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: What is the deemed disposition day in respect of the transferee trust under subsection 104(5.8) where the trust-to-trust transfer takes place after the transferor trust's deemed disposition day of January 1, 1999 pursuant to subsection 104(5.3)?
Position: Given the facts provided, the deemed disposition day in respect of the transferee trust is 21 years after the January 1, 1999 deemed disposition day of the transferor trust.
Reasons: The transferor trust's deemed disposition day under subparagraph 104(5.3)(a)(i) is considered for purposes of clause 104(5.8)(a)(i)(A).
January 8, 2013
Re: Deemed disposition day on a trust-to-trust transfer
This is in response to your email of August 21, 2012 in which you enquired as to what the deemed disposition day would be in respect of a transferee trust under subsection 104(5.8) of the Income Tax Act (Canada) (the "Act") where a trust-to-trust transfer takes place after a transferor trust's January 1, 1999 deemed disposition day.
In the scenario described, a testamentary trust was set up in 1960 upon a testator's death. The trust was not a spousal trust as the children could encroach upon the assets of the trust. The 21-year deemed realization rule came into effect in 1972; accordingly, the first deemed disposition day for the trust under paragraph 104(4)(b) of the Act would have been January 1, 1993. The trust made an exempt beneficiary election under subsection 104(5.3) of the Act. As a result, the trust's deemed disposition day was deferred until January 1, 1999. In 2000, one of the beneficiaries died and a successor trust was established. Accordingly, assets were transferred from the testamentary ("transferor") trust to the successor ("transferee") trust and subsection 104(5.8) applies to the transfer. For the purposes of this enquiry, it is assumed that the trust-to-trust transfer occurred and the transferee trust was created on January 1, 2000.
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. Your request was not submitted as an advance income tax ruling request. However, as stated in paragraph 22 of Information Circular IC 70-6R5, we provide written opinions on general enquiries and are prepared to provide you with the following general comments which may be of assistance.
Paragraph 104(4)(b) of the Act generally provides for a deemed disposition at fair market value of certain property owned by a trust 21 years after the day on which the trust was created and every 21 years thereafter. Subsection 104(5.8) prevents the avoidance of the 21-year deemed realization rule by the use of trust-to-trust transfers that do not involve dispositions of property at fair market value.
Given that subparagraphs 104(5.8)(b) through (b.3) are not applicable to your fact situation, subparagraph 104(5.8)(a)(i) deems the "disposition day" of the transferee trust to be the earliest of five days, only two of which are relevant to this enquiry:
- Clause 104(5.8)(a)(i)(A) determines the first day on or after the transfer date on which the transferor trust would have been deemed under subsection 104(4) to dispose of its property, without regard to the transfer or any transaction or event occurring after the transfer.
- Clause 104(5.8)(a)(i)(B) determines the first day on or after the transfer date on which the transferee trust would have been deemed under subsection 104(4) to dispose of its property, without regard to any transaction or event occurring after the transfer.
The transferor trust elected under subsection 104(5.3) to defer its deemed disposition day. In particular, given the facts you provided, we assume that the transferor trust had an exempt beneficiary throughout the time period required for subparagraph 104(5.3)(a)(i) to deem the day determined under paragraph 104(4)(b) for the transferor to be January 1, 1999. If the transfer is disregarded, the first day ending at or after the January 1, 2000 trust-to-trust transfer would be determined under paragraph 104(4)(c) in respect of the transferor trust to be 21 years after the January 1, 1999 deferred deemed disposition day. Therefore the day determined under clause 104(5.8)(a)(i)(A) is January 1, 2020.
The first day ending at or after the January 1, 2000 trust-to-trust transfer determined under paragraph 104(4)(b) in respect of the transferee trust would be 21 years after the latest of January 1, 1972 and the day on which the transferee trust was created, January 1, 2000. In this case the day determined under clause 104(5.8)(a)(i)(B) is January 1, 2021.
In this example, the earliest day determined under subparagraph 104(5.8)(a)(i) is the day determined under clause 104(5.8)(a)(i)(A). Therefore, the transferee trust's first deemed disposition day is January 1, 2020.
Under subparagraph 104(5.8)(a)(ii), the transferee trust in this situation would not also have a deemed disposition on January 1, 2021 for purposes of subsections 104(4) to (5.2).
We trust our comments will be of assistance to you.
Steve Fron, CA
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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