10 January 1996 External T.I. 9429625 - 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

									942962
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 facsimiles dated November 17, 1994, January 3 and September 15, 1995, wherein you requested our opinion regarding the above-noted provision of the Act in the context of the following scenario:

1.A taxpayer transfers capital property into a trust (the "Trust") as settlor. The majority of the capital property is shares in private and public Canadian resident corporations which have accrued but unrealized capital gains.

2.Under the Trust, the taxpayer would be the sole income and capital beneficiary of the Trust. The taxpayer's spouse would be the sole trustee of the trust but there could be an additional trustee or trustees. All trustees will be Canadian residents, at all relevant times.

3.The terms of the trust indenture would also include the following terms:

(a)The trustee(s) will have complete discretion in the management of the property held by the Trust and in particular, will control all distributions of income and capital from the Trust to the taxpayer during his lifetime. Any income or capital not distributed will be accumulated in the Trust.

(b) Any attempt at alienation by the taxpayer of his interests in the Trust during his lifetime will be null and void.

(c) Upon the taxpayer's death, the beneficiaries of the Trust will be the taxpayer's spouse and children.

The sole purpose of the Trust is to protect and safeguard a taxpayer's assets, where he or she may not be capable of managing his or her financial affairs in the future.

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.

Since the Trust you have described above does not contain the terms we consider necessary for a "protective trust", any transfer of property to the Trust would result in a change in beneficial ownership of that property. Therefore, there would be a disposition by the settlor of that property for income tax purposes at its full fair market value.

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