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: Does paragraph 107(2)(a) change the timing of the disposition for the purposes of section 116?
Position: No
Reasons: The deeming rule in paragraph 107(2)(a) only determines the proceeds of disposition of the property to the non-resident trust. It does not actually create a separate disposition apart from, or change the timing of, the actual disposition by the non-resident trust to the beneficiary.
January 23, 2013
Compliance Programs Branch HEADQUARTERS
Specialty Audit Division IT Rulings Directorate
112 Kent Street, 19th Floor, Tower B Henry Leung
Ottawa, ON K1A 0L5 (613) 957-2129
Attention: Mr. Claudio DiRienzo
2012-046508
Section 116 Certificate of Compliance Request and Distribution of real property from a Non-Resident Trust
This is in response to your e-mail of October 9, 2012 regarding paragraph 107(2)(a) of the Income Tax Act (Act).
Facts
Your enquiry relates to the following facts:
A personal trust resident in XXXXXXXXXX made a distribution of real property that is situated in Canada (consisting of XXXXXXXXXX) to a corporate beneficiary resident in XXXXXXXXXX. It is assumed that the trust held no other property. This distribution took place in XXXXXXXXXX.
It is assumed that the distribution of the property from the trust results in a disposition of all of the beneficiary's capital interest in the trust.
Under subsection 107(2), such property is distributed to the beneficiary on a roll-over basis.
Subsection 107(2) states:
(2) Distribution by personal trust Subject to subsections (2.001), (2.002) and (4) and (5), if at any time a property of a personal trust or a prescribed trust is distributed (otherwise than as a SIFT trust wind-up event) by the trust to a taxpayer who was a beneficiary under the trust and there is a resulting disposition of all or any part of the taxpayer's capital interest in the trust,
(a) the trust shall be deemed to have disposed of the property for proceeds of disposition equal to its cost amount to the trust immediately before that time;
(b) subject to subsection (2.2), the taxpayer is deemed to have acquired the property at a cost equal to the total of its cost amount to the trust immediately before that time and the specified percentage of the amount, if any by which
You request our views on whether paragraph 107(2)(a) deems a disposition of the property to occur immediately before the actual distribution from the non-resident trust to the beneficiary.
An interpretation that has been suggested is that a deemed disposition under paragraph 107(2)(a) takes place before the actual distribution of the property by the trust and the subsequent disposition of the capital interest in the trust by the beneficiary. Under such a deemed disposition, there would be no change in the beneficial ownership of the property as the trustee would still maintain beneficial ownership of the property for all intents and purposes "before that time", as the phrase is used in paragraph 107(2)(a) of the Act. Accordingly, subparagraph (i) of paragraph (f) of the definition of "disposition" would be met and the deemed disposition under paragraph 107(2)(a) would not fall within the notification requirements of section 116.
In our view, paragraph 107(2)(a) does not change the timing of the disposition of the real property by the non-resident trust to the beneficiary.
The phrase "immediately before that time" as used in paragraph 107(2)(a) of the Act, qualifies only the words "... its cost amount to the trust..." for the purposes of determining the proceeds of disposition. It is our position that paragraph 107(2)(a) does not deem a disposition of property to occur by the non-resident trust to the beneficiary prior to the actual disposition time. Such an interpretation would be consistent with our interpretation of other rollover provisions such as subsection 85.1(1) and subparagraph 88(1)(a)(iii).
To further support our position, consider paragraphs 107(2.01)(a) and (b) of the Act which states:
(2.01) Distribution of principal residence Where property that would, if a personal trust had designated the property under paragraph (c.1) of the definition "principal residence" in section 54, be a principal residence (within the meaning of that definition) of the trust for a taxation year, is at any time (in this subsection referred to as "that time") distributed by the trust to a taxpayer in circumstances to which subsection (2) applies and the trust so elects in its return of income for the taxation year that includes that time,
(a) the trust shall be deemed to have disposed of the property immediately before the particular time that is immediately before that time for proceeds of disposition equal to the fair market value of the property at that time; and
(b) the trust shall be deemed to have reacquired the property at the particular time at a cost equal to that fair market value.
Looking only at the timing between these two sections, if paragraph 107(2)(a) of the Act created a change in the timing of the disposition, paragraph 107(2.01)(b) of the Act would deem the trust to have acquired the property at the same time that paragraph 107(2)(a) would deem the trust to dispose of the same property. Such a result would be absurd and could not have been contemplated.
Based on the above discussion, paragraph 107(2)(a) does not create a disposition apart from the actual disposition or change the timing of such actual disposition. In this case, when the non-resident trust actually makes the distribution of the real property to the beneficiary, subsection 116(3) of the Act will need to be complied with. CRA has also taken the position that section 116 will also need to be complied with upon the disposition of the capital interest in the trust by the non-resident beneficiary. Please refer to E2010-0385771E5 for such an example.
Based on the above, it is our view that section 116 of the Act will need to be complied with by the non-resident trust at the time of the actual disposition from the non-resident trust to the beneficiary, and at that same time by the non-resident beneficiary in respect of its disposition of its capital interest in the trust.
We trust these comments are of assistance.
Olli Laurikainen, C.A.
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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