29 November 1995 CTF Roundtable Q. 1, 6M11910 - TRANSFERS OF PROPERTY TO PROTECTIVE & BARE TRUSTS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

	Transfer of property to a protective trust. Is paragraph 	(e) of section 54 applicable? 

Position:

Paragraph (e) of section 54 is applicable

Reasons:

See files E6M1189 and 9419898

Canadian Tax Foundation
November 19, 1995

The following is the (partial) text of a presentation given on November 29, 1995 by Michael Hiltz of the Income Tax Rulings and Interpretations Directorate of Revenue Canada at the annual conference of the Canadian Tax Foundation held in Toronto.

REVENUE CANADA REVIEW
47th Annual Conference - Canadian Tax Foundation

Opening Remarks

Publication of all Advance Income Tax Rulings

Merger of Income Tax Rulings and Technical Publications

1.Trusts

(a) Revocable Living Trusts

(b) Protective Trusts

(c) Bare Trusts

Protective Trusts

Revenue Canada has received a number of enquiries concerning whether the transfer of property to a protective trust results in a disposition of the property for income tax purposes. A protective trust would be established by a settlor to protect property in the event of some contingency such as deteriorating health.

It is our view that a trust will be considered a protective trust when its indenture contains all of the following terms:

• The settlor is the sole beneficiary of the trust.
• The settlor is entitled to so much of the annual income and any realized capital gains of the trust as he or she may request or, in the absence of such a request, such amounts as the trustees, in their absolute discretion, deem advisable. (For this purpose, the income of the trust is its net income calculated without reference to the provisions of the Act. Realized capital gains are capital gains as calculated in accordance with the provisions of the Act.)
• The property of the trust reverts to the settlor if the trust is terminated prior to the settlor's death.

The trust will terminate upon the death of the settlor unless it is terminated at an earlier date. (When the settlor dies, any property held by the trust will devolve in accordance with the terms of the settlor's will or, if the settlor dies intestate, the property of the trust will devolve in accordance with the laws of intestacy that are relevant to the estate.)

Transfers of property to a protective trust will not result in a disposition pursuant to paragraph (e) of the definition of "disposition" in section 54 of the Act. However, a protective trust is recognized for income tax purposes and is the owner of the property for all purposes of the Act. The settlor will have an income and capital interest in the protective trust and subsection 75(2) will be applicable during the lifetime of the settlor while he or she is resident in Canada.

Bare Trusts

Revenue Canada stated in a paper entitled "Bare Trusts" at the 1989 Corporate Management Tax Conference that, pending a review of our position, where property is held by a bare trust, we will ignore the trust for income tax purposes and will consider the transferor/settlor to be the owner of the property for all purposes of the Act.

It was further stated that we generally view a trust under common law to be a bare trust when:

• the trustee has no significant powers or responsibilities, and can take no action without instructions from the settlor;
• the trustee's only function is to hold legal title to the property; and
• the settlor is the sole beneficiary and can cause the property to revert to him or her at any time.

Our review of this matter has been completed and the above position remains unchanged.