2007 Ruling 2006-0201561R3 - settlement of an estate

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. Will the amendments to the will, as set out in the Minutes of Settlement and as approved by the court, result in a resettlement of the Trusts or the Estate or a disposition of any of the property of the Estate?

2. Will the consent by the Beneficiaries, being the children and grandchildren of the Deceased, as part of the Minutes of Settlement result in a disposition of any of the their respective interests in the estate?

3. Assuming that the variation of the will results in no disposition of the property of either the trust or the estate, what provision governs the transfer of assets from the estate to the testamentary trusts?

4. Will the trust be a testamentary trust and a personal trust such that 107(2) will apply to any distribution to the beneficiaries?

5. Will the proposed transactions result in any income inclusion under 56(2), 105(1) or 246(1)?

Position: 1. No. 2. No 3. There is no disposition of property, either by operation of law or because of paragraph (f) of the definition of disposition 4. Yes. 5. No.

Reasons: 1. In as far as possible, given the uncertainty of the interpretation of the will, there is no substantial change to any of the entitlements under the will. This is consistent with prior positions taken.

2. Because of the uncertainty caused by the revocation, none of the beneficiaries have a provable right under the will. The Minutes of Settlement together with the approval of the Children's Lawyer and the Court will confirm the beneficiaries' entitlements under the will.

3. Given the stated fact that the trusts are not beneficiaries of the estate, no disposition will arise, either by operation of law or because the conditions in paragraph (f) of the definition of disposition are met.

4. Conditions necessary to meet the definition of personal trust and testamentary trust are met.

5. Since the proposed transactions do not involve the providing of any benefits to a taxpayer by a person or from or under the trusts, the provisions of subsections 105(1) and 246(1) of the Act will not apply as a result of the proposed transactions, in and by themselves. This is consistent with past positions. While subsection 56(2) does not specifically require a transfer of property in order to apply, this case can be distinguished from those in which 56(2) does apply because of the uncertainty in the interpretation of the will. Without certainty, it cannot be said that the heirs are in a position to concur or acquiesce in any subsequent transfer of estate or trust property.

XXXXXXXXXX 							2006-020156

Attention: XXXXXXXXXX

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: 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 following documents:

• copy of the will of XXXXXXXXXX, including the codicils dated XXXXXXXXXX and the document purporting to revoke the codicil dated XXXXXXXXXX; and
• draft Minutes of Settlement to be approved by the Court.

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 Child 1, Child 2 or Child 3, individually;

"Child 1" means XXXXXXXXXX, a child of the Deceased;

"Child 2" means XXXXXXXXXX, a child of the Deceased;

"Child 3" means XXXXXXXXXX, a child of the Deceased;

"Children" means Child 1, Child 2 and Child 3, collectively;

"Codicil A" means the two-page holograph codicil dated XXXXXXXXXX;

"Codicil B" means the one-page holograph codicil dated XXXXXXXXXX;

"Codicil C" means the one-page holograph codicil dated XXXXXXXXXX;

"Codicils" means Codicil A, Codicil B, Codicil C, collectively;

"Court Order" means the order of the XXXXXXXXXX Superior Court of Justice giving approval to the Minutes of Settlement;

"Court" means the XXXXXXXXXX Superior Court of Justice;

"Deceased" means XXXXXXXXXX;

"Estate" means the estate of XXXXXXXXXX;

"Friend" means XXXXXXXXXX, a resident of XXXXXXXXXX;

"Grandchild" means any of the Grandchildren, individually;

"Grandchildren" means XXXXXXXXXX;

(the minor children of Child 1); XXXXXXXXXX, (the adult children of Child 2); XXXXXXXXXX, (the minor children of Child 3), collectively;

"Minutes of Settlement" means the draft minutes of settlement to be approved by the Court;

"Parties" means the Trustees, the adult beneficiaries of the Estate, and the Children's lawyer of XXXXXXXXXX on behalf of minor or unborn beneficiaries;

