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: Can a transfer of a property from a personal trust to a beneficiary constitute both a settlement of a debt owing to the beneficiary and a distribution that meets the requirements for a rollover under subsection 107(2)?
Reasons: It cannot simultaneously be both.
December 19, 2013
Re: Interpretation of subsection 107(2) of the Income Tax Act (the "Act")
This is in response to your submission dated August 21, 2013 ("August letter") in regard to our recent technical interpretation ("TI") 2013-0488061E5. This letter will also respond to the interpretive comments expressed in XXXXXXXXXX's follow-up letter of September 13, 2013 ("September letter") to the XXXXXXXXXX Tax Services Office regarding the above-referenced TI, as well as TI 2013-0488381E5.
In regard to the September letter, we have the following comments:
Based on the comment in the first sentence of the third paragraph of the letter in respect of TI 2013-0488061E5 and 2013-0488381E5 it appears that XXXXXXXXXX failed to consider the assumptions and statements of fact in the two respective documents. Note that fact assumption (vi) in document 2013-0488061E5 contemplates that the Child's debt from the trust will be effectively repaid (not cancelled) by a portion of the real property that would pass to the Child on the wind-up of the trust. Similarly, in document 2013-0488381E5 the sentence "In order to retire the $30 debt, the portion of the fair market value of the property required to settle the debt is $30" must be considered. The sentence contemplates a scenario in which a debt ceases to exist because the creditor has received payment from the debtor of value sufficient to settle the debt.
In general terms, subsection 107(2) of the Act applies to a distribution of property by a personal trust to a beneficiary in satisfaction of their capital interest in the trust, where certain requirements are met. The term "capital interest" is defined in subsection 108(1) of the Act. The definition refers to the "rights of the taxpayer as a beneficiary under the trust".
In this regard, the discussion by Justice Bonner of the Tax Court of what constitutes a "distribution" for purposes of subsection 107(2), in paragraph 13 of his decision in the case of Chan v The Queen (99 DTC 1215), is notable:
"The word "distribute" in the context of subsection 107(2) refers to an allotment of trust property to a beneficiary in accordance with his proportionate share. Such a distribution, being an action taken by the trustee in response to fiduciary duty, is one for which consideration cannot be exacted except in accordance with a provision in the trust deed."
Under the law of equity, fiduciary duties are imposed on a trustee and are enforceable by the beneficiaries of a trust. In our view, in the two TIs referred to above, the settlement of the debts owing by the trust would not constitute a distribution undertaken by the trustee under a fiduciary duty to a beneficiary qua beneficiary, but rather, the fulfilment of requirements imposed on a debtor.
It cannot be said that a transfer that settles a debt can also constitute a distribution for purposes of subsection 107(2) of the Act. In order for both a distribution for purposes of subsection 107(2) and a settlement of debt to occur, it is our view that two transfers of property must occur. Note that the settlement of the debt by the transfer of property to the creditor does not occur by virtue of rights of the holder of the interest as a beneficiary under the trust. It occurs by virtue of the rights held as a creditor.
In regard to XXXXXXXXXX's comments regarding the tax policy in respect of subparagraph 107(4.1)(c)(i) of the Act, we would point out that reference in the preamble to subsection 107(4.1) to a "distribution of any property of a particular personal trust" invokes the same issue as noted above; namely, that not all of the property transferred to the beneficiary would constitute a "distribution".
As to the calculations presented in the third, fourth and fifth points of the September letter, we will leave these issues to be dealt with by the auditor you are presently dealing with.
In regard to the August letter, we have the following comments:
As noted above, a transfer of property by a trustee in settlement of a debt cannot also be a distribution for purposes of subsection 107(2) of the Act; it is one or the other. A distribution is the fulfilment of a fiduciary duty owed to the beneficiary in respect of the trust property. Thus, for the portion of a transfer of value that settles a debt owing by the trust, the preamble to subsection 107(2) of the Act is not met, and by extension, paragraph 107(2)(a) will not apply in respect of that transfer of property.
Please note that a copy of this letter is being provided to the XXXXXXXXXX Tax Services Office for their files.
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
XXXXXXXXXX Tax Services Office
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2013
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2013