13 September 1995 External T.I. 9521125 - PARTIAL RENUNCIATION OF AN INCOME INTEREST

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 a "partial renunciation" of an income interest in a personal trust.

Position TAKEN:

Refer to IT-385R2. If a variation of trust involved, the tax consequences would be determined on a case by case basis.

Reasons FOR POSITION TAKEN:

IT position is self explanatory. There is no Revenue Canada publication regarding a variation of a trust.

			952112
XXXXXXXXXX       	T. Murphy
(613) 957-8953

September 13, 1995

Dear XXXXXXXXXX:

Re: Estate of XXXXXXXXXX

This is in reply to your letter of April 28, 1995, which was forwarded to us for reply on August 9, 1995. You have asked about the tax consequences of a "partial renunciation" of your mother's life interest in the Estate, the intent being to free-up certain assets which will be distributed in specie to her three children according to the terms of the will of the late XXXXXXXXXX.

Our policy is to consider requests on proposed transactions only when they are submitted in the form of an advance income tax ruling as outlined in Information Circular 70-6R2. However, we offer the following general comments on the subject matter of your letter.

The tax consequences of a disposition of an income interest in a trust are discussed in Interpretation Bulletin IT-385R2, a copy of which is enclosed for your reference. It would appear that the "partial renunciation" referred to above is, in accordance with the description in the Bulletin, a release or surrender of part of an income interest in a trust.

It is not clear to us how a "partial renunciation" would permit assets to be distributed out of the trust prior to your mother's death given that the will provides that one equal share of the residue is to be held in trust until her death and that it is only on her death that the amount remaining in the trust is to be divided and distributed to the three children. Perhaps you are considering a variation of the terms of the trust to permit capital of the trust to be distributed to the children prior to the spouse's death? We do not have a publication dealing with the tax consequences of a variation of a trust and the tax consequences of any proposed variation would be determined on a case by case basis. The article Mr. Simon Thompson referred to in his letter to you dated June 5, 1995, outlines several issues that would need to be considered in determining the tax consequences; e.g., whether the variation results in a disposition of assets by the trust or in a disposition of interests in the trust by the beneficiaries.

We note the reference in your letter to the February 11, 1991, Department of Finance Press Release which states: "It (the 21-year rule) encourages trusts to distribute property to beneficiaries before the application of the 21-year rule." It must be kept in mind, however, that the ability to distribute property to beneficiaries will depend on the terms of the trust.

In July, 1995, draft legislation was released by the Minister of Finance which, if enacted, will amend subsection 104(5.3) of the Act such that the election to defer the 21-year rule will no longer be available to postpone deemed disposition days that occur after 1998. The result will, as noted in your letter, be that there is a deemed disposition of the property held by the trust on the death of the spouse of a pre-72 spousal trust.

In the event that you decide to request an advance income tax ruling we have enclosed a copy of Information Circular 70-6R2, outlining the procedures to be followed. Also enclosed is ATR-3 on the subject of winding-up an estate.

We trust our comments will be of assistance to you.

Yours truly,

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

Enclosures

cc. Mr. Simon Thompson, Chief

Pensions, Trusts and Resources
Department of Finance

Ms Nancy Kelly, Chief
Special Processing Division
Revenue Canada