27 October 2020 CTF Roundtable Q. 7, 2020-0861041C6 - CTF Question 7 - Subsection 105(1)

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 the CRA confirm that its position in respect of the rent-free use of personal use property held by a trust will also apply to a trust that is an alter ego trust or a joint partner trust?

Position: General comments provided.

Reasons: See below.

2020 CTF Conference

CRA Roundtable

Question 7: Use of Cottage By Children of Settlor of an Alter Ego/Joint Partner Trust

At the 1988 and 1989 Round Tables, the CRA commented on whether a benefit would arise under section 105 from the use of property, such as a cottage, held in trust for an individual in circumstances where no rent is paid but the costs of maintenance and upkeep are paid. The CRA took the position that the use of a cottage property by a beneficiary does constitute a benefit. However, with respect to property owned by a trust that had been or would have been personal-use property (“PUP”) of an individual, the CRA would generally not seek to assess a benefit where the trust is effectively standing in the place of the individual and no benefit or tax advantage would have arisen if the individual, instead of the trust, had allowed the use of the property. PUP is as defined in section 54 and includes homes, cottages, boats, and cars. The CRA confirmed its position in CRA Documents 9707305 and 2012-0470951E5.

Can the CRA confirm that its position will also apply to a trust that is an alter ego trust or a joint spousal or common-law partner trust?

CRA Response

Consistent with our previously published comments, although it is the CRA’s position that the use of trust property by a beneficiary of the trust constitutes a benefit for the purposes of subsection 105(1), in the case of PUP owned by a trust, the CRA will generally not assess a benefit for the use of that property. In this regard, PUP of a trust will, in accordance with the definition in section 54, include property (such as homes, cottages, boats, cars, etc.) owned primarily for the personal use or enjoyment of a beneficiary of the trust or any person related to the beneficiary.

Consequently, where, pursuant to the terms of the trust indenture or will, a trust owns PUP for the benefit, enjoyment or personal use of a beneficiary, our position is that a taxable benefit under subsection 105(1) will generally not be assessed to that beneficiary for the rent-free use of the property. Notwithstanding the above comments, a benefit in respect of the upkeep, maintenance, or taxes for such property may arise pursuant to subsection 105(2).

Pursuant to subsection 73(1) of the Act, an individual (other than a trust) can transfer capital property on a tax-deferred basis, where certain conditions are met. In order for subsection 73(1) to apply, the following conditions must be met:

1. at the time of the transfer of property, both the transferor of the property and the transferee must be resident in Canada;

2. the transferor must not elect out of the rollover rule; and

3. subsection 73(1.01) must apply in respect of the transfer (a “qualifying transfer”).

Subsection 73(1.01) provides that, subject to the requirements of subsection 73(1.02), qualifying transfers include, inter alia, transfers to a trust created by the individual transferring the property:

1. that meets the requirements of subparagraph 73(1.01)(c)(ii), such that the individual is entitled to receive all the income of the trust arising before his or her death and under which no person except that individual may receive or otherwise obtain the use of any of the income or capital of the trust before that individual’s death; or

2. that meets the requirements of subparagraph 73(1.01)(c)(iii), such that the individual and his or her spouse or common-law partner is entitled to receive all the income of the trust arising before their deaths and under which no one other than the individual or the individual’s spouse or common-law partner is permitted to receive or otherwise obtain the use of any of the income or capital of the trust before the death of both the individual and the individual’s spouse or common-law partner.

Subsection 73(1.02) imposes additional conditions that must be met in order for a trust to meet the requirements of either subparagraph 73(1.01)(c)(ii) or (iii). Generally, in either case:

• the trust must be created after 1999; and
• the individual must be at least 65 years of age at the time the trust is created, or, the transfer of property by the individual must involve no change in beneficial ownership of the property and no person (other than the individual) or partnership has any absolute or contingent right as a beneficiary under the trust (determined with reference to subsection 104(1.1)).

A trust described in subparagraph 73(1.01)(c)(ii) that meets all of the relevant conditions outlined above will generally be an “alter ego trust” as defined in subsection 248(1). Similarly, a trust described in subparagraph 73(1.01)(c)(iii) that meets all of the relevant conditions outlined above will generally be a “joint spousal or common-law partner trust” as defined in subsection 248(1).

As such, where pursuant to the terms of the trust indenture an alter ego trust or a joint spousal or common-law partner trust owns PUP for the benefit, enjoyment or personal use of a beneficiary during their lifetime, our position is that a taxable benefit will generally not be assessed to that beneficiary for the rent-free use of the property by that beneficiary.

However, when considering the use of the PUP by another individual, one must remember that for an alter ego trust, in order to meet the conditions outlined in paragraph 73(1.01)(c), the alter ego trust must be a trust under which no person except the settlor may receive or otherwise obtain the use of any of the income or capital of the trust before the settlor’s death. Similarly, in the case of a joint spousal or common-law partner trust, the terms of the trust must provide that no person other than the settlor and their spouse may obtain the use of any of the income or capital of the trust before the later death of the settlor and their spouse.

K. Robinson
October 27, 2020
2020-086104