29 May 2018 STEP Roundtable Q. 9, 2018-0744111C6 - Vested Indefeasibly

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: Requirements for a trust to have all interests in the trust vest indefeasibly.

Position: Question of fact - but general guidance given.

Reasons: Based on previous ITRD positions.

2018 STEP CRA Roundtable – May 29, 2018

QUESTION 9. Requirements for a trust to have all interests in the trust vest indefeasibly

For purposes of the so-called 21-year deemed disposition rule, a trust does not include a trust where “all interests in which, at that time, have vested indefeasibly”. Can CRA comment on what is required for all interests in the trust to have vested indefeasibly?

CRA Response

Paragraph (g) of the definition of “trust” in subsection 108(1) of the Act provides for a potential exception to the 21-year deemed disposition rule in subsection 104(4). When all interests in a particular trust are vested indefeasibly prior to the end of the day that the 21-year deemed disposition rule would otherwise apply, the trust property would not be subject to a deemed disposition at the trust level on that day. However, subparagraphs (g)(i) through (vi) exclude certain types of trusts from the “vested indefeasibly” exclusion found in the preamble of paragraph (g). For example, pursuant to subparagraph (iv), where interests in a Canadian resident trust have otherwise vested indefeasibly, but the total fair market value of all interests in the trust held by non-resident beneficiaries exceeds 20% of the total fair market value of all the beneficiaries interests in the trust held at that time the exclusion to the application of subsection 104(4) will not apply.

The Act does not define the term vested indefeasibly. Cancelled Interpretation Bulletin IT-449R entitled Meaning of “Vested Indefeasibly” provided the statement that “vested indefeasibly refers to the unassailable right to ownership of a particular property” and “…that such right cannot be defeated by any future event, even though that person may not be entitled to the immediate enjoyment of all the benefits arising from that right.” Although the Bulletin dealt with provisions of the Act other than the definition of “trust” found in subsection 108(1), we believe the same views apply.

It is important to note that paragraph (g) of the “trust” definition refers to the vesting of the interests in the trust and not the property or assets of the trust being vested indefeasibly. In contrast various other rollover provisions in the Act dealing with, for example, the transfer of capital property to a spouse or spouse trust and the transfer of farming or fishing property to a child, in section 70, require that the particular property being transferred becomes vested indefeasibly in the recipient within a certain time period.

The decision in The Queen v. Boger Estate 93 DTC 5276 (FCA) dealt with the interpretation of the expression indefeasible vesting. This case involved the question of whether certain farm land had vested indefeasibly immediately upon the death of a taxpayer in the deceased taxpayer’s children (so as to qualify for the rollover under subsection 70(9)). The Federal Court of Appeal approved the trial judge’s statement of the determinative legal principles that vesting occurs where:

(i) there is no condition precedent to be fulfilled before the gift can take effect; and

(ii) the persons entitled (the children) are ascertained and ready to take possession forthwith, there being no prior interests in existence;

and that a vested interest is indefeasible where there is no condition subsequent or a determinable limitation set out in the grant.

It is a question of fact and law whether all interests in a particular trust have vested indefeasibly in the beneficiaries in order for the exception from the 21-year deemed disposition rule to apply. Such a determination can only be made following a review of the applicable law, jurisprudence, the will or trust agreement and all other relevant documents and circumstances in respect of those interests. It is also a question of fact and law as to whether a trustee has the power within the terms of a trust to vest all interests which are not currently vested indefeasibly.

For an interest in a trust to vest indefeasibly in a beneficiary of the trust, the situation must be such that that the beneficiary can be ascertained and that there is no condition precedent to the beneficiary holding such trust interest. Further, there must be no condition subsequent, or possible future event or limitation that could revoke, limit or defeat the beneficiary’s interest in the trust.

In an article in the Canadian Tax Journal entitled Vested Indefeasibly: Its Importance for Tax Purposes (footnote 1), Catherine Brown offers the following framework for guidance in determining whether an interest is vested indefeasibly:

• The interest must be ascertainable. What is the interest?
• The recipient must be identifiable or ascertainable. Who is the beneficiary?
• The interest must not be subject to a condition precedent (except for the expiry of a previous interest). Is the beneficiary's right dependent on a condition of acquisition (for example, successfully completing university)?
• The interest must not be subject to a condition subsequent. Such an interest is usually created by the use of words such as “but if” and “provided that.” Is a condition of retention attached to the gift that might cause it to be defeated (for example, “to Jeremy provided that he remains a tax resident of Canada”)?
• The interest must not be subject to a determinable limitation. Such an interest is usually created by the use of words such as “while,” “during,” “so long as,” or “until.” Does a limitation exist (for example, “to A so long as he maintains his primary residence in Canada”)?
• The interest must not be subject to partial divestment. This can occur if the gift is to a class of recipients, such as “my children at age 25.” Is the wording of the gift such that others might share in the gift at a future time (for example, might more children be born into a class)?
• The interest need not vest “in possession”; it may vest only “in interest.” Does the interest provide either an immediate or a present subsisting future right to future enjoyment (for example, on the death of the life interest holder)?

In summary, in order to vest indefeasibly, the gift must be transferred “with no strings attached” that would prevent the recipient from acquiring the gift either immediately or in the future, or defeat the gift once it has been made.

Where none of the exceptions in subparagraphs (g)(i) through (vi) apply and it is clear in law that interests have vested indefeasibly since inception or where a trust gives the trustees the power to indefeasibly vest the interests in the trust and they lawfully do so before the 21st anniversary date specified in subsection 104(4), the 21-year deemed disposition rule will not apply.

Depending upon the facts in a given situation, where a trust agreement must be amended to allow the trustees the power to vest the interests, the change in trust terms may be seen as so significant so as to result in a resettlement of the trust and therefore a disposition and reacquisition of all trust property for tax purposes.

Lena Holloway
2018-074411

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 CTJ 2006 4 968-991