2007 Ruling 2006-0196501R3 - 21 year rule 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: Application of 104(4)

Position: Not applicable

Reasons: Vested interest

XXXXXXXXXX 									2006-019650

XXXXXXXXXX, 2007

Dear Sir,

Re: Advance Income Tax Ruling
XXXXXXXXXX - Tax Number XXXXXXXXXX (XXXXXXXXXX Tax Services Office, XXXXXXXXXX Tax Centre);
XXXXXXXXXX : SIN : XXXXXXXXXX (XXXXXXXXXX Tax Services Office, XXXXXXXXXX Tax Centre;
XXXXXXXXXX : SIN :XXXXXXXXXX (XXXXXXXXXX Tax Services Office, XXXXXXXXXX Tax Centre

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

We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:

a) dealt with in an earlier return of the taxpayer or a related person;

b) 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;

c) under objection by one or any of the taxpayers or a related person;

d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and

e) the subject of a ruling previously issued by this Directorate.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.l (5th supp.), as amended, and unless otherwise stated, every reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "Adult Grandchild" means any one of the Adult Grandchildren of the Settlor individually;

(c) "Adult Grandchildren" means all the grandchildren of the Settlor who will have attained the age of majority on the Distribution Date, including but without limiting the foregoing: XXXXXXXXXX;

(d) "Beneficiary" means any one of the Grandchildren of the Settlor who become entitled to receive a distribution from the Trust on the Distribution Date and in a case of a Minor Grandchild includes a trust created for the benefit of the Minor Grandchild on Distribution Date;

(e) "Beneficiaries" means all of the Grandchildren of the Settlor who become entitled to receive a distribution from the Trust on the Distribution Date and in a case of the Minor Grandchildren include all trusts created for the benefit of the Minor Grandchildren on Distribution Date;

(f) "Child" means any one of the five children of the Settlor individually;

(g) "Child1's Spouse" means XXXXXXXXXX , the legally married spouse of Child1;

(h) "Children" means the five children of the Settlor who are XXXXXXXXXX (Child1), XXXXXXXXXX (Child2), XXXXXXXXXX (Child3), XXXXXXXXXX (Child4) and XXXXXXXXXX (Child5);

(i) "Child1's Release and Surrender" means the Deed of disclaimer, release and surrender to be signed by Child1 prior to the Termination Date;

(j) "Child1's Spouse Release and Surrender" means the Deed of disclaimer, release and surrender to be signed by Child1's Spouse prior to the Termination Date;

(k) "Distribution Date" means XXXXXXXXXX or any earlier date determined by the Trustees, pursuant to sub-paragraph (ii) of the definition of the expression "Termination Date" at the paragraph 1(i) of the Trust Indenture;

(l) "Fund" means any one of the five shares of the capital of the Trust Fund, hereinafter Fund1, Fund2, Fund3, Fund4 and Fund5;

(m) "Fund1" means the share of the capital of the Trust Fund established for the benefit of Child1 XXXXXXXXXX pursuant to the Trust Indenture;

(n) "Fund2" means the share of the capital of the Trust Fund established for the benefit of Child2 XXXXXXXXXX pursuant to the Trust Indenture;

(o) "Fund3" means the share of the capital of the Trust Fund established for the benefit of Child3 XXXXXXXXXX pursuant to the Trust Indenture;

(p) "Fund4" means the share of the capital of the Trust Fund established for the benefit of Child4 XXXXXXXXXX pursuant to the Trust Indenture;

(q) "Fund5" means the share of the capital of the Trust Fund established for the benefit of Child5 XXXXXXXXXX pursuant to the Trust Indenture;

(r) "Grandchild" means any one of the Grandchildren of the Settlor individually;

(s) "Grandchildren" means all the grandchildren of the Settlor who are, at the date of this letter, XXXXXXXXXX;

(t) "Minor Grandchild" means any one of the Minor Grandchildren of the Settlor individually;

(u) "Minor Grandchildren" means all the Grandchildren of the Settlor who will not have attained the age of majority on the Distribution Date, including but without limiting the foregoing: XXXXXXXXXX ;

(v) "Release" means the Deed of disclaimer, release and surrender signed by Child1 on XXXXXXXXXX in respect of which XXXXXXXXXX was issued;

(w) "Representatives" means XXXXXXXXXX;

(x) "Settlor" means XXXXXXXXXX, a resident of Canada;

(y) "Termination Date" has the meaning ascribed to it in paragraph 1(i) of the Trust Indenture;

(z) "Trust" means XXXXXXXXXX, a trust established by the Trust Indenture;

(aa) "Trust Fund" has the meaning ascribed to it in paragraph 1(k) of the Trust Indenture;

(bb) "Trust Indenture" means the document establishing the terms of XXXXXXXXXX settlement created on XXXXXXXXXX between the Settlor and XXXXXXXXXX , as trustee; and

(cc) "Trustees" means the trustees of the Trust. The initial Trustee of the Trust was XXXXXXXXXX . The current Trustees of the Trust are Child1, Child2, Child3, Child4 and Child5. The Trust and the Trustees are all residing in Canada except for Child2 who is a resident of XXXXXXXXXX.

