16 January 1996 External T.I. 9525465 - Transfers of property to revocable living trusts

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")

									952546
XXXXXXXXXX							G. Kauppinen
(613) 957-4363

Attention: XXXXXXXXXX

January 16, 1996

Dear Sirs:

Re: Revocable Living Trusts

This is further to our letter to you dated March 31, 1993, (file number 922722) regarding the estate of XXXXXXXXXX.

Your query concerned 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 in the letter 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 would be 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 revocable living trusts which have contingent beneficiaries. Therefore, the letter is incorrect to the extent that it referred to the Trust as a "bare trust" during the settlor's lifetime. The letter 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 letter 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 Income Tax 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 as expressed in the above-referenced letter (which was available in a "severed" format through various access services), 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.

At the November 1995 annual conference of the Canadian Tax Foundation, we announced that a revocable living trust will 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 (i.e., question 33 of the 1988 Revenue Canada Round Table is withdrawn). We also announced that the income tax consequences of transactions completed by taxpayers who relied on our previous opinion as expressed in the above-referenced letter will be determined on a case by case basis.

We do not propose to take any action with respect to your clients. The purpose of this letter is to advise you that the opinions expressed in our previous letter should not be relied on where transfers of property to a revocable living trust are contemplated.

We trust the above is satisfactory for your purposes.

Yours truly,

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

c.c. International Tax Office