2012 Ruling 2010-0367401R3 - Variation of 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: Would a variation of trust terms to allow capital
encroachment to a spouse and a disclaimer of a child beneficiary's capital interest in a spousal trust result in (1) a resettlement of the trust, (2) a disposition of the remaining beneficiaries’ interest in the trust, (3) the application of subsection 107(2) on the distribution to the spouse, and
(4) the application of subsection 73(1) on the subsequent transfer of the funds by the spouse to a new trust?

Position: (1) no (2) no (3) yes (4) yes

Reasons: The amendments to the terms of the trust are not material so
as to result in a disposition of an interest - previous rulings on this similar issue. Technical provisions of the Act are satisfied.

XXXXXXXXXX

										2010-036740 

XXXXXXXXXX , 2012

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX , requesting an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX ) and your subsequent submissions of XXXXXXXXXX .

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

(i) in an earlier tax return of the taxpayer or a related person;

(ii) being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts or,

(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

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.

Unless otherwise stated, all references to a statute are to 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 definitions unless otherwise indicated.

DEFINITIONS

The following terms and taxpayers referred to throughout this document will have the
following meaning:

“Appointor” of Trust means the person or persons who will have the power to appoint
and remove Trustees;

“Beneficiaries” of Trust, as provided by the Will, means Mrs. X, Child 1, Child 2, the
Unborn Beneficiaries and Child 3;

“Child 1” means XXXXXXXXXX ;

“Child 2” means XXXXXXXXXX ;

“Child 3” means XXXXXXXXXX ;

“Court” means the court XXXXXXXXXX ;

“CRA” means the Canada Revenue Agency;

“FMV” means fair market value, being that amount at which property would be
transferred by a willing seller to a willing buyer in an open and unrestricted market,
between informed parties under no compulsion to act;

“Holdco” means XXXXXXXXXX ;

“Mr. X” means XXXXXXXXXX ;

“Mrs. X” means XXXXXXXXXX spouse of Mr. X;

“New Trust” means XXXXXXXXXX Trust the relevant terms of which are described
in 9 herein;

“New Trust Appointor” will be the Appointor of New Trust as described in 9(e) herein;

“New Trust Trustees” will be the trustees of New Trust as described in 9(d) herein;

“Opco” means XXXXXXXXXX ;

“Public Guardian and Trustee” means a representative of the Office of the Public
Guardian and Trustee of XXXXXXXXXX ;

“Specified Portion” means the distribution of capital that will be made to Mrs. X by
Trust as described in 7(a) herein;

“Trust” means XXXXXXXXXX created pursuant to the Will;

“Trustee(s)” of Trust are XXXXXXXXXX ;

“Unborn Beneficiaries” of Trust are the potential unborn issue of Child 1 and the
potential unborn issue of Child 2;

“Valuation Date” means XXXXXXXXXX ;

“Will” means the Last Will and Testament of Mr. X.

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

FACTS

1. Trust is a testamentary trust as defined in subsection 108(1) of the Act, created
pursuant to the Will of Mr. X.

2. The relevant terms of Trust are summarized as follows:

(a) Income of Trust is payable to Mrs. X during her lifetime;

(b) Upon the death of Mrs. X, property of Trust is divided into two equal
portions for Child 1 and Child 2;

(c) The portions for each of Child 1 and Child 2, as described in 2(b), is to be
held in trust until each child reaches XXXXXXXXXX years;

(d) If Child 1 dies before attaining the age of 35 years, Child 1’s portion will
devolve to the issue of Child 1; and provided further that if Child 1 dies
before attaining XXXXXXXXXX years and leaving no issue, this portion
will be added to the portion held for Child 2;

(e) Similarly, if Child 2 dies before attaining the age of XXXXXXXXXX
years, Child 2’s portion will devolve to the issue of Child 2; and provided
further that if Child 2 dies before attaining XXXXXXXXXX years and
leaving no issue, this portion will be added to the portion held for Child 1;
and

(f) In event of lapse or failure, any remaining property of Trust shall be paid
to Child 3.

3. Trust owns XXXXXXXXXX shares of Holdco (representing a XXXXXXXXXX
% direct interest in Holdco), XXXXXXXXXX shares of Opco (which together
with Holdco represents less than a XXXXXXXXXX % direct and indirect interest
in Opco), a non-interest bearing demand note and marketable securities. As at the
Valuation Date, it was estimated that the FMV of the property of Trust was
approximately $XXXXXXXXXX .

4. With the approval of the Public Guardian and Trustee, the living Beneficiaries
have agreed to a variation plan under which assets worth approximately
$XXXXXXXXXX as at the Valuation Date will be settled on New Trust in
respect of the interests of the Unborn Beneficiaries. New Trust will be resident in
Canada at all times.

PROPOSED TRANSACTIONS

5. Subject to Court approval for the variation of Trust as described in 6 and 7 herein,
Child 3 will disclaim, release and surrender her interest in Trust.

