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")
952548
XXXXXXXXXX G. Kauppinen
(613) 957-4363
Attention: XXXXXXXXXX
October 23, 1995
Dear Sirs:
Re: Revocable Living Trusts / Grantor Trusts
This is further to our letter dated July 28, 1993, (the "letter") in reply to your letter dated March 3, 1993, wherein you requested our opinion as to the income tax consequences which would result when property is transferred revocable living trust (commonly referred to in the U.S. as a "grantor trust").
The settlor of a grantor trust is by the terms of the Declaration of Trust also the trustee and during his or her lifetime is the sole income and capital beneficiary. The settlor retains the ability at any time to revoke, alter or amend the terms of the grantor trust. Additionally, the settlor has the unfettered ability to deal with the property as he or she sees fit during his or her lifetime. The terms of the trust provide for the vesting of the property in (contingent) capital beneficiaries at the time of the settlor's death.
We opined in the letter that transfers of property to a grantor trust would not be a disposition of property pursuant to paragraph 54(c)(v) of the Income Tax Act ("Act") (now paragraph "(e)" of the definition of "disposition" in section 54).
We further stated in the letter that where a living individual transfers legal title of property to a trust but retains beneficial ownership of that property the Department's position is that there will be no disposition of that property, pursuant to subparagraph 54(c)(v) of the Act, if the transferee trust is a "bare trust".
The Department considers a trust to be "bare trust" where the following conditions are satisfied:
1.During the settlor's lifetime he or she is the sole beneficiary of the income and capital of the trust.
2.The settlor retains the ability to, at any time, revoke, alter or amend the terms of the trust.
3.The settlor has the unfettered ability to deal with the property as he or she sees fit during his or her lifetime.
Where property is held by a bare trust the settlor will be considered to be the owner of the property for all purposes of the Act and as such the settlor will report all income and losses (including taxable capital gains and allowable capital losses) related to the property.
In the letter we also stated that in a situation where a settlor transfers property to a trust which has the foregoing provisions, but also stipulates that income and/or capital interests of other beneficiaries, which are contingent during the settlor's lifetime, will vest upon the settlor's death, the trust will be considered to 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 grantor trusts which have contingent beneficiaries. Therefore the letter is incorrect to the extent that it refers to a grantor trust as a "bare trust" during the settlor's lifetime. The letter should have stated that we would consider a grantor trust indenture 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 grantor trust and we would consider the settlor to be the owner of the property held by the trust for all purposes of the Act.
After consultation with our legal advisors and consideration of relevant jurisprudence and numerous articles by practitioners it is now our position that a grantor 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, the opinion stated in the letter is not to be relied upon where transfers of property to a grantor trust are contemplated.
Yours truly,
for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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