10 January 1996 External T.I. 9405995 - 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.

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:

Yes.

Reasons:

See Summary to file 6M11910

									940599
XXXXXXXXXX							G. Kauppinen
(613) 957-4363

Attention: XXXXXXXXXX

January 10, 1996

Dear Sirs and Mesdames:

Re: 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 March 4, 1994, wherein you requested our opinion regarding the above-noted provision of the Act in the context of the following scenario:

1.an individual ("Mrs. X") settles an inter vivos trust by transferring to it a capital property with an accrued capital gain;

2.the trust agreement provides that Mrs. X is the sole income and capital beneficiary of the trust during her lifetime and that on her death, the assets of the trust are to pass to those persons appointed in her will;

3.the trust agreement provides that the trust is fully revocable by Mrs. X at any time and its terms may be amended by Mrs. X at any time; and

4.the trustees of the trust would be Mrs. X and several family members, with decisions to be made by a majority of the trustees.

In your view the establishment of a revocable trust of this nature is often attractive where the settlor is an elderly or ailing individual. The revocable trust structure allows such an individual full control over her assets when capacitated; however, in the event that she becomes incapacitated, the other trustees are able to simply take over management of her assets.

You have asked us to confirm that the transfer of capital property to such a trust would not constitute a disposition for income tax purposes pursuant to paragraph (e).

Our Opinion

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.

It is our opinion that, if the trust you have described contains the terms of a "protective trust" as stated above, there would be no disposition for income tax purposes on the transfer of property by the settlor to the trust pursuant to paragraph (e).

If, however, after the death of the settlor, the property of the trust passes to other beneficiaries pursuant to the terms of the trust agreement, the trust would not be a protective trust as defined above and paragraph (e) would not apply to the transfer of the property to the trust. Consequently, 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. The fact that the settlor could change the beneficiaries at any time either by amending the terms of the trust agreement or by revoking the trust and resettling the assets on a new trust would not change our opinion in this regard.

We trust the foregoing is of assistance and we apologize for the delay in our response.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch