terms of Trust B is approximately $XXXXXXXXXX.

12. On XXXXXXXXXX, the Settlor settled Trust C. The dispositive provisions of Trust C provide for how the property of Trust C is to be distributed both before and after the time of division, which is the earliest of:

(a) the day before the XXXXXXXXXX anniversary of the establishment of Trust C;

(b) such date selected by the trustees of Trust C; and

(c) the date of death of the Settlor.

13. Since Settlor is now deceased, the relevant dispositive provisions currently governing the trust are those governing the distribution of the trust fund after the time of division described in paragraph 12 above. These provisions are identical to those governing Trust A. In particular, the relevant dispositive provisions of Trust C provide as follows:

(a) The capital of Trust C remaining at the time of division and all property subsequently contributed to Trust C is to be divided into as many equal shares as there shall be Children then living. Each share is to be held in trust for the Child for whom it was set aside and also for the issue of such Child.

(b) During the life of the Child, the trustees of Trust C are directed to divide all of the income earned from a Child's share among the Child and his or her issue then living as the trustees of Trust C in their discretion decide in each year. The trustees of Trust C are not permitted to accumulate income. The trustees of Trust C are authorized to make payments out of the capital of a Child's share for the benefit of the Child and his or her issue to provide for emergencies such as illness or accident or for their education.

(c) Upon the death of a Child, the capital of the Child's share is to be divided in equal shares per stirpes among the surviving issue of the Child. If a Child is not survived by issue, the capital of the Child's share is to be divided upon his or her death in equal shares per stirpes among the issue of Settlor then living.

(d) If a grandchild or remoter issue of Settlor becomes entitled to any part of the capital of Trust C before he or she has attained the age of XXXXXXXXXX years, the trustees of Trust C are directed to resettle such capital on a subtrust for that grandchild or remoter issue. The trustees of Trust C will be the trustees of any subtrust so created and they are directed to invest the capital and to pay or apply all or so much of the income derived therefrom as they in their uncontrolled discretion deem necessary or advisable to or for the benefit of such grandchild or remoter issue until the Distribution Date of the subtrust. Any income not paid out to such grandchild or remoter issue in any year is to be accumulated and dealt with as part of the capital of the subtrust. Upon the Distribution Date of the subtrust the capital held in trust for him or her is to be paid to the grandchild or remoter issue. If the grandchild or remoter issue dies prior to this date, the capital held in trust for him or her is to be divided among the surviving issue of that grandchild or remoter issue in equal shares per stirpes. The trustees of any such subtrust are authorized to make payments out of the capital held for a grandchild or remoter issue of the Settlor as they in their uncontrolled discretion deem necessary or advisable to or for the benefit of such grandchild or remoter issue.

14. The original and current trustees of Trust C are the Surviving Spouse, Child1 and Child2. The terms of Trust C require a majority decision of the trustees for all decisions concerning trust property.

15. All of the Children were born prior to the establishment of Trust C and are all currently alive. The current fair market value of the property held by the trustees of Trust C under the terms of Trust C is approximately $XXXXXXXXXX.

16. Under the terms of the Trust, the trustees of Trust A and the trustees of Trust B, are provided with the Resettlement Power in respect of Trust A and Trust B respectively.

17. Of the current trustees for each of Trust A, Trust B and Trust C all but Child1 are resident in Canada for purposes of the Act.

18. The ascertained beneficiaries of Trust A, Trust B and Trust C are identical. The beneficial entitlements of these beneficiaries under Trust A, Trust B and Trust C are also identical. The potential unborn and unascertained beneficiaries of Trust A, Trust B and Trust C are identical. The beneficial entitlements of these potential beneficiaries under Trust A, Trust B and Trust C are also identical.

19. There is a degree of overlap between the current trustees of Trust A and the current trustees of Trust C. In particular, XXXXXXXXXX the current trustees of Trust A are also current trustees of Trust C and represent all the current trustees of Trust C.

20. There is a degree of overlap between the current trustees of Trust B and the current trustees of Trust C. In particular, XXXXXXXXXX current trustees of Trust C are current trustees of Trust B and represent XXXXXXXXXX of the current trustees of Trust B.

21. Trust A, Trust B and Trust C have not directly or indirectly received any property from any of the beneficiaries of Trust A, Trust B or Trust C.

Proposed Transactions

22. It is proposed that Trust A, Trust B and Trust C be consolidated. The consolidation of the trusts will be carried out as follows:

(a) The current trustees of Trust A will exercise the Resettlement Power as contained in article XXXXXXXXXX of the trust agreement of Trust A to resettle the assets of Trust A on the current trustees of Trust C to be held pursuant to the terms of Trust C. As a result of this transaction, the assets of Trust C are expected to increase from $XXXXXXXXXX to $XXXXXXXXXX. All of the property of Trust A will be resettled on Trust C on the same day. Upon the transfer of the assets of Trust A to Trust C, Trust A will be wound up following the filing of the appropriate income tax returns and the receipt of a clearance certificate from Canada Revenue Agency.

(b) The current trustees of Trust B will exercise the Resettlement Power as contained in article XXXXXXXXXX of the trust agreement of Trust B to resettle the assets of Trust B on the current trustees of Trust C to be held pursuant to the terms of Trust C. As a result of this transaction, the assets of Trust C are expected to increase from $XXXXXXXXXX to $XXXXXXXXXX. All of the property of Trust B will be resettled on Trust C on the same day. Upon the transfer of the assets of Trust B to Trust C, Trust B will be wound up following the filing of the appropriate income tax returns and the receipt of a clearance certificate from Canada Revenue Agency.

23. Given the uniformity of beneficiaries and dispositive provisions among Trust A, Trust B and Trust C, the proposed transactions will not result in a change of any beneficiary's beneficial entitlement to any property held by Trust A, Trust B or Trust C.

24. In particular, the value of each beneficiary's beneficial ownership in each property held in Trust C immediately after the resettlement will be the same as the value of each beneficiary's beneficial ownership in each property held by any of Trust A, Trust B or Trust C immediately before the resettlement.

25. Immediately following the proposed transactions, the rights of any contingent beneficiary, including the rights of any of the issue of any Child under a trust to be established out of the assets of Trust C upon the death of a Child, will be the substantially the same as they were under Trust A or Trust B.

26. Neither Trust A nor Trust B will make the election in subparagraph 107.4(3)(a)(i) of the Act.

Purpose of the Proposed Transactions

27. The purpose of the proposed transaction is to simplify the manner in which the family's financial circumstances are managed; and reduce ongoing administrative expenses.

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 transfer of all of the properties of Trust A to Trust C as described in paragraph 22 above, will not, in and by itself, give rise to the application of subsection 75(2) of the Act.

B. The transfer of all of the properties of Trust B to Trust C as described in paragraph 22 above, will not, in and by itself, give rise to the application of subsection 75(2) of the Act.

C. The transfer of all the property of Trust A to Trust C will be a "qualifying disposition" pursuant to subsection 107.4(1) of the Act.

D. The transfer of all the property of Trust B to Trust C will be a "qualifying disposition" pursuant to subsection 107.4(1) of the Act.

E. The provisions of subsection 107.4(3) will apply to the transfer of all the property of Trust A to Trust C.

F. The provisions of subsection 107.4(3) will apply to the transfer of all the property of Trust B to Trust C.

These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act.

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 proposed transactions as described in paragraph 22 above, are completed within six months of the date of this letter. Nothing in this advance income tax ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed the fair market value or adjusted cost base of any property referred to herein, or any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

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