29 January 1996 External T.I. 9408365 - TRANSFER OF PROPERTY TO A TRUST FOR CONSIDERATION

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:

	Will a tranfer of property to a trust in return for 	a FMV promissory note prevent the application of 	paragraph (e) of section 54?

Position:

Yes

Reasons:

	There will be a change in beneficial ownership of 	the property.

		940836
XXXXXXXXXX   	G. Kauppinen
(613) 957-4363

Attention: XXXXXXXXXX

January 29, 1996

Dear Sirs:

Re: Transfers of Property to a Trust

This is in reply to your letters dated March 25, 1994, April 7, 1993, and June 12, 1992, and further to our letters dated March 17, 1993, and February 9, 1994, regarding the application of paragraph (e) of the definition of "disposition" in section 54 ("paragraph (e)" (former subparagraph 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:

"Subparagraph 54(c)(v) of the Act is generally not applicable where there are proceeds of disposition from the trust for property sold 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 (or contributed to) 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, (former) subparagraph 54(c)(v) of the Act can be applicable to a transfer to a trust whether or not there is consideration.

In our letter dated February 9, 1994, we stated at the first paragraph on page 2 that:

"Where (former) 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 issued a promissory note to the transferor equal to the fair market value of the property it (is our view) that the transferor's beneficial ownership in the property has changed."

The foregoing has been confirmed verbally with our legal advisors. Therefore we remain of the view that paragraph (e) of the Act cannot apply in this scenario.

We trust the foregoing is of assistance.

Yours truly,

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

.../cont'd