"Revocation" means the one-page holograph revocation of Codicil A dated XXXXXXXXXX;

"Spouse" means the legal spouse of the Deceased, being XXXXXXXXXX from whom the Deceased had been separated since XXXXXXXXXX;

"Trust" means Trust1, Trust2, Trust3 and Trust4, individually;

"Trust1" means the trust created out of the estate for the issue of Child 1;

"Trust2" means the trust created out of the estate for the issue of Child 2;

"Trust3" means the trust created out of the estate for the issue of Child 3;

"Trust4" means the trust created out of the estate for the benefit of the Friend during his lifetime and for the Children and Grandchildren upon his death;

"Trustees" means the trustees of the Estate, being XXXXXXXXXX, a corporation resident in Canada, and Friend;

"Trusts" means Trust1, Trust2, Trust3 and Trust4, collectively; and

"Will" means the last will and testament of the Deceased dated XXXXXXXXXX as amended by the various Codicils and Revocation;

The relevant Taxation Services Office for the Estate, Trust1, Trust2, Trust3 and Trust4 is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX Centre.

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

Facts

1. The Deceased died on XXXXXXXXXX.

2. The Trustees were appointed pursuant to a Certificate of Appointment of Estate Trustee with a Will issued by the Court on XXXXXXXXXX. The taxation year of the Estate ends on XXXXXXXXXX.

3. The Deceased left a Will dated XXXXXXXXXX. Subparagraphs XXXXXXXXXX of the Will deal with the residue of the Estate, establishing testamentary trusts for the Children and their issue.

4. The relevant portions of subparagraph XXXXXXXXXX of the Will as originally written in XXXXXXXXXX may be summarized as follows:

(a) the residue of the Estate is to be divided equally into three Trusts for each of the Children (or the issue of any deceased Child where that Child predeceases the Deceased), with provision made for the payment of initially XXXXXXXXXX of the income earned by the Trust to or for a Child XXXXXXXXXX until XXXXXXXXXX and all of the income earned by the Trust XXXXXXXXXX to or for a Child for the remainder of that Child's lifetime;

(b) a distribution of $XXXXXXXXXX is to made to the Child on XXXXXXXXXX out of the capital of the Trust;

(c) the Trustees are permitted to encroach on the capital of a trust for a Child, in their sole discretion, for the purpose of ensuring appropriate medical care for that Child; and

(d) upon the death of a Child, the capital remaining in the Trust for that Child is to be divided among his or her children and the issue of any deceased children of that Child, with a provision that covers the situation where a Child leaves no issue.

5. If any part of the income or capital of a Trust created under the Will devolves upon a Grandchild under the age of XXXXXXXXXX, the terms of the Will as originally written in XXXXXXXXXX provide that that part is to be dealt with according to subparagraph XXXXXXXXXX of the Will, the relevant portions of which may be summarized as follows:

(a) the Trustees have the sole discretion to pay any part of the Grandchild's share of the income or capital of the Trust to the Grandchild until the Grandchild attains the age of XXXXXXXXXX , and thereafter the Trustees are directed to pay all of the Grandchild's share of the net income derived from the Trust to the Grandchild until he or she attains the age of XXXXXXXXXX at which time all of the Grandchild's share of the Trust's capital shall be paid to him or her;

(b) the Trustees are permitted to encroach on the capital of the Trust for the Grandchild, in their sole discretion, solely for the purposes of ensuring appropriate medical care and education for such Grandchild; and

(c) in the event the Grandchild dies before the age of XXXXXXXXXX, the issue of such deceased Grandchild would be the beneficiaries of that Grandchild's share and if there are no such issue, the Children and the issue of deceased Children would be the beneficiaries of such share.

6. In addition to the Will, the Deceased left the following testamentary documents:

Codicil A, the Revocation, Codicil B and Codicil C.

7. Codicil A revoked the residue clause in the Will in its entirety. The Revocation revoked Codicil A but did not substitute a replacement residue clause or expressly reinstate the original residue clause. As a result, there is uncertainty as to the proper distribution of the residue of the Estate.

