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 CRA accept the Sommerer decision and can CRA provide guidance on when 75(2) will apply to transactions between an individual and a trust.
Position: Commentary provided on our view of impact of the decision and Budget 2013 changes to 75(2).
Reasons: See below
2013 STEP CANADA ROUNDTABLE, June 10 & 11, 2013
QUESTION 9. Sommerer Case and Subsection 75(2)
Does CRA accept the Sommerer decision in its application to subsection 75(2)? In this case, it was held that a fair market value sale to a trust did not come within the ambit of subsection 75(2). If CRA does accept this, can CRA offer some broad guidelines now as to when subsection 75(2) would not apply in transactions between an individual and a trust?
CRA Response
Our comments that follow are in respect of the decision of the Federal Court of Appeal ("FCA") in the case of The Queen v Sommerer (2012 FCA 207). In paragraph 49 of her decision, Justice Sharlow, with concurrence of her two colleagues, Justices Blais and Letourneau, concluded that Parliament did not intend for subsection 75(2) to apply "in respect of property that the trust acquired from the beneficiary in a bona fide sale transaction." In her concluding statement in paragraph 57 of the decision, Justice Sharlow noted that the Crown's interpretation of the provision was "wrong because it is based on the incorrect premise that 75(2) can apply to a beneficiary of a trust who transfers property to the trust by means of a genuine sale."
As regards the terms "bona fide" and "genuine" in the decision, in our view, these are both concepts that suggest a question of fact approach to their determination. It would appear that the FCA used both terms interchangeably, and in the context of their normal meaning (i.e. the sale must be made honestly and in good faith; it must be what it purports to be).
With the exception of the limited definition of a "sale" in Regulation 230(1) for purposes of security reporting, the Act is silent as to what constitutes a sale. Accordingly, one would typically refer to its ordinary meaning. The Oxford English Dictionary defines a sale as an "exchange of a commodity for money or other consideration." Similarly, Black's Law Dictionary refers to a "transfer of property
for consideration." As was noted in H. W. Liebig & Co. v Leading Investments Ltd., [1986] 1 S.C.R. 70, "the primary meaning of sale is the transfer of property to another for a price." In our view, it is clear that the FCA, in its decision in Sommerer, had a more definitive concept in mind when it referred to a bona fide or genuine sale.
It should be noted that the FCA expressed their approval of the conclusion reached by Justice Miller in the Tax Court decision at paragraph 91 where he noted "only a settlor, or a subsequent contributor who could be seen as a settlor, can be the "person" for purposes of 75(2) of the Act." It is our view that Justice Miller was simply referring to someone who has contributed value to the trust. This is further supported by the FCA comments in paragraph 58 of their decision which noted that "Peter Sommerer has not endowed the Sommerer Private Foundation with any other money or property."
Accordingly, it is our view that the FCA decision in Sommerer does stand for the general proposition that where property is transferred to a trust by a beneficiary of the trust in return for consideration that constitutes a fair market value, subsection 75(2) will not apply to attribute income in respect of that property to that beneficiary. Note, however, that attribution pursuant to subsection 75(2) may occur in respect of that property to the beneficiary or another person, if the property in question is substituted property, as defined in subsection 248(5), in respect of that beneficiary or other person. For example, if a person settles a discretionary trust in which the settlor is a capital beneficiary with $100, and the trustee subsequently uses those funds to purchase shares from the beneficiary, at fair market value, then subsection 75(2) can apply to attribute income to the beneficiary in respect of income derived from the shares.
As was noted by the FCA in paragraph 13 of its decision in CIT Financial Ltd. v The Queen (2004 FCA 201), "the determination of fair market value is a question of fact rather than a question of law" and "there is ample authority for the proposition that a trial judge is entitled to arrive at his own opinion as to value." In Carr v The Queen (2004 TCC 434), the Tax Court noted that the judicial definition accepted by the courts in Canada was "
the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and under no compulsion to buy or sell." This definition reflects the key elements of the CRA definition of fair market value, as noted in Information Circular IC 89-3 - Policy Statement on Business Equity Valuations.
In the recent 2013 Federal Budget, the Department of Finance ("Finance") released a proposed amendment to subsection 75(2) and related proposed amendment to subsection 107(4.1), along with revisions to section 94 (the non-resident trust rules), in response to the FCA decision in Sommerer. The commentary that accompanied the proposed changes noted that the FCA interpretation of subsection 75(2) was not in accordance with intended tax policy. The commentary further noted that the proposals were intended to "protect the integrity of the tax rules that apply where a Canadian-resident taxpayer maintains effective ownership over property held by a non-resident trust."
The revision to subsection 75(2), along with the proposed change to paragraph 94(4)(h), will effectively restrict the application of the attribution rule in subsection 75(2) to trusts that are factually resident in Canada. In general, proposed new subsection 94(8.1) will cause subsection 94(8.2) to apply, regardless of the amount of consideration exchanged, where a non-resident trust holds property on condition that it may revert to a Canadian-resident person, its distribution may be determined by that person, or it shall not be disposed of by the trust without the consent or direction of the person. These conditions mirror those in subsection 75(2) and, as noted in the Finance commentary to the Budget, are indicative of effective ownership of the property by the Canadian-resident person.
2013-048035
Phillip Kohnen
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