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: 1) Will the income beneficiary receive proceeds of disposition when she renounces her interest? 2) Will the beneficiaries receive proceeds of disposition when they consent to the distribution of Fund property? 3) Will subsection 107(2) apply to the proposed distributions to the beneficiaries? 4) Will GAAR apply?
Position: 1) No. 2) No. 3) Yes, to the extent that they are not distributions of net TCGs. 4) No.
Reasons: 1) to 4) See discussions below.
XXXXXXXXXX 2021-091910
XXXXXXXXXX, 2022
Dear XXXXXXXXXX,
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX (the "Submission Date"), in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the Proposed Transactions, or issues involved in this ruling request are the same as or substantially similar to transactions or issues that are:
(i) in a previously filed return of the taxpayers or a related person and
(a) being considered by the CRA in connection with a previously filed tax return of the taxpayers or a related person;
(b) under objection by the taxpayers or a related person; or
(c) the subject of a current or completed court process involving the taxpayers or a related person; or
(ii) the subject of a ruling previously considered by the Income Tax Rulings Directorate.
Further, the above-referenced taxpayers represent that the Proposed Transactions will not result in them or any related person being unable to pay its outstanding tax liabilities.
Unless otherwise stated, all references to a statute are to the Income Tax Act RSC 1985 (5th Supp), c 1, as amended (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated. Unless otherwise noted, all references herein to a currency are a reference to Canadian dollars.
DEFINITIONS
In this letter the following terms have the meanings specified:
“capital property” has the meaning assigned in section 54;
“CRA” means the Canada Revenue Agency;
“Daughter1” means XXXXXXXXXX;
“Daughter2” means XXXXXXXXXX;
“Daughter2’s Children” means XXXXXXXXXX;
“Daughter2’s Grandchildren” means the children of XXXXXXXXXX;
“disposition” has the meaning assigned in subsection 248(1);
“Estate” means the estate of XXXXXXXXXX;
“Father” means XXXXXXXXXX;
‘‘Fund” has the meaning set out in paragraph 6 below;
“Mother” means XXXXXXXXXX;
“Proposed Transactions” means the proposed transactions that are described under the heading Proposed Transactions below;
“resident of Canada” means resident of Canada for the purposes of the Act;
“Scheme of Distribution” has the meaning set out in paragraph 23 below;
“Trust Company” means XXXXXXXXXX;
“Trustees” means Daughter1 and the Trust Company; and
“Will” has the meaning assigned in paragraph 3 below.
Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:
FACTS
1. Each of the individuals referred to below was and, if they are still living, is a resident of Canada.
2. Daughter1 and Daughter2 were the children of the marriage of Mother and Father.
3. Father made his last will and testament (the “Will”) on XXXXXXXXXX, and died on XXXXXXXXXX.
4. Mother died on XXXXXXXXXX. In accordance with the terms of the Will, Daughter1 became one of the two executors of Father’s estate together with the XXXXXXXXXX.
5. The XXXXXXXXXX issued letters probate for the Will on XXXXXXXXXX. Probate was granted to Daughter1 and the XXXXXXXXXX. The Trust Company is the successor in interest of the XXXXXXXXXX.
6. The Will, at paragraph 3(h), provided for the settlement of $XXXXXXXXXX on a trust called the “Security Fund” (the “Fund”).
7. The Fund is resident in Canada, is a “testamentary trust” as defined in subsection 108(1), and is a “personal trust” as defined in subsection 248(1) of the Act.
8. Daughter1 and the Trust Company are the Trustees of the Fund.
9. The terms and conditions of the Fund can be summarized as follows:
a. Mother was entitled to all of the net annual income of the Fund during her lifetime. The Trustees also had the power to encroach on the capital of the Fund for the benefit of Mother.
b. Upon the death of Mother, the Fund was to be divided into two equal parts, one part for each of Daughter1 and Daughter2. The income from each part was to be paid to the respective daughter. On the death of a daughter, that part was to be paid to the issue of that daughter in equal parts per stirpes. If a daughter did not or does not have issue at death, then that part is to be paid to Father’s issue in equal parts per stirpes.
c. There is no power to encroach upon the capital of the Fund for the benefit of any beneficiary other than Mother.
10. Daughter2 died on XXXXXXXXXX. Following her death, Daughter2’s share of the Fund was distributed to her issue.
11. Daughter1, Daughter2’s Children and Daughter2’s Grandchildren are alive. Each of them is an adult and each has capacity.
12. Other than as set out in this letter, there are no other living issue of Father. In particular, none of Daughter2’s Grandchildren has children.
13. Daughter1 is currently the income beneficiary of the Fund.
14. Daughter1 does not have children and as of the Submission Date Daughter1 was XXXXXXXXXX years old.
15. In accordance with the terms of the Fund, upon Daughter1’s death, the property of the Fund is to be paid in equal shares to the surviving issue of Father per stirpes.
16. The Fund holds an investment portfolio which is comprised of marketable securities and units of mutual fund trusts that are capital property of the Fund.
17. On XXXXXXXXXX, the total fair market value of the marketable securities of the Fund was approximately $XXXXXXXXXX and the total adjusted cost base for the purposes of the Act of the marketable securities of the Fund was approximately $XXXXXXXXXX.