8. Neither Codicil B nor Codicil C affects the distribution of the residue of the Estate in any significant way. Codicil B amends paragraph XXXXXXXXXX of the Will to provide that the contents of the Deceased's cottage are to be given to the Friend and then the cottage is to be sold. Codicil C amends paragraph XXXXXXXXXX of the Will by increasing the amount to be transferred to Trust4 from $XXXXXXXXXX to $XXXXXXXXXX and adding incidental directions which are not relevant to this ruling request. Codicil C states that certain amounts will be added to the residue of the Estate in the event that the Friend dies before the sale of a home acquired for his use during his lifetime.

9. The Deceased was survived by Friend, Children, Grandchildren and Spouse, all of whom, except the Spouse, are still living. The Friend, Children and Grandchildren are all resident in Canada.

10. No issue of the Deceased predeceased him.

11. The Children's Lawyer of XXXXXXXXXX has been appointed to act on behalf of the minor Grandchildren, all unborn persons and any other person who may become entitled to an interest at some future date in the Estate.

12. The Parties have reached a tentative agreement with respect to the distribution of the residue of the Estate.

Proposed Transactions

13. The Parties will enter into the Minutes of Settlement. Pursuant to the Minutes of Settlement, the Parties will apply to the Court to have the Will and the Trusts created under the Will varied in the following manner:

(a) Codicil A and its subsequent revocation will be ignored; andXXXXXXXXXX;

(b) the Estate will be administered as if the residue clause in paragraph XXXXXXXXXX of the Will remained in effect as originally set out in the Will, subject to the variation set out below:

(i) with respect to the residue of the Estate described in paragraph XXXXXXXXXX of the Will, the Children will be entitled to XXXXXXXXXX% of the residue such that each Child receives one-third of that amount, and XXXXXXXXXX % of the residue will be settled on the Trusts such that Trust1, Trust2 and Trust3 each receive one-third of that amount;

(ii.1) the Children will not be entitled to any of the income or capital of any of Trust1, Trust2 or Trust3;

(ii) references to the vesting of a Grandchild's share of the Estate described in paragraph 5(a) and (c) above will be changed from age XXXXXXXXXX to age XXXXXXXXXX;

(iii) subparagraph XXXXXXXXXX of the Will will be amended to provide that payments of income and capital for the benefit of a Grandchild will continue to be discretionary beyond age XXXXXXXXXX until the capital is distributed at age XXXXXXXXXX and that the Trustees are directed to take into account any other resources which the Trustees reasonably believe are, or should be, available to such Grandchild, including the means of his or her parents or guardians when considering making distributions to a Grandchild; and

(iv) the provision governing distribution of a Grandchild's share if he or she dies before the age of XXXXXXXXXX will be changed to delete members of his or her parent's generation as potential recipients of that Grandchild's share in the event that the Grandchild dies without issue before the final distribution from the Trust.

14. Following the death of the Friend, the residue of Trust4 that will be held for his benefit during his lifetime pursuant to paragraph XXXXXXXXXX of the Will as amended by Codicil C will be distributed as follows:

(i) XXXXXXXXXX% thereof will be divided equally among the Children, and if any of them is not then living, his or her share shall be paid to his or her personal representatives; and

(ii) the remainder of property of Trust4 will be administered for the issue of the each Child in accordance with paragraph XXXXXXXXXX as if such Child were then dead, and if any amount should devolve upon a person who is then under the age of XXXXXXXXXX years the provisions of paragraph XXXXXXXXXX as varied, will apply.

15. Each of the Children's respective proportionate entitlements under the Will remains unchanged after the proposed variations described in paragraph 13 and 14 above.

16. The Children's Lawyer of XXXXXXXXXX has expressed the view that the proposed variations described in paragraph 13 and 14 above will not significantly affect the rights of any of the minor Grandchildren, all unborn persons or any other person who may become entitled to an interest at some future date in the Estate.

