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.
5-910290
Dear Sirs:
Re: Subsections 70(6), 70(6.1) and 107(2) and Subparagraph 54(c)(v) of the Income Tax Act
This is in reply to your letter of January 28, 1991 in which you ask the following questions concerning the above-referenced provisions of the Income Tax act (the "Act")
1. Subsection 107(2)
Assuming property has been willed by a taxpayer to a trust described in paragraph 70(6)(b) of the Act (a "spouse trust"), does subsection 107(2) of the Act permit a distribution of property to the surviving spouse on a tax-free basis.
2. Subparagraph 54 (c)(v)
Assuming property has been willed by a taxpayer to a trust described in paragraph 70(6)(b) of the Act (a "spouse trust"), does subsection 107(2) of the Act permit a distribution of property to the surviving spouse on a tax- free basis.
3. Subparagraph 54 (c)(v)
If the answer to 1 above is yes, would subparagraph 54(c)(v) of the Act apply to permit the property distributed to the surviving spouse to be subsequently transferred on a tax-free basis to a trust in which the surviving spouse is the sole beneficiary.
24(1)
4. Subsections 70(6) and (6.1)
24(1)
Our Comments
It would appear that some or all of the above questions relate to a series of transactions. The tax implications inherent in a particular series of transactions can be determined only by reviewing all the relevant facts and documentation. Such a review would be made by this office where the transactions are the subject matter of an advance ruling request or by the relevant district taxation office where completed transactions are involved. The following comments are therefore of a general nature.
Where a beneficiary has both a capital and an income interest in a discretionary testamentary trust, and the trustee distributes property to the beneficiary in satisfaction of all or part of the capital interest, subsection 107(2) of the Act will apply to the distribution. This view was expressed by the Department at the 1985 Canadian Tax Foundation Conference Round Table Discussion.
Where property is transferred by an individual to a trust of which the individual is the sole beneficiary, and the individual's capital and income interests in the trust have rights and attributes that are identical to the rights and attributes attached to the property, subparagraph 54(c)(v) of the Act would apply such that the transfer would not result in a disposition provided the trust is not one described in any of clauses 54(c)(v)(A) to (D). However, where the property transferred to the trust is one that was recently received from another trust of which the individual was also the sole beneficiary, consideration would be given to whether or not the two transactions when viewed together resulted in a tax benefit and, if so, whether or not subsection 245(2) of the Act would apply to deny the benefit.
As indicated in Interpretation Bulletin IT-51O under the heading "Discussion and Interpretation", a transfer includes a sale at FMV. Accordingly, the fact that a trust transfers property to its sole beneficiary in exchange for property (cash, etc.) of equal value would not of itself cause subparagraph 54(c)(v) of the Act to not apply.
Where subparagraph 54(c)(v) applies so that there is no disposition with respect to such an exchange of property, it is our view that the amount by which the FMV of the property received by the trust exceeds the adjusted cost base ("ACB") to the trust of the property transferred to the beneficiary would represent a contribution to the trust by the beneficiary. The ABC of the former trust property to the beneficiary would be equal to the ABC of that property to the trust immediately before the exchange.
Subsection 107(2) of the Act would normally not apply to an exchange of property between a trust and its beneficiary at FMV. If subsection 107(2) were applicable to such an exchange, it is our view that the results would be the same as those set out above in the immediately preceding paragraph.
The court order referred to in subsection 70(6.1) of the Act must be made pursuant to a law of a province providing for the relief or support of dependants. For example, paragraph 70(6.1)(b) of the Act would not apply to an order under a Variation of Trusts Act. It would however, apply to an order under the Family Law Act of Ontario ("FLA"), and our following comments are based on the assumption that your concerns relate to an order under the FLA.
Where a surviving spouse has applied for equalization of property under the FLA and the court orders that property be settled upon a trust of which the spouse is the beneficiary, subsection 70(6.1) of the Act would apply to deem the trust to be one created by the deceased taxpayer's will. The subsection 70(6) rollover would thus apply if the trust is one described in paragraph 70(6)(b) of the Act (i e., a "spouse trust")
It is possible in our view for a spouse trust created under a will to co-exist with a spouse trust created by a court order under the FLA, but only in limited circumstances as explained in the following comments. Subsection 6(7) of the FLA provides that where a surviving spouse elects to receive the entitlement under section 5 of the FLA, the gifts made to the spouse in the deceased taxpayer's will are revoked and the will shall be interpreted as if the surviving spouse had died first, unless the will expressly provides that the gifts are in addition to the entitlement under the FLA. It is therefore our view that a spouse trust created under a will can co-exist with a spouse trust created by a court order under the FLA only where the will provides that gifts to the surviving spouse thereunder are in addition to the spouse's entitlement under the FLA. The fact that the trustees might differ, or that the property of one trust might be located in a country different from that in which the property of the other trust is located, is in our view immaterial in and of itself.
The above comments are an expression of opinion only and are not binding on the Department, as explained in paragraph 21 of Information Circular 70-6R2. We trust however that they are of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate
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