11 February 2013 External T.I. 2012-0451791E5 - Disposition of trust interest

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) Would the addition of a beneficiary to a discretionary trust, as per the trust agreement, result in a resettlement of the trust property?
2) If the answer to 1) is no, would the addition of a beneficiary result in a disposition of any part of the existing beneficiaries' interest in that trust?

Position: 1) Not necessarily. 2) Yes.

Reasons: 1) Where the terms of the trust provides for such addition from the beginning itself, and where the trustees exercise such right, there will be no new trust created and, therefore, there will be no disposition of the trust properties.
2 The addition of another beneficiary varies the rights of the existing beneficiaries such that they are considered to have disposed of a portion of their interest in the trust.

XXXXXXXXXX
2012-045179
V. Srikanth

February 11, 2013

Dear XXXXXXXXXX:

Re: Addition of a beneficiary to a discretionary trust

This is in response to your correspondence dated June 12, 2012 wherein you requested our views on the possible application of subsections 106(2) and 107(1) of the Income Tax Act (the "Act") to the following scenario:

• Mrs. X is the daughter of Mr. and Mrs. B. Mrs. X is a Canadian citizen, but has been living in the US and is a non-resident of Canada for tax purposes.
• Mr. and Mrs. B and their other children are Canadian citizens as well as residents of Canada for tax purposes.
• Mr. A will settle a discretionary family trust for the benefit of Mr. B and his family. The trustee will be Mr. B. The beneficiaries of the trust at any given time will be Mr. and Mrs. B, and their children, but only if a particular beneficiary is a resident of Canada for tax purposes at that relevant time.
• The trustee will, in his absolute discretion, be able to pay or transfer any part of the income or capital of the trust to any beneficiary provided he/she is a resident of Canada for tax purposes.

Specifically, your concern is at the time Mrs. X becomes a Canadian resident, whether it would result in a disposition of the other beneficiaries' interests in the trust.

Our Comments

Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled ‘Advance Income Tax Rulings', dated May 17, 2002. This Information Circular and other Canada Revenue Agency (the "CRA") publications can be accessed on our website at http://www.cra-arc.gc.ca. Your request was not submitted as an advance income tax ruling request, however, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries and we are prepared to provide you with the following comments.

Our response herein to the given scenario will consider only the following two issues (ignoring any other tax concerns that may be applicable):

(i) whether there is a resettlement of the trust when Mrs. X becomes a Canadian resident, and consequently, the trust property is deemed to have been disposed of to a new trust;

and,

(ii) if there is no resettlement of the existing trust, in the event Mrs. X becomes a Canadian resident, will it result in an addition of a beneficiary such that each of the existing beneficiaries will be deemed to have disposed of a portion of their respective beneficial interests in the trust.

As indicated in the CRA rulings document 2001-0111303 (and referenced in your letter), where the terms of the trust agreement of a discretionary trust provide for an addition of a beneficiary and the trustees' exercise their right to add such a beneficiary, it would not result in the creation of a new trust, nor in the resettlement of the trust.

In the given instance, based on the information you provided, it would appear that Mrs. X may be a beneficiary of the trust from its creation, but that she would be entitled to receive a distribution from the trust only when she becomes a resident of Canada. However, please note that such a determination will depend upon the terms of the trust agreement and other related documentation.

Generally, where an addition of a beneficiary varies the rights of the existing beneficiaries, the latter are considered to have disposed of a portion of their interest in the trust. Subsection 106(2) applies where a taxpayer disposes of an income interest (as defined in subsection 108(1) of the Act) in a trust (if subsection 106(3) of the Act is not applicable) and subsection 107(1) contains special rules that apply to the disposition of a capital interest in a trust. In the given instance, as discussed above, if it can be established that there was no addition of a beneficiary when Mrs. X became a resident of Canada, then in our view, there would be no disposition of income or capital by the other beneficiaries. However, as stated earlier, this is a question of fact.

We trust our comments will be of assistance to you.

Yours truly,

Phil Kohnen
For Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch