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: Whether our 1995 administrative policy statement associated with our 1988 to 1993 opinions on revocable living trust applied in the current case
Reasons: See document
February 14, 2014
Nick Correia, Team Leader HEADQUARTERS
Estate and Trust Section, Audit Dominic Tiu
Toronto Centre TSO (416) 973-8002
1 Front Street, West
Toronto ON M5J 2X6
We are responding to your October 1st, 2013 request for our comments on the following issues raised by the taxpayer representatives (the "Representatives") with respect to the XXXXXXXXXX (the "Trust"):
A. Whether our 1995 administrative policy statement associated with our 1988 to 1993 opinions on revocable living trusts applied in the current case. More specifically, whether the Trust will continue to be considered as a testamentary instrument which only becomes effective on the death of each grantor/settlor to the extent of that person's interest in the trust.
B. Whether there was any disposition of the trust property (the "Property") for tax purposes when the late XXXXXXXXXX ("Mother") and her XXXXXXXXXX children (collectively, the "Children") transferred their interests in the Property to the Trust in XXXXXXXXXX.
C. Whether the deemed disposition of Mother's XXXXXXXXXX interest in the Property as at her death in XXXXXXXXXX would not be subject to tax in Canada by virtue of Article VIII of the 1942 Canada-US Tax Convention.
We comment as follows:
We have assumed that it is unlikely that the Audit Division would revisit any of the issues raised for the years XXXXXXXXXX and XXXXXXXXXX. Therefore, we have limited our views to those in respect of item A above.
To the extent the subject transactions at issue in the current file occurred in XXXXXXXXXX and prior, it cannot be said that at the time, the subject taxpayers relied on opinions we subsequently expressed between 1988 and 1995, regardless of the fact that these views were undergoing change. As stated in our presentation at the 1995 CTF Conference on November 29th, 1995, it is our opinion that a revocable living trust should be recognized for income tax purposes at the time that legal title to property is transferred to it, in the current case in XXXXXXXXXX. Therefore, for Canadian tax purposes, it is our opinion that the Trust is a trust that would be subject to the 21-year deemed disposition provisions of subsection 104(4) of the Income Tax Act (the "Act") for the first time on XXXXXXXXXX. In our view, it would not be appropriate to use those very same opinions we expressed between 1988 and 1995 as a justification for any failure to report the resulting XXXXXXXXXX capital gain, if any. While not unprecedented, it is up to the Audit Division to decide whether any assessment/reassessment should/could be done at this time.
1. On XXXXXXXXXX, Mother and her late spouse, XXXXXXXXXX ("Father"), both US residents, acquired the Property, XXXXXXXXXX. Mother acquired a XXXXXXXXXX interest and Father acquired the remaining XXXXXXXXXX interest in the Property. In the Certificate of Ownership provided, Father held the XXXXXXXXXX interest in the Property as "Trustee" with no details as to whose benefit he was holding it for.
2. In an affidavit (the "Affidavit") signed XXXXXXXXXX, Father stated that the above noted XXXXXXXXXX interest in the Property was acquired in trust equally for the benefit of each of the Children as beneficiaries under XXXXXXXXXX trust agreements. The Children are also all US residents. Based in part on the Affidavit and in part from the XXXXXXXXXX letter of the family's US counsel, we surmised that the subject trust agreements and the date they were signed are as follows:
- XXXXXXXXXX ("Child A") "Trust A" signed XXXXXXXXXX
- XXXXXXXXXX ("Child B") "Trust BC" signed XXXXXXXXXX
- XXXXXXXXXX ("Child C") "Trust BC" signed XXXXXXXXXX
As evidence for the above noted claims, it is our understanding that Father provided the Internal Revenue Services a copy of his XXXXXXXXXX US Gift Tax Return showing the US gift tax paid. However, the same was not made available to us.
3. We were not provided a copy of the trust indenture for either Trust A or Trust BC. However, we were told/surmised the following:
- It is our understanding from the Affidavit that under the terms of Trust BC, all trust properties were to be shared equally between Child B and Child C and were to be distributed when each child turned XXXXXXXXXX. Child B and Child C turned XXXXXXXXXX on XXXXXXXXXX and XXXXXXXXXX respectively.
- In their XXXXXXXXXX letter, the Representatives indicated that when Child A turned XXXXXXXXXX on XXXXXXXXXX, she received her XXXXXXXXXX interest in the Property from Trust BC and transferred the same to a Grantor Trust, i.e., Trust A with Father as trustee. The Representatives must have made an error since the Property was not acquired until XXXXXXXXXX.
- In their subsequent XXXXXXXXXX letter, the Representatives indicated that Trust BC was a trust agreement originally created by Father for the benefit equally of all XXXXXXXXXX Children and that Child A turned XXXXXXXXXX on XXXXXXXXXX, received all of her interest in Trust BC without mention of Child A's Grantor Trust as noted above.
- Although the Affidavit indicated that Trust A was established by Child A with Father as trustee for the sole benefit of Child A, it is curious to note that the Affidavit also indicated that all trust properties held in Trust A were to be distributed XXXXXXXXXX years after Child A's XXXXXXXXXX birthday or XXXXXXXXXX. It would seem that Father, and not Child A, was dictating the substantive terms of the trust. Moreover, Child A ultimately received the distribution of her interest in Trust A, which is the XXXXXXXXXX interest in the Property in XXXXXXXXXX and not XXXXXXXXXX.
- In their further XXXXXXXXXX letter, the Representatives indicated that Father made a gift of the XXXXXXXXXX interest in the Property into Child A's Grantor Trust, i.e., Trust A, a new variation on information provided previously. Included was a later XXXXXXXXXX revocable trust created by Child A that reportedly mirrored the earlier XXXXXXXXXX Trust A without the XXXXXXXXXX-year restriction on distribution noted above.
- We are unable to determine whether the terms of Trust A allowed for variation or allowed the trustee discretion to supersede the above noted XXXXXXXXXX-year restriction on distribution. Without a copy of Trust A, this could not be determined definitively.
4. According to the Representatives, until the Trust was created on XXXXXXXXXX, Father remained the registered owner of the XXXXXXXXXX interest in the Property despite the fact that these interests were reportedly "distributed" to their beneficial owners on or before that time under the terms of Trust A and Trust BC.
5. On XXXXXXXXXX, the Trust was created and Mother and each of the Children transferred their interests in the Property to the Trust that is governed by the laws of XXXXXXXXXX. The trust document provides for the following:
- Section XXXXXXXXXX provides that during the duration of this trust, and provided that each of the Children shall then be living, Mother and the Children shall have the right to revoke the trust created hereunder, or to amend this Agreement with respected to the trust created hereunder. In the event the trust is revoked under this Section XXXXXXXXXX, the Trustee shall forthwith distribute the entire then trust estate of the trust in the following shares XXXXXXXXXX to Mother and XXXXXXXXXX each to the Children.
- Section XXXXXXXXXX provides that if at any time after the death of Father and Mother, the trustee and all of the then living advisors (the Children), shall determine that it would be in the best interests of the beneficiaries of this trust, considered as a group to sell the Property and distribute the proceeds of such sale, then the trustee, upon the written advice of all such then living advisors, shall sell the Property on such terms as the trustees and all such then living advisors shall deem appropriate.
- Section XXXXXXXXXX provides that upon the death of the last of the surviving Grantors of this trust or upon the sale by the Trustee hereunder of the Property, whichever event shall first occur, the Trustee shall forthwith distribute the entire then trust estate of this trust, including undistributed income thereof, to the then living descendant of Mother, per stirpes and not per capita, as their absolute property, and this trust shall thereupon terminate.
6. Mother died in XXXXXXXXXX. It is our understanding that the value of her XXXXXXXXXX interest in the Property as at the time of death was $XXXXXXXXXX. According to her will, the residue of the estate would be transferred to the Mother Revocable Trust (the "MRT") with Child C as trustee. As noted above, the XXXXXXXXXX interest in the Property held personally by Mother was already transferred to the Trust in XXXXXXXXXX. In their XXXXXXXXXX letter, the Representatives indicated that at the time of her death, the said interest did not devolve under the terms of her will and that its disposition would occur pursuant to the terms of the Trust.
7. Father died XXXXXXXXXX. We were not provided with a copy of his will.
8. The Children remain alive and the Trust remains in existence. XXXXXXXXXX
9. During the initial conversations with the Representatives (XXXXXXXXXX/Tiu) in April 2013, we suggested that the CRA voluntary disclosure process may be more appropriate for the case they were consulting us with. At the time, their query was on a "no-name" basis but was clearly related to actual facts scenario. The Representatives ultimately chose to deal with the Estate and Trust Section of the Audit Division of the Toronto Centre Taxation Services Office.
Submission of the Representatives
10. The CRA's treatment of revocable living trusts established by US residents went through a number of variations until finally settled by the CRA and announced at the 1995 CTF Annual Tax Conference. The CRA Technical Interpretation dated January 16, 1996 (Doc. #9525465) (the "1996 Letter") briefly summarizes the history of the unsettled tax treatment.
11. In 1988 the CRA was of the view that a transfer to a revocable living trust resulted in a disposition of the remainder interest at fair market value. In a 1993 Interpretation (Doc. #9227225) the CRA stated that a revocable living trust would be considered to be a bare trust with the result that there was no Canadian tax implication on the creation of the trust. In 1995 the CRA withdrew the 1988 position and stated that a transfer to a revocable living trust occurs at the fair market value of the property on the date of transfer. The CRA went on to state that the 1993 letter was incorrect in that instead of referring to a bare trust it should have stated that the arrangement would be a testamentary instrument which only becomes effective on the death of the settlor/grantor.
12. In the 1996 Letter, the CRA recognized the difficulty faced by taxpayers with the shifting position of the CRA and therefore announced its intention to determine the income tax consequences of transactions completed before the CRA finalized its position in 1995 on a case by case basis. This would suggest that the CRA is prepared to apply pre 1995 positions to revocable living trusts set up prior to the finalization of the CRA's position in 1995.
