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 revocable living trust. Does paragraph (e) of section 54 apply?
Position:
No.
Reasons:
See Summary to file 6M11900 ("Summary")
941068
XXXXXXXXXX G. Kauppinen
(613) 957-4363
Attention: XXXXXXXXXX
January 10, 1996
Dear Sirs:
Re: Revocable Inter Vivos Trusts
This is in reply to your letters dated April 18 and October 12, 1994, and January 25, 1995, concerning transfers of appreciated capital property to a revocable inter vivos trust (also referred to as a "revocable living trust"). We apologize for the delay in our response.
Your letter makes reference to an opinion (#9227225) issued by this Department on March 31, 1993. That opinion was with regard to a U.S. citizen who in 1990 established a revocable living trust (the "Trust"), of which he was sole trustee and beneficiary, to which was transferred, inter alia, an Ontario vacation property. 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 his 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.
For Canadian income tax purposes we opined 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 was a "bare trust" until the death of the settlor.
It should be noted that the generally accepted definition of a bare trust does not include trusts such as revokable living trusts which have contingent beneficiaries. Therefore the above-noted opinion is incorrect to the extent that it refers to a revokable living trust as a "bare trust" during the settlor's lifetime. The opinion should have stated that we would consider the Trust to be a testamentary instrument which only becomes effective on the death of the settlor. However, this does not change the tax consequences. The opinion in effect stated that, during the settlor's lifetime, we would ignore the existence of the Trust and we would consider the settlor to be the owner of the property held by the Trust for all purposes of the Act.
Recently, we have received a number of technical interpretation requests concerning the income tax consequences of a transfer of property to a revocable living trust. In connection with these requests we reconsidered our previous opinion, our response to question 33 of the Revenue Canada Round Table at the 1988 Canadian Tax Conference (wherein we stated that a transfer of property to a trust where the transferor retained a lifetime income interest was a disposition at fair market value of the remainder interest only), and the relevant jurisprudence and literature.
It is now our opinion that a revocable living trust should be recognized for income tax purposes at the time that legal title to property is transferred to it and that the transfer of the property is at its full fair market value (and not at the value of the remainder interest only). Consequently, our response to question 33 of the 1988 Revenue Canada Round Table and our previous opinion referred to above are withdrawn.
We hope 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
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