15 January 2008 External T.I. 2007-0251591E5 - Vested indefeasibly & change in trustees

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: General questions 1. Can an interest be considered to have vested indefeasibly where the exact constitution of a class of beneficiaries is unknown? and 2. where one non-resident trustee of a non-resident trust is changed for another is there a disposition where the only ppty held is personal use property situated in Canada?

Position: 1. depends on terms of the trust and the amount of discretion Trustee has wrt the distribution of the property; 2.No disposition where trustee is changed provided new trustee is also non-resident.

Reasons: 1. Question of fact

XXXXXXXXXX
2007-025159
Lena Holloway
January 15, 2008

Dear XXXXXXXXXX:

Re: Interpretation Request- Trust Issues

This is in reply to your letter of September 10, 2007 in which you pose specific questions relating to the income tax treatment of two scenarios involving trusts.

Unless otherwise stated in this letter, all references in this letter to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as enacted to the date of this letter.

Your first question relates to the meaning of the words "vested indefeasibly" as found in the definition of "trust" in subsection 108(1). You asked whether an interest can be considered as vesting indefeasibly if the exact constitution of a class of beneficiaries is unknown. In particular you gave as an example a trust established by a will stating

"I transfer property 1 to my trustee Mr.Y for the issue of Mr. X" and asked whether in such a case, all interests had vested indefeasibly.

The Act does not define the term "vested indefeasibly" and accordingly the meaning must be construed within the context of the provision where it is used. As stated in Interpretation Bulletin IT-449R, "vested indefeasibly" refers to the unassailable right to ownership of a particular property that, in consequence of death of the owner, has been transferred or distributed to a beneficiary of the deceased's will and that beneficiary obtains a right to absolute ownership of that property in such a manner that such right cannot be defeated by any future event. Paragraph 1 of IT-449R goes on to state:

"Where property is held in trust for the benefit of one or more persons it is the Department's view that such property normally vests indefeasibly in the trust and not in a beneficiary thereof. However, where the Department is satisfied that a property is held in trust solely to carry out the terms of a will under which the ultimate and absolute ownership of that property is bequeathed to a particular individual and the trust arrangement is such that the individual's ownership rights cannot be defeated by any future event and no other person has any right whatsoever to an immediate or future benefit from that property or that trust, the property will be considered to vest indefeasibly in that individual."

While IT-449R has been archived, we are of the opinion that the above statements are still valid and therefore whether the interests described in your example have vested indefeasibly is a question of fact. Assuming that the will in your example went onto to say that the issue were to share equally in the property (where the issue is restricted in meaning to descendants of the first degree) and that the trust and the trustee's function was solely to carry out the terms of the will, one could safely conclude that the property has vested indefeasibly in the children on the date of the testator's death. Where however the Trustee is given the discretion to determine which of the issue or how the issue shall share in the property, it cannot be said that the property has vested in any beneficiary until the Trustee makes that determination. At the date of the testator's death the members of the named class of beneficiaries is determinable, however depending on the trustee's powers, where an interest is subject to partial divestment, the interest will not be indefeasibly vested.

Secondly you requested confirmation of your understanding that a substitution of one non-resident trustee for another would not cause a disposition for Canadian tax purposes in a situation where a non-resident trust has one trustee and holds as its only property a personal use property situated in Canada. We can confirm this statement only where the substituted trustee is also a non-resident of Canada. If the new trustee is a Canadian resident, the trust would then become a Canadian resident trust resulting in a deemed disposition and reacquisition of the trust property under paragraphs 128.1(1)(b) and (c) of the Act. As set out in Interpretation Bulletin IT-447, the Canada Revenue Agency generally considers a trust to be resident where the trustee who has ownership or control over the assets of the trust is resident.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5. All of the bulletins mentioned in this letter are available on the Canada Revenue Agency's website, www.cra-arc.gc.ca.

We trust our comments have clarified the issues raised in your letter.

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