FACTS

1. The Settlor has five children all of whom are currently over 18 years of age and are not under any legal disability.

2. Child1 is legally married to Child1's Spouse and has been co-habiting with Child1's Spouse since XXXXXXXXXX.

3. As at the date of this Ruling Request, Child1 has no children.

4. Child1's Spouse is no longer able to have children.

5. Child1 has no intention of adopting any children.

6. XXXXXXXXXX.

7. XXXXXXXXXX.

8. XXXXXXXXXX.

9. XXXXXXXXX.

10. All the Grandchildren reside in Canada.

11. Pursuant to paragraph 6(a) of the Trust Indenture, the Trust was established and shall be governed by and construed under the laws of the Province of XXXXXXXXXX.

12. The Trust resides in Canada and will be residing in Canada as of the Distribution Date.

13. The Trust is a "personal trust" as defined in subsection 248(1) of the Act.

14. Pursuant to paragraph 1(i) of the Trust Indenture, the Trustees may, in their absolute and uncontrolled discretion, determine the Termination Date.

15. On XXXXXXXXXX, for no consideration and without directing in any manner who is entitled to the capital interest of Fund1, Child1 executed the Release pursuant to which he disclaimed, released and surrendered, all of his right, title and interest to any capital distribution from the property of the Trust.

16. As a consequence of the Release, Child1 does not have any right, title or interest in any capital interest in the Trust or its properties and, in particular, in any capital interest in Fund1 or its properties.

17. The Trust filed a T3 Trust Income Tax and Information Return for each year from the date of its creation until XXXXXXXXXX inclusively (account number XXXXXXXXXX). For the years XXXXXXXXXX, five distinct trust returns were filed. The returns were filed in the names of the five trusts described below (being Fund1, Fund2, Fund3, Fund4 and Fund5 respectively):

- XXXXXXXXXX, a trust established by the Trust Indenture for the benefit of Child1 XXXXXXXXXX; its account number is XXXXXXXXXX;
- XXXXXXXXXX, a trust established by the Trust Indenture for the benefit of Child2 XXXXXXXXXX; its account number is XXXXXXXXXX;
- XXXXXXXXXX, a trust established by the Trust Indenture for the benefit of Child3 XXXXXXXXXX; its account number is XXXXXXXXXX;
- XXXXXXXXXX, a trust established by the Trust Indenture for the benefit of Child4 XXXXXXXXXX; its account number is XXXXXXXXXX; and
- XXXXXXXXXX, a trust established by the Trust Indenture for the benefit of Child5 XXXXXXXXXX; its account number is XXXXXXXXXX.

The filing of the five trust returns was prompted by a new interpretation of the Trust Indenture by the Representatives that each of Fund1, Fund2, Fund3, Fund4 and Fund5 was created in XXXXXXXXXX as a consequence of the Trust Indenture. The CRA does not recognize that the Trust Indenture created five trusts instead of one in XXXXXXXXXX. The Representatives and the Trustees accept that the Trust Indenture created a single trust in XXXXXXXXXX. No new trusts were in fact created at any time subsequent to the creation of the Trust in anticipation of any transfers of property of the Trust to any new trusts pursuant to article 6(d) of the Trust Indenture or otherwise. Moreover since XXXXXXXXXX, there were no transfers of the property of the Trust and no legal documentation of any kind exists (transfer agreements, trustee resolutions etc...) supporting a change in the ownership of the property of the Trust to any new trusts, except that the share certificates held by the Trust were registered in the name of the five trusts.

18. Pursuant to Article XXXXXXXXXX of the Trust Indenture, if a Child dies before the Termination Date without leaving any children or grandchildren then living, subject to the rights of any surviving spouse of the Child, that part of the Trust Fund attributable to the deceased Child shall accrue equally to the other Funds in respect of the other beneficiaries designated in Article XXXXXXXXXX of the Trust Indenture and the Trustees are required to deal with same as provided for in Article XXXXXXXXXX for such other Funds.

19. Pursuant to Article XXXXXXXXXX of the Trust Indenture, if the Termination Date occurs during the lifetime of a Child, the Trustees are required to distribute that part of the Trust Fund attributable to such Child's Fund among the legitimate and adopted children of the Child then living and the legitimate and adopted children of any children of the Child who have predeceased the Termination Date leaving children then living, in equal shares by roots. In the event there are no children or grandchildren of the Child alive at the Termination Date, the capital of the Child's Fund is to be paid and transferred to the Child.