Whether our 1995 administrative policy statement associated with our 1988 to 1993 opinions on revocable living trusts applied in the current case
13. The Canada Revenue Agency's (the "CRA") treatment of revocable living trusts established by US residents went through a number of variations, most notably, the following:
- In response to question 33 during the 1988 CTF CRA Roundtable, we responded as follows:
Question on Remainder Interest
Does Revenue Canada regard the transfer of personal property to a trust with the creation of a lifetime income interest payable only to the transferor and a residual capital interest to another person as being a disposition of the entire interest in the personal property, or only the remainder interest? Is the answer to the question the same for revocable and irrevocable trusts? If Revenue Canada views such a transfer as being a disposition only of the remainder interest, would the proceeds of disposition be calculated on an actuarial basis? What portion of the cost basis of the personal property transferred to the trust would Revenue Canada consider to be allocable to the remainder interest?
Department's Position (emphasis added)
In our opinion, such a transfer, either to a revocable or to an irrevocable trust, is a disposition at fair market value of the remainder interest only. Whether the remainder interest vests defeasibly or absolutely, and the value of the life interest created at the time of transfer, are examples of factors that would be considered in the determination of the deemed proceeds of disposition. The adjusted cost base of the remainder interest would be the fair market value of the remainder interest divided by the fair market value of the total property multiplied by the adjusted cost base of the total property.
- In severed document 9227225 dated March 31st, 1993, we stated the following: (emphasis added)
The Trust Document provided that the income from the Trust was to accrue entirely for the benefit of the husband during his lifetime and he could revoke or amend the Trust at any time. After the husband's death the wife became the sole income beneficiary of the Trust and also had full discretionary power to encroach on any or all of the capital of the Trust during her lifetime. On the wife's death any remaining capital would be distributed to their children per stirpes. For Canadian income tax purposes it is our opinion that, because of the power of the settlor to revoke or change the terms of the Trust at any time during his lifetime and, because all income from it was to accrue entirely for his benefit during his lifetime, the trust is a "bare trust" until the death of the husband.
- In a presentation given by the CRA during the 1995 CTF conference dated November 29th, 1995, we stated the following: (emphasis added)
Some people use a revocable living trust to avoid the potential impact of provincial probate taxes. By the Declaration of Trust the settlor is a trustee and, during his or her lifetime, is the sole income and capital beneficiary. The settlor retains the ability to revoke, alter or amend the terms of the trust at any time. Additionally, the settlor has the unfettered ability to deal with the property as he or she sees fit during his or her lifetime. The Declaration of Trust further provides for the vesting of the income and capital interests in the trust in other beneficiaries at the time of the settlor's death.
Revenue Canada has previously opined that because the settlor retained beneficial ownership of the property during his or her lifetime, a transfer of property to a revocable living trust resident in Canada would not be a disposition of property pursuant to paragraph (e) of the definition of "disposition" in section 54 and that we would ignore the trust for income tax purposes during the lifetime of the settlor. Consequently, the settlor would be considered to be the owner of the property for all purposes of the Act.
Recently, we have received a number of technical interpretation requests concerning the income tax consequences of a transfer of property to a revocable living trust. In connection with these requests we reconsidered our previous opinion, our response to question 33 of the Revenue Canada Round Table at the 1988 Canadian Tax Conference, and the relevant jurisprudence and literature.
- It is now our opinion that a revocable living trust should be recognized for income tax purposes at the time that legal title to property is transferred to it and that the transfer of the property is at its full fair market value (and not at the value of the remainder interest only). Consequently, our response to question 33 of the 1988 Revenue Canada Round Table is withdrawn and the income tax consequences of transactions completed by taxpayers who relied on our previous opinion on transfers of property to a revocable living trust will be determined on a case by case basis. Subsection 75(2) will be applicable during the lifetime of the settlor while he or she is resident in Canada.
Finally, in our severed interpretation document 9525465 dated January 16th, 1996 we reconfirmed what was presented during the 1995 CTF conference dated November 29th, 1995 and detailed above.
14. Based on the foregoing and to the extent the subject transactions at issue in the current file occurred in XXXXXXXXXX and prior, it cannot be said that at the time, the subject taxpayers relied on opinions we subsequently expressed between 1988 and 1995.
15. As stated in our presentation at the 1995 CTF conference on November 29th, 1995, it is our opinion that a revocable living trust should be recognized for income tax purposes at the time that legal title to property is transferred to it and that the transfer of the property is at its full fair market value, in the current case, in XXXXXXXXXX. Therefore, for Canadian tax purposes, it is our opinion that the Trust would be subject to the 21-year deemed disposition provisions of subsection 104(4) of the Act for the first time on XXXXXXXXXX. In our view, it would not be appropriate to use those very same opinions we expressed between 1988 and 1995 as a justification for any failure to report the resulting XXXXXXXXXX capital gain, if any. While not unprecedented, it is up to the Audit Division to decide whether any XXXXXXXXXX assessment/reassessment should/could be done at this time.
Trusts Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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