31 March 1993 Income Tax Severed Letter 9227225 - Revocable Living Trust/Grantor Trust

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.

                                        922722
XXXXXXXXXX                              G. Kauppinen
                                        (613) 957-4363

Attention: XXXXXXXXXX March 31, 1993

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your facsimile dated September 17, 1992 and your letter dated October 19, 1992. Since your queries are in respect of completed transactions they should be directed to a District Taxation Office. However, given the exceptional circumstances of this case, particularly the current tax year filing deadline, we offer the following comments for your consideration.

                    XXXXXXXXXX

In 1990 the husband established a "revocable living trust" (the "Trust"), of which he was sole trustee and beneficiary, to which was transferred, inter alia, the Ontario vacation property. The Trust Document was signed by the husband only but a deed ("the Deed") was prepared and signed by both the husband and the wife which conveyed the Ontario vacation property to the Trust. The Trust Document provided that the income from the Trust was to accrue entirely for the benefit of the husband during his lifetime and he could revoke or amend the Trust at any time. After the husband's death the wife became the sole income beneficiary of the Trust and also had full discretionary power to encroach on any or all of the capital of the Trust during her lifetime. On the wife's death any remaining capital would be distributed to their children per stirpes.

It is our understanding that, under United States law, the type of trust evidenced by these facts (a "Grantor Trust") is not recognized for income tax purposes as constituting a separate entity. No income tax returns are required for the "trust", and the settlor continues to report all of the income on the settlor's personal income tax returns as if the "trust" had not been created. The Social Security Number of the settlor is the identification number for the "trust". Upon death of the settlor, death taxes are payable on the decedent's assets in such a trust, in the same manner as if the assets were disposed of by Will.

For Canadian income tax purposes it is our opinion that, because of the power of the settlor to revoke or change the terms of the Trust at any time during his lifetime and, because all income from it was to accrue entirely for his benefit during his lifetime, the trust is a "bare trust" until the death of the husband.

The Department generally views a bare trust to be a trust under common law where:

     a)   the trustee has no significant powers or
          responsibilities, and can take no action
          without instructions from the settlor; 

     b)   the trustee's only function is to hold legal title
          to the property; and 

     c)   the settlor is the sole beneficiary and can
          cause the property to revert to him at any
          time.

In the case of a "Grantor Trust," it is our understanding the settlor is usually also the trustee. Consequently, it is the Department's view that pre-conditions for the existence of a bare trust described in (a) and (b) above are obviously satisfied.

Where property is held by a bare trust the Department considers the settlor to be the owner of the property for all purposes of the Income Tax Act ("Act").

Therefore, provided that our understanding of the limited facts is correct and on the assumption that by virtue of her signing of the Deed on XXXXXXXXXX the wife legally evidenced the gift of her interest in the vacation property to her husband effective XXXXXXXXXX, the Canadian income tax consequences of the foregoing are as follows:

1. The wife effectively gifted her 1/2 interest in the property to her husband on XXXXXXXXXX prior to the transfer of legal title of the property to the trust. This constituted a disposition of taxable Canadian property at fair market value pursuant to subparagraph 69(1)(b)(ii) of the Act. A taxable capital gain should have been reported for Canadian income tax purposes for the wife's 1990 taxation year pursuant to subparagraph 115(1)(b)(i) of the Act. However, pursuant to Article XIII(9) of the Canada - U.S. Income Tax Convention (1980) ("Convention")(which was ratified in 1984) any accrued gain on the property up to December 31, 1984 will be exempt from Canadian tax.

2. The husband will be deemed to have acquired his wife's 1/2 interest in the property on XXXXXXXXXX at its fair market value on that date pursuant to paragraph 69(1)(c) of the Act.

3. There was no disposition for Canadian income tax purposes when legal title (but not beneficial ownership) of the property was transferred to the trust in 1990 pursuant to subparagraph 54(c)(v) of the Act.

4. The husband will be deemed to have disposed of the entire property at its fair market value immediately before his death in 1992 pursuant to subsection 70(5) of the Act. The taxable capital gain must be reported for Canadian income tax purposes pursuant to subparagraph 115(1)(b)(i) of the Act and the husband's final T1 income tax return is due on or before April 30, 1993. The adjusted cost base of the property to the husband is 1/2 of the fair market value of the property on December 31, 1984 (because of the exemption of the gain on the 1/2 the husband always held pursuant to Article XIII(9) of the Convention as discussed above) plus 1/2 of the fair market value of the property on XXXXXXXXXX (i.e. the 1/2 gifted to him by his wife as discussed above).

As mentioned in paragraph 22 of Information Circular 70-6R2, the above comments constitute an expression of opinion only and are not binding on this Department.

We will forward a copy of this reply to the International Taxation Office at 2540 Lancaster Road in Ottawa (K1A 1A8). We encourage you to contact that office (1-800-267-5177) should you require further assistance in this matter.

We trust the foregoing is of assistance.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate Legislative and Intergovernmental Affairs Branch