1 May 2013 External T.I. 2012-0459541E5 - Capital interest in a 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: Will a capital interest in a personal trust qualify as 'eligible property', as defined in subsection 85(1.1) of the Act, for the purposes of subsection 85(1)?

Position: Yes, provided it is determined to be a capital property of the taxpayer.

Reasons: Pursuant to the provisions of section 54, subsections 107(1), 108(1) and 248(1) of the Act.

XXXXXXXXXX
2012-045954
V. Srikanth

May 1, 2013

Dear XXXXXXXXXX:

Re: Capital Interest in a personal trust and eligible property

This is in response to your correspondence dated August 16, 2012, wherein you wanted our views on whether a ‘capital interest', as defined in subsection 108(1) of the Income Tax Act (the "Act"), in a personal trust (defined in subsection 108(1) of the Act), would qualify as ‘eligible property' pursuant to subsection 85(1.1) for the purposes of subsection 85(1) of the Act.

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 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.

Subsection 85(1.1) provides the definition of the term ‘eligible property' for the purposes of the rules under subsection 85(1) which allow a transfer on a tax-deferred basis of eligible property by a taxpayer to a taxable Canadian corporation. For the purposes of subsection 85(1), ‘eligible property' includes, inter alia, "a capital property (other than real property, or an interest in or an option in respect of real property, owned by a non-resident person)". Further, pursuant to paragraph 54(1)(b) of the Act, capital property means "any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer." The definition of property in subsection 248(1) of the Act includes a right of any kind whatever.

A ‘capital interest' in a trust is defined in subsection 108(1) to mean all rights of a taxpayer as a beneficiary under the trust other than an income interest in the trust. Subsection 107(1) of the Act contains special rules applicable to the disposition of capital interest in a trust. Note that paragraph 107(1)(a) provides for the computation of a taxpayer's capital gain, if any, from the disposition of a capital interest in a personal trust. It will, however, be a question of fact whether a capital interest in a personal trust is a capital property of a taxpayer.

Accordingly, in our view, the capital interest in a personal trust will qualify as ‘eligible property' pursuant to subsection 85(1.1) and for the purposes of subsection 85(1) of the Act, provided it is a capital property of the taxpayer.

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