18. The Fund will be deemed to dispose of its capital property pursuant to paragraph 104(4)(c) on XXXXXXXXXX.
PROPOSED TRANSACTIONS
19. Daughter1 will sign an instrument by which she will renounce her income interest in the Fund and, for greater certainty, disclaim any capital interest in the Fund that might accrue to her as a result of her renunciation of the income interest. The relevant proposed wording of the instrument is as follows:
WHEREAS:
i) XXXXXXXXXX in his Last Will and Testament created a security fund (the “Fund|) for the benefit of XXXXXXXXXX wife, namely, XXXXXXXXXX, to be enjoyed during her life-time;
ii) The said, XXXXXXXXXX died on or about the XXXXXXXXXX, whereupon the Fund was eventually invested for the benefit of XXXXXXXXXX;
iii) The income from the Fund was to be paid to the said XXXXXXXXXX during her lifetime.
NOW THEREFORE in consideration of these presents and other good and valuable consideration (the sufficiency of which is hereby acknowledged by the undersigned) the undersigned, the Income Beneficiary of the Fund, as and from this day forward, hereby
1. renounces all right title and interest to the income from the Fund; and
2. for greater certainty, disclaims all right, title and interest to the capital of the Fund.
THE UNDERSIGNED is executing this Renunciation and Disclaimer voluntarily and without coercion of any kind by or on behalf of XXXXXXXXXX and the Residual Beneficiaries of the Fund.
20. Daughter1 will not renounce or disclaim in favour of anyone nor will she direct who is to benefit from the renunciation. She will not receive any monetary consideration in return for her renunciation or disclaimer.
21. Each of Daughter1, Daughter2’s Children and Daughter2’s Grandchildren will sign a consent to the distribution of all of the capital property of the Fund to Daughter2’s Children as described below. There will be no entitlement to consideration in return for the consent given by each of Daughter1, Daughter2’s Children and Daughter2’s Grandchildren.
22. Each of Daughter1, Daughter2’s Children and Daughter2’s Grandchildren will sign a Release and Indemnity addressed to the Trustees upon presentation of a Statement of Account with a Final Executors’ compensation calculation attached.
23. The Trust Company will prepare a Scheme of Distribution that divides the property in the Fund into three shares, each with a fair market value equal to one-third of the total fair market value of the Fund property. Daughter1 will approve of the scheme before it is sent to Daughter2’s Children.
24. Daughter2’s Children will indicate which properties they wish to have transferred to them in-kind, bearing in mind that certain properties of the Fund cannot be transferred and must be sold (as is noted in paragraph 28 below). As a result, it is expected that the distribution to each of Daughter2’s Children will be made partly in specie and partly in cash. The Scheme of Distribution noted in paragraph 23 above will be maintained in that each of Daughter2’s Children will receive a one-third (based on fair market value) share of the property of the Fund.
25. Once an interim distribution has been made, accounts approved and final compensation taken, the Trustees will file a final T3 Return for the Fund. The Fund will not elect under subsection 107(2.001) in respect of any of the property that is distributed.
26. Upon receipt of a clearance certificate, the final distribution will be made to the beneficiaries in accordance with the Scheme of Distribution described in paragraph 23 above.
27. The interim distribution of the property of the Fund and the request for a clearance certificate will occur within XXXXXXXXXX months of the issuance of favourable rulings from the CRA. The final distribution of the property and the dissolution of the Fund will occur as soon as possible after the issuance of a clearance certificate.
28. The property of the Fund includes units of mutual fund trusts that cannot be distributed in-kind to the beneficiaries under the Fund. As a result, the Fund will sell the units for proceeds of disposition equal to their fair market value so that the Fund will realize capital gains in respect of the units. At the Submission Date it was expected that the total of the capital gains that would be realized would be equal to about one-half of the total accrued but unrealized taxable capital gains of the Fund’s investment portfolio. The Fund will allocate one-third of the net taxable capital gains realized on the sale of units to each of Daughter2’s Children and will make a designation in respect of each of Daughter2’s Children in accordance with subsection 104(21).
29. The Fund had no plans to sell, and would not sell, the mutual fund units but for the Proposed Transactions.
30. The Trustees have confirmed that it is not necessary to apply to a court for an order varying the terms of the Fund to permit the distributions contemplated herein.
PURPOSE OF THE PROPOSED TRANSACTIONS
Daughter1 does not require the income of the Fund to maintain her standard of living. She wishes to see Daughter2’s Children enjoy the benefit of the property of the Fund during her lifetime.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions, and purpose of the Proposed Transactions, and provided further that the Proposed Transactions as described above are all carried out in a legally effective manner, our rulings are as follows:
A. The Proposed Transactions, other than the distributions described in paragraphs 25 and 26 above, will not, in and of themselves, result in a disposition for purposes of the Act of any property of the Fund.
B. The renunciation by Daughter1 of her income interest in the Fund, and the disclaimer by her of her capital interest, as described in paragraphs 19 and 20 above, will not, in and of themselves, result in Daughter1 being considered to have received any proceeds of disposition for purposes of subsections 40(1), 106(2) and 107(1) of the Act.
C. The consent provided by each of Daughter1, Daughter2’s Children and Daughter2’s Grandchildren to distribute the Fund property, as described in paragraph 21 above, will not, in and of itself, result in any of Daughter1, Daughter2’s Children and Daughter2’s Grandchildren being considered to have received any proceeds of disposition for purposes of subsections 40(1), 106(2) and 107(1) of the Act.
D. Subsection 107(2) of the Act will apply to the distributions of the Fund property to each of Daughter2’s Children.
E. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.
CAVEAT
Nothing in this letter should be construed as implying that we are ruling on any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above. In particular we express no opinion with respect to:
(a) the fair market value of any property referred to herein, or
(b) the legal validity of the renunciation and the disclaimer described in paragraph 19 above.
The above advance income tax rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R12, dated April 1, 2022, and are binding on the CRA provided the proposed transactions are implemented within 6 months of the date of this letter.
Yours truly,
XXXXXXXXXX
Acting Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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