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 capital interest in a personal trust held by a taxpayer qualify as "eligible property" for purposes of the rollover in section 85 of the Act?
Position: Yes, provided it is capital property of the taxpayer.
Reasons: See below.
STEP CRA Roundtable June 2014
QUESTION 17. Capital interest in a trust is it "eligible property"?
A taxpayer holds a capital interest in a personal trust. The taxpayer is contemplating transferring the capital interest to a corporation if the transaction can be done by way of a section 85 rollover. Can the capital interest qualify as eligible property for purposes of the rollover rules in section 85 of the Income Tax Act?
CRA Response
For purposes of this response, it is assumed that the taxpayer holds a "capital interest", as defined in subsection 108(1) and that the trust is a "personal trust", as defined in subsection 248(1) of the Act.
Subsection 85(1.1) provides the definition of the term "eligible property" for the purposes of the rules under subsection 85(1) which allow a transfer on a tax-deferred basis of eligible property by a taxpayer to a taxable Canadian corporation. For the purposes of subsection 85(1), "eligible property" includes, inter alia, "a capital property (other than real property, or an interest in or an option in respect of real property, owned by a non-resident person)". Further, pursuant to paragraph (b) of the definition of "capital property" in subsection 54(1) of the Act, capital property means "any property (other than depreciable property), any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer." The definition of property in subsection 248(1) of the Act includes a right of any kind whatever.
A "capital interest" in a trust is defined in subsection 108(1) to mean all rights of a taxpayer as a beneficiary under the trust other than an income interest in the trust. Subsection 107(1) of the Act contains special rules applicable to the disposition of capital interest in a trust. Note that paragraph 107(1)(a) provides for the computation of a taxpayer's capital gain, if any, from the disposition of a capital interest in a personal trust. It will, however, be a question of fact whether a capital interest in a personal trust is a capital property of a taxpayer.
Accordingly, in our view, the capital interest in a personal trust will qualify as "eligible property" pursuant to subsection 85(1.1) and for the purposes of subsection 85(1) of the Act, provided it is a capital property of the taxpayer.
Phil Kohnen
2014-052656
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