17. The Court Order will approve the variation of the Will and will state that the variation to the Will does not create a revocation or resettlement of any of the Trusts established under the Will.

18. Upon obtaining the Court's approval for the variation of the Will, the Estate will be considered fully administered and the property of the Estate will be distributed among the Trusts in the manner specified in the Minutes of Settlement. The trustees of the Trusts will be the Trustees. The Trusts will receive the property on behalf of the Children and Grandchildren as the Trusts are not, themselves, beneficiaries of the Estate.

19. Immediately following the receipt of the Court's approval for the variation of the Will, the Executors will distribute XXXXXXXXXX% of the residue to the Children such that each Child receives 1/3 of that amount.

20. Pursuant to the Minutes of Settlement and following the distribution of capital to each of the Children, each of Trust1, Trust2 and Trust3 will be administered solely for the issue of the relevant Child pursuant to the provisions of paragraphs XXXXXXXXXX, as varied;

21. In all other respects, the terms of the Will as amended by Codicil B and Codicil C will apply. None of the beneficiaries of the Estate will be entitled to any amount other than the amounts set out in the Minutes of Settlement as approved by the Court.

Purpose of the Proposed Transactions

22. The purpose of the proposed transactions is to provide for the proper administration of the Will with respect to the distribution of the residue in light of the uncertainty created by Codicil A and the Revocation. In particular, the settlement permits the Children to receive a portion of their share of the residue of the Estate immediately, while preserving an equitable amount for the Grandchildren as provided for under the terms of the Will as originally drafted.

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 proposed variation of the Will described in paragraphs 13 and 14 above, if approved by the Court as contemplated in paragraph 17, will not, in and by itself, result in a disposition for income tax purposes of any property of the Estate.

B. The proposed variation to the terms of each Trust as described in paragraphs 13 and 14 above, if approved by the Court as contemplated in paragraph 17, will not, in and by itself, result in the creation of a new trust or in a resettlement of either Trust, nor will it result, in and by itself, in a disposition for income tax purposes of any property of either Trust.

C. The transfer of property from the Estate to Trust1, Trust2, Trust3 and Trust4 will not result in a disposition of the property of the Estate within the meaning of the definition of "disposition" in subsection 248(1) of the Act.

D. The proposed variation to the terms of each Trust as described in paragraphs 13 and 14 above, if so approved by the Court as contemplated in paragraph 17, will not, in and by itself, result in a disposition for income tax purposes of any property of the Children or Grandchildren for purposes of section 106 or 107 of the Act. The Children and Grandchildren will not be considered to have received any proceeds of disposition for the purposes of sections 38, 39, or 107 as a result of their consent, and that of the Children's Lawyer of XXXXXXXXXX, to the proposed variation of the Will and the Trusts described in paragraphs 13 and 20 above.

E. The distribution of capital from the Estate to the Children will be governed by subsection 107(2) of the Act provided the Children are resident in Canada at the time of the distribution.

F. Provided that the beneficiaries are resident in Canada at the time of the relevant distribution, the provisions of subsection 107(2) of the Act will apply to the Trusts and their capital beneficiaries under the Will as varied by the Court Order at the time any remaining property of a Trust is distributed to a capital beneficiary in satisfaction of all or any part of that beneficiary's respective capital interest in the Trust.

G. The Trusts will not lose their status as testamentary trusts as defined in subsection 108(1) of the Act solely as a result of the proposed transactions described in paragraphs 13 to 20 above.

H. The proposed variation of the Will and the Trusts will not result in the conferral of a taxable benefit under subsection 56(2), 105(1) or 246(1) on any of the beneficiaries of the Trusts.

Nothing in this ruling should be construed as confirmation, express or implied, that the Canada Revenue Agency has agreed to, reviewed or has made any determination in respect of:

a) the fair market value or adjusted cost base of any property referred to herein; or

b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

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 paragraphs 13 to 21 above, are 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