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.
This is in reply to your letter dated April 7, 1993 and further to our letter dated March 17, 1993 regarding the application of paragraph 54(c)(v) of the Income Tax Act ("Act"). We apologize for the delay in our response.
In our March 17, 1993 letter we stated at the third paragraph on page 2 that:
"Paragraph 54(c)(v) of the Act is generally not applicable where there are proceeds of disposition from the trust for property transferred to it. In such cases, there would be dispositions of the property for proceeds equal to the fair market value of the consideration received.
It is necessary to distinguish property "settled" on the trust for nil proceeds from property sold to a trust in return for valuable consideration."
You have replied that while a payment for property by a trust settled solely for the benefit of the transferor would be for consideration, the fact that there are proceeds of disposition is immaterial unless there has been a disposition of property. In your opinion, paragraph 54(c)(v) of the Act can be applicable to a transfer to a trust whether or not there is consideration.
In our opinion, it is not possible at law for a trust to be created on a settlement of property on it where the trust simultaneously issues a promissory note to the settlor (transferor) equal to the fair market value of that property.
Where paragraph 54(c)(v) of the Act applies on a transfer of property to an existing trust, the transferor has retained the beneficial ownership (i.e. all the attributes of ownership or "bundle of rights" attached to the property) and the full fair market value of that property is inherent in the income and capital interest in the trust that the transferor now holds. If the trust has also issued a promissory note to the transferor equal to the fair market value of the property it would seem to us that the transferor's beneficial ownership in the property has changed. Therefore we remain of the view that paragraph 54(c)(v) of the Act cannot apply in this scenario.
We trust the foregoing is of assistance. However, as mentioned in paragraph 22 of Information Circular 70-6R2, the above comments constitute an expression of opinion only and are not binding on Revenue Canada, Customs, Excise and Taxation.
for Acting DirectorManufacturing Industries, Partnerships and Trusts Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch
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