6. Mrs. X, Child 1 and Child 2, as the then three remaining living Beneficiaries, will
apply to the Court to vary the terms of Trust such that, subject to the life interest
of Mrs. X, the capital interests of Child 1 and Child 2 vest indefeasibly.

7. The terms of Trust will be varied to provide as follows:

(a) The Trustees, within XXXXXXXXXX days of variation, shall be
permitted to encroach on capital and distribute 3 shares of Holdco,
representing an approximate FMV of $XXXXXXXXXX (the Specified
Portion), to Mrs. X;

(b) Upon the death of Mrs. X, Child 1’s portion shall be paid to Child 1, or if
Child 1 is then deceased, to the estate of Child 1;

(c) Upon the death of Mrs. X, Child 2’s portion shall be paid to Child 2, or if
Child 2 is then deceased, to the estate of Child 2; and

(d) The Trustees shall be such persons as the Appointor determines; Mrs. X
will be the Appointor and upon her death, Child 1 and Child 2 will assume
this role together as co-Appointers at that time.

8. Upon receipt of the Specified Portion so distributed, Mrs. X will agree to transfer
the Specified Portion to New Trust. Mrs. X will not elect in her return of income
for the year in which the transfer occurs to not have the provisions of subsection
73(1) of the Act apply to the transfer.

9. The terms of New Trust will provide that:

(a) Income of New Trust will be paid to Mrs. X during her lifetime;

(b) Upon the death of Mrs. X, XXXXXXXXXX % of the property of New
Trust will be transferred to the issue of Child 1, in equal shares per stirpes;
if Child 1 has no issue then living, that portion shall be transferred to the
issue of Child 2 then living, in equal shares per stirpes; if neither Child 1
nor Child 2 have living issue, that portion shall be transferred to Child 1 or
the estate of Child 1;

(c) Upon the death of Mrs. X, XXXXXXXXXX % of the property of New
Trust will be transferred to the issue of Child 2, in equal shares per stirpes;
if Child 2 has no issue then living, that portion shall be transferred to the
issue of Child 1 then living, in equal shares per stirpes; if neither Child 1
nor Child 2 have living issue, that portion shall be transferred to Child 2 or
the estate of Child 2;

(d) The New Trust Trustees will be Mrs. X and an independent person. The
terms of New Trust will require that there be not less than two New Trust
Trustees and that XXXXXXXXXX % of the New Trust Trustees must be
either accountants, lawyers, or trust companies and must not be related to
Mrs. X, Child 1 or Child 2; and

(e) The New Trust Appointor will have the power to appoint and remove New
Trust Trustees, subject to the requirements in 9(d). Mrs. X will be the
New Trust Appointor and upon her death, Child 1 and Child 2 will assume
this role together.

10. The Public Guardian and Trustee will recommend that the Court approve the
variation plan on behalf of the Unborn Beneficiaries.

11. Trust will not elect pursuant to subsection 107(2.001) in respect of the distribution
of the Specified Portion.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to vest the property of Trust indefeasibly in
the hands of Mrs. X, Child 1 and Child 2. The transactions as proposed will give these
three Beneficiaries control over the selection of Trustees and the eventual devolution of
the property of Trust and ensure that the interests of the Unborn Beneficiaries will be
protected.

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 there are no
other transactions that may be relevant to the rulings given, our rulings are as follows:

A. Child 3 will not be considered to have received any proceeds of disposition for
purposes of sections 40 or 107 of the Act as a result of executing the disclaimer,
release and surrender described in 5 herein.

B. The variation of Trust described in 7 herein, if approved by the Court, will not, in
and by itself, result in a re-settlement of Trust.

C. The proposed transactions will not, in and by themselves, cause Trust to fail to
meet the definition of “testamentary trust” as defined in subsection 108(1) of the
Act.

D. Neither the variation of Trust described in 7 herein, nor the consent of the
Beneficiaries to such variation, will, in and by themselves, result in a disposition
for income tax purposes of any Beneficiary’s interest in Trust.

E. Subject to subsection 107(4), subsection 107(2) of the Act will apply to the
distribution of the Specified Portion described in 7(a) herein from Trust to Mrs.
X.

F. Subject to subsection 73(1.02), subsection 73(1) of the Act will apply to the
transfer of the Specified Portion described in 8 herein from Mrs. X to New Trust.

Except as expressly stated, this advance income tax ruling does not imply acceptance,
approval or confirmation of any other income tax implications of the facts or proposed
transactions described herein. For greater certainty, the CRA has not considered,
confirmed or made any determination in respect of:

(a) the FMV of any property referred to herein;

(b) whether the variations to Trust as described in 7 herein, will result in the creation of a
new trust under the laws of XXXXXXXXXX ; and

(c) any income tax consequences relating to the facts or proposed transactions described
herein other than those specifically described in the rulings given above.

The above advance income tax rulings, which are based on the Act and Income Tax
Regulations to the Act in their present form and do not take into account any proposed
amendments thereto, are given subject to the general limitations and qualifications set out
in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and
are binding on the CRA provided that the proposed transactions are completed within six
months of the date of this letter.

Yours truly,

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