7 July 1995 External T.I. 9506285 - RELEASE/SURRENDER INCOME & CAPITAL INTERESTS

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:

Tax consequences of: (1) gifts or bequests of an interest in a trust, (2) disclaimers, releases or surrenders of an interest in a trust, and (3) acqisitions of an interest in a trust.

Position TAKEN:

(1) Generally, fair market value proceeds deemed received. (2) See IT-385R2 re income interests. For consistency same position should apply for capital interests. (3) Most significant issue is, assuming trust initially qualified as a personal trust, whether definition would continue to be met.

Reasons FOR POSITION TAKEN:

Paragraphs 70(5)(a) and 69(1)(b) and IT-385R2. Also see E-9207904 and E-920790A for discussion of disclaimers, releases or surrenders.

									950628

XXXXXXXXXX							T. Murphy
(613) 957-8953
July 7, 1995

Dear XXXXXXXXXX:

Re: XXXXXXXXXX Trust

This is in reply to your letter of February 7, 1995 which was forwarded to us on March 3 by Bill Luhta, Ottawa Tax Services. All references herein to sections or components thereof are references to the Income Tax Act.

Your queries concern a proposed trust indenture and an "Agreement Between the Cousins" annexed to that indenture. Revenue Canada does not comment on proposed transactions other than in the context of an advance income tax ruling. The procedure for requesting a ruling is set out in Information Circular 70-6R2. We offer the following general comments on the various subject matters of your letter.

Generally speaking, where property is gifted inter vivos or bequested on death to children the provisions of paragraph 69(1)(b) and 70(5)(a), respectively, apply to deem the taxpayer to have received proceeds of disposition equal to the fair market value of the property.

Paragraphs 7, 8 and 9 of Interpretation Bulletin IT-385R2 discuss the tax consequences of a disclaimer, release or surrender of an income interest in a trust. In our opinion, the principles set out therein would also apply to capital interests (the reference to subsection 106(2) being replaced with a reference to section 40).

Assuming that an inter vivos trust initially qualified as a personal trust as defined in subsection 248(1), the acquisition of an interest in the trust by a person for consideration payable directly or indirectly to the trust or any contributor of property to the trust would disqualify the trust from being a personal trust (unless the excepting condition specified in the definition were met). This would have implications in various areas. E.g., the definition of income interest in subsection 108(1) is only relevant to a personal trust, and subsection 107(2), which provides for a tax deferred distribution of trust property to a beneficiary, only applies to a personal trust.

We trust our comments will be of assistance to you. Copies of the circular and bulletin referred to above are attached for your reference.

Yours truly,

R.S. Biscaro
Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Enclosures