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 amendment to the trust indenture to delete all references to units cause a resettlement of the trust property or a disposition of the beneficiary's interest in the trust?
2. Will the trust be a unit trust following the amendments to the trust indenture?
Position: 1. No. 2. No.
Reasons: 1. The changes to the declaration of trust are not so significant as to cause a resettlement of the existing trust. In particular, the amendment of the trust indenture will not affect the beneficial entitlement or rights of its existing sole unitholder. The amendments will not give rise to any change in beneficial ownership of the trust property nor will the sole beneficiary receive any proceeds of disposition. While paragraph (h) of the definition of disposition in subsection 248(1) states, by negative inference, that any payment to a unitholder that does involve a reduction in the number of units would give rise to a disposition, none of the conditions in paragraphs (a) to (d) of the def'n of "disposition" apply in this case and for greater certainty no payment will be made to the sole beneficiary as a result of the amendments. Consequently, the reduction in the number of units held by the sole beneficiary will not result in a disposition at law or for tax purposes since the beneficiary will still have the same beneficial interest in the trust property as before the amendments.
2. As a result of the amendments to the trust indenture, the sole beneficiary's interest in the trust will not be described by reference to units such that the trust will not be a unit trust as defined in subsection 108(2).
XXXXXXXXXX 2006-021372
XXXXXXXXXX, 2007
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
Account Number XXXXXXXXXX
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:
- Contract of Trust for XXXXXXXXXX;
- draft revisions to the Contract of Trust for XXXXXXXXXX; and
- Contract of Trust for XXXXXXXXXX.
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.
Except as otherwise noted, 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 all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
The following terms have the meanings specified:
"Contract of Trust1" means the Contract of Trust for XXXXXXXXXX;
"Corporation" means XXXXXXXXXX;
"Group A" means the XXXXXXXXXX, a group of related entities represented by the Settlor that includes Trust1 and Trust2;
"Group B" means the XXXXXXXXXX, a group of related entities represented by XXXXXXXXXX , a resident of Canada;
"Partnership" means XXXXXXXXXX, a partnership between Trust1 and Group B;
"Settlor" means XXXXXXXXXX, a resident of the United States and the head of the "XXXXXXXXXX";
"Trust1" means XXXXXXXXXX, an inter vivos trust created on XXXXXXXXXX by a Contract of Trust pursuant to the laws of the Province of XXXXXXXXXX;
"Trust2" means XXXXXXXXXX, an inter vivos trust created on XXXXXXXXXX by a Contract of Trust pursuant to the laws of the Province of XXXXXXXXXX; and
"Trustee" means XXXXXXXXXX, a resident of Canada and the trustee of Trust1 and Trust2.
The relevant Tax Services Office for Corporation is the XXXXXXXXXX Tax Services Office and the relevant Tax Centre is the XXXXXXXXXX Tax Centre. The relevant Tax Services Office for Trust1 is the XXXXXXXXXX Tax Services Office and the relevant Tax Centre is the XXXXXXXXXX Centre.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. Trust1 was settled by the Settlor with $XXXXXXXXXX in XXXXXXXXXX. Trust1 is an unincorporated unit trust resident in Canada, the beneficial interests in which constitute a single class of units. Each unit represents an undivided interest in Trust1 with all other units. Only unitholders can be beneficiaries under Trust1. Trust1 was created to hold a partnership interest in the Partnership for the benefit of Corporation, and ultimately, the U.S. investors who hold an interest a U.S. subchapter S-Corporation that is the sole shareholder of Corporation.
2. For the purpose of the application of the Act, Trust1 qualifies as a "unit trust" as defined in subsection 108(2) since Corporation's interest in Trust1 is described by reference to units and because, among other things, the units are redeemable on demand.
3. The Corporation acquired XXXXXXXXXX units in Trust1 for $XXXXXXXXXX. Corporation is the sole unitholder and sole beneficiary of Trust1.
4. Trust2 is an unincorporated unit trust resident in Canada, the beneficial interests in which constitute a single class of units. Each unit represents an undivided interest in Trust2 with all other units. Trust2 was created to finance the Partnership. The Partnership borrowed $XXXXXXXXXX dollars (US) from a trust resident in the United States, bearing interest at a rate of XXXXXXXXXX% and $XXXXXXXXXX (CAD) from Trust2. Trust2 borrowed the funds from a Canadian commercial lender and then lent the amount to the Partnership. The Partnership used these funds to acquire and build the property located at XXXXXXXXXX.
5. The Corporation acquired XXXXXXXXXX units in Trust2 for $XXXXXXXXXX. Corporation is the sole unitholder and sole beneficiary of Trust2.
6. The terms of the Partnership agreement provide that XXXXXXXXXX% of the income and losses of the Partnership will be allocated to Trust1 and XXXXXXXXXX% to Group B. No member of Group B is related to Settlor, Trust1 or Trust2. However, as a major part of the funding of the Partnership was acquired from persons related to Trust1, the Partnership agreement further provides that 100% of the income and losses of the Partnership will be allocated to Trust1 until such time as the loan from a member of Group A is repaid. Trust1 acquired its interest in the Partnership on XXXXXXXXXX for a nominal amount. The Partnership acquired the property at XXXXXXXXXX for $XXXXXXXXXX.
Proposed Transactions
7. Contract of Trust1 will be amended in order to remove all references to units and unitholders in the description of the interest of the beneficiaries in Trust1.
8. The Corporation will remain the sole beneficiary in Trust1 following the proposed amendments to Contract of Trust1.
Purpose of the Proposed Transactions
9. The initial intent of the Settlor was to create a trust to hold the Canadian real estate on behalf of Corporation and there was never any intention to issue any interest in either Trust1 or Trust2 to anyone other than the Corporation. As a result, the proposed amendments are being made for the purpose of establishing that Trust1 is a personal trust for the purposes of the Act.
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, the proposed transactions are completed in the manner described above and provided that there are no other transactions that may be relevant to the rulings requested, our rulings are as follows:
A. The proposed amendments to Contract of Trust1 as described in paragraph 7 above will not result in a disposition or deemed disposition for the purposes of the Act by Trust1 of any the assets held by Trust1 at the time of such amendments or by the Corporation of its beneficial interest in Trust1.
B. Immediately following the amendment to the Contract of Trust1, Trust1 will not be a unit trust as defined in subsection 108(2) for the purposes of 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 the proposed transactions 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. Unless otherwise confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of any other tax consequences relating to the facts, proposed transactions or any transaction or event taking place either prior to the proposed transactions or subsequent to the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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© Her Majesty the Queen in Right of Canada, 2007
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