20. Pursuant to Article XXXXXXXXXX of the Trust Indenture, in the event that a Minor Grandchild becomes entitled to receive on Distribution Date any distribution of property from the Trust, then the property to be distributed shall be invested by the Trustee in a new trust as a separate fund for the sole benefit of such Minor Grandchild. Until such Minor Grandchild attains the age of majority, the Trustees shall accumulate the income derived from the said property subject to a power to encroach on income and capital of the said separate fund, for the benefit of the said Minor Grandchild, at the discretion of the Trustees. No person other than the particular Minor Grandchild is entitled to any portions of the capital or income of such fund, and should said Minor Grandchild die before attaining the age of majority, then the fund shall be paid to the estate of the deceased Minor Grandchild.

21. Pursuant to subsection 104(4) of the Act, the Trust will be deemed to have disposed of its assets at the end of the day on XXXXXXXXXX.

PROPOSED TRANSACTIONS

22. On a date prior to the Termination Date, for no consideration and without directing in any manner who is entitled to the income interest of Fund1, Child1 will execute Child1's Release and Surrender, pursuant to which he will disclaim, release and surrender, all of his right, title and interest to any and all distributions of income not due and payable (inclusive of net income as such term may be defined in the Trust Indenture) derived from the Trust and, in particular, from Fund1.

23. On a date prior to the Termination Date, for no consideration and without directing in any manner who is entitled to the income and capital interests of Fund1, Child1's Spouse will execute Child1's Spouse Release and Surrender, pursuant to which she will disclaim, release and surrender, all of her right, title and interest to any and all capital distributions from the property of the Trust and, in particular, Fund1 and to any and all distributions of income not due and payable (inclusive of net income as such term may be defined in the Trust Indenture) derived from the Trust and, in particular, from Fund1.

24. As a consequence of the Release and Child1's Release and Surrender, Child1 will not have any right, title or interest in any capital or income interest in the Trust or its properties and, in particular, in any capital or income interest in Fund1 or its properties.

25. As a consequence of Child1's Spouse Release and Surrender, Child1's Spouse will not have any right, title or interest in any capital or income interest in the Trust or its properties and, in particular, in any capital or income interest in Fund1 or its properties.

26. As a result of Child1's Release and Surrender and Child1's Spouse Release and Surrender, the capital and income interests of the beneficiaries in Fund2, Fund3, Fund4 and Fund5 are accelerated. In particular, pursuant to Article XXXXXXXXXX of the Trust Indenture and coincident with Child1's Release and Surrender and Child1's Spouse Release and Surrender, that part of the Trust Fund attributable to Fund1 will accrue equally to the other Funds in respect of the other designated beneficiaries' capital and income interests in Fund2, Fund3, Fund4 and Fund5 and the Trustees will be required to and will deal with same as provided for in Article XXXXXXXXXX for Fund2, Fund3, Fund4 and Fund5.

27. On a date prior to the XXXXXXXXXX anniversary of the Trust, the Trustees will exercise their power and discretion, provided by paragraph XXXXXXXXXX of the Trust Indenture, to determine that the Distribution Date shall be the Termination Date of the Trust.

28. On the Distribution Date, the Trustees of the Trust will distribute the remaining Trust Fund (being Fund2, Fund3, Fund4 and Fund5) to its Beneficiaries, as described in paragraph 19 above, as a distribution in satisfaction of their respective capital interests in the Trust Fund.

29. To the extent that on the Distribution Date any Minor Grandchild is entitled to a part of the Trust Fund, pursuant to Article XXXXXXXXXX of the Trust Indenture, the Trustees will distribute the Minor Grandchild' share of the Trust Fund to a separate trust fund for the sole benefit of such Minor Grandchild. The nine newly created trusts will be Beneficiaries of the Trust and are referred to herein as the "Minor's Trust" and collectively as the "Minors' Trusts". The distribution to the Minors' Trusts will be in satisfaction of their capital interest in the Trust Fund. The terms of the Minors' Trusts are provided for in the provisions of Article XXXXXXXXXX of the Trust Indenture and provide that until such Minor Grandchild attains the age of majority, the Trustees shall accumulate the income derived from the Minor's Trust subject to a power to encroach on income and capital of the Minor's Trust, for the benefit of the Minor Grandchild, at the discretion of the Trustees. No person other than the particular Minor Grandchild is entitled to any portion of the capital or income of the Minor's Trust, and should the Minor Grandchild die before attaining the age of majority, then the Minor's Trust shall be paid to the estate of the deceased Minor Grandchild. The initial trustees of each of the nine Minors' Trusts will be the Trustees of the Trust in accordance with Article XXXXXXXXXX of the Trust Indenture.

