10 January 1996 External T.I. 9317875 F - Transfer of Property to a Protective 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.

PRINCIPAL ISSUES:

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

POSITION:

Yes.

REASONS:

See Summary to file 6M11910

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

Re:  Transfers to a "Protective Trust"

Paragraph (e) of the definition of "disposition" in section 54 of the Income Tax Act ("Act") ("paragraph e")

This is in reply to your letter dated June 10, 1993, wherein you requested our opinion with respect to the application of paragraph (e) where capital property with an accrued capital gain is transferred to a "protective trust".  We apologize for the delay in our response.

At the 1995 Canadian Tax Foundation Conference Revenue Canada announced its position with respect to protective trusts.  It is Revenue Canada's 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).  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) of the Act will be applicable during the lifetime of the settlor while he or she is resident in Canada.

Upon his or her death the settlor will be deemed to have disposed his or her capital interest in the trust for proceeds equal to its fair market value immediately before his or her death pursuant to subsection 70(5) of the Act. The fair market value of the capital interest in the trust will be equal to the fair market value of the property held by the trust.

It is not relevant to the forgoing opinions whether or not the property in question is, or is not, real property.

If the property does not devolve in accordance with the terms of the settlor's will upon his or her death but rather pursuant to the terms of the trust indenture, the trust would not be a protective trust as defined above and paragraph (e) would not apply to the transfer of property by the settlor to the trust.  The settlor would be considered to have disposed of the property at its fair market value at the time of its transfer to the trust.  This opinion remains unchanged whether or not the settlor has the power to change the terms of the trust or revoke the trust during his or her lifetime.

We trust the foregoing is of assistance.

Yours truly

for DirectorManufacturing IndustriesPartnerships and Trusts DivisionIncome Tax Rulings and Technical Interpretations DirectoratePolicy and Legislation Branch