30. Following the Distribution Date, the Trust will be wound up following the filing of the appropriate income tax returns and elections.

31. On or after the Distribution Date, the Trustees of each Minors' Trust will resign except for a trustee of a Minor's Trust who is an ascendant of the Minor Grandchild.

32. When a Minor Grandchild attains the age of majority, the Trustee shall distribute the Minor Grandchild 's share to such Minor Grandchild, as described in paragraph 20 above, as a distribution in satisfaction of such Minor Grandchild 's respective capital interest in the Minor's Trust. Following the date on which a Minor's Trust held for a Minor Grandchild is distributed in full ownership to such Minor Grandchild, that Minor's Trust will be wound up following the filing of the appropriate income tax returns and elections.

PURPOSE OF THE PROPOSED TRANSACTIONS

33. Since the Trust was settled on XXXXXXXXXX , pursuant to subsection 104(4) of the Act it will be deemed to have disposed of its capital properties at the end of the day which is XXXXXXXXXX years after XXXXXXXXXX.

34. Given the significant income tax costs that will be incurred by the Trust on a deemed disposition of its properties if the Trustees did not take any actions prior to that date, the Trustees of the Trust have concluded that it will be an appropriate time to distribute the property of the Trust to the Beneficiaries entitled thereto on the Distribution Date.

35. The main purpose of the proposed transactions is to distribute the Trust Fund to the Beneficiaries in order to mitigate the income tax consequences which will arise as a result of the deemed disposition of the Trust's properties, pursuant to subsection 104(4) of the Act.

RULINGS REQUESTED

Provided the above statements of Facts, Proposed Transactions and Purpose thereof are accurate and constitute complete disclosure of all relevant Facts and Proposed Transactions, our rulings are as follows:

A. The execution by Child1 of Child1's Release and Surrender, described in paragraph 22 above, will not result in Child1 being considered to have received any proceeds of disposition for purposes of subsection 106(2) of the Act.

B. Subsections 56(2), 56(4), 74.1(1), 74.1(2) and 106(3) of the Act will not apply in respect of the Proposed Transaction described in paragraph 22 above.

C. The execution by Child1's Spouse of Child1's Spouse Release and Surrender, described in paragraph 23 above, will not result in Child1's Spouse being considered to have received any proceeds of disposition for purposes of subsections 106(2), 40(1) and 107(1) of the Act.

D. Paragraph 69(1)(b) of the Act will not apply in respect of the Proposed Transaction, described in paragraph 23 above, to deem Child1's Spouse to have received proceeds of disposition equal to the fair market value of her interest in the Trust.

E. Subsections 56(2), 56(4), 74.1(1), 74.1(2) and 106(3) of the Act will not apply in respect of the Proposed Transaction described in paragraph 23 above.

F. For the purposes of the Act, the Trust will be deemed to be an individual in respect of the trust property pursuant to subsection 104(2), and any acceleration of the capital or income interests of any beneficiaries in their respective Fund under the Trust as a result of Child1's Release and Surrender and Child1's Spouse Release and Surrender will not give rise, in and of itself, to any disposition of the property of the Trust for the purposes of the Act. Moreover, the cost of the property of the Trust, for the purposes of the Act, will not be affected as a result of Child1's Release and Surrender and Child1's Spouse Release and Surrender.

G. Subject to subsections 107(2.001), (2.002) and (4.1) of the Act, subsection 107(2) of the Act will apply to the distribution of the assets of the Trust to the Beneficiaries as described in paragraphs 28 and 29 above, in particular, the distribution of the assets of Fund2, Fund3, Fund4 and Fund5 to their respective Beneficiaries including, in the case of a Minor Grandchild, a distribution, pursuant to Article 14 of the Trust Indenture, to the Minor's Trust for the sole benefit of such Minor Grandchild.

H. Subsection 104(4) of the Act will not apply to cause a deemed disposition of the assets of the Minor's Trust.

I. As a result of the Proposed Transaction described in paragraph 29 above, in and of by itself, the Minister will not make a designation pursuant to subsection 104(2) of the Act.

J. Subsection 245(2) of the Act will not apply as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

The rulings given herein are based solely on the Facts, Proposed Transactions and Purposes of the Proposed Transactions described above. Facts and Proposed Transactions in the documents submitted with your request not described above do not form part of the Facts and Proposed Transactions on which these rulings are based.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act. 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 described in the rulings given.

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 Canada Revenue Agency provided that the Proposed Transactions, except for those in paragraphs 30 and 32 above, are completed before XXXXXXXXXX.

Yours truly,

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