20 August 1996 External T.I. 9601665 - 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:

Application of the attribution rules of 75(2) where a trust acquires shares of a corporation for fair market value from a trustee where the trustee's children are beneficiaries of the trust. There are two other trustees of the trust.

Position:

General comments provided only - 75(2) and other attribution rules may apply.

Reasons:

We do not have sufficient facts to provide specific response in this client situation. We need to examine all the facts, including the terms of the trust to determine specific rights and powers of the contributing "trustee".

XXXXXXXXXX                                      960166

Attention: XXXXXXXXXX

August 20, 1996

Dear Sirs:

Re: Application of Subsection 75(2)

This is in reply to your facsimile letter dated January 9, 1996, wherein you requested our comments on the application of subsection 75(2) of the Income Tax Act (the "Act"). We apologize for the length of the delay in our response.

The situation you described in your letter appears to reflect a factual situation involving specific clients. It is not the Department's practice to provide opinions on the income tax consequences of specific fact situations without a complete review of all the relevant facts and information of the particular situation. Such a review would be made by your local Tax Services Office in respect of a completed transaction, or by this office where a transaction is proposed and is the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2 dated September 28, 1990 (as amended by special release dated September 30, 1992). While we are not in a position to give you a definitive response to the situation described in your letter, we offer the following general comments which may be of some assistance to you.

Our general position concerning the application of subsection 75(2) of the Act is outlined in Interpretation Bulletin IT-369R, as amended by special release dated June 24, 1994. As indicated in paragraph 3 of IT-369R, pursuant to subsection 75(2) of the Act, there will be attribution to the person from whom property was directly or indirectly received if the terms of the trust are such that the property:

(a) may revert to that person,

(b) may be distributed to beneficiaries to be determined by that person at a time after the trust was created, or

(c) may only be disposed of with the consent of, or at the direction of, that person while alive.

As indicated in paragraph 11 of IT-369R, while generally it is the settlor who is the "person" to whom the income therefrom is attributed under subsection 75(2) of the Act, a person other than the settlor may transfer property to a trust under one or more of the conditions described above and become subject to the attribution rules of that subsection. Moreover, the application of subsection 75(2) does not depend on whether the property was sold by the person to the trust at fair market value, but rather whether the property is held by the trust under one or more of the conditions described above.

For example, if the terms of the trust are such that there is a possibility, however remote, that the person may reacquire the property (or property substituted for that property) then clause 75(2)(a)(i) of the Act would apply. This would include a situation where the terms of the trust provide that the person may reacquire the property as a consequence of the death of the last of all other beneficiaries under the trust, or where the person is a contingent beneficiary in the event of the death of the last of all other beneficiaries and the property may revert to the person by virtue of the terms of the trust.

In addition, if the property (or substituted property) held by the trust cannot be disposed of without the consent or direction of that person, even if that person acts as a trustee along with a second trustee or a group of trustees, then clause 75(2)(a)(ii) of the Act, or paragraph 75(2)(b) of the Act would apply. This would include a situation where the person from whom the property was received retains the power to veto distributions of property to beneficiaries.

Lastly, we would like to point out that depending on the particular facts consideration of the potential application of the other income attribution rules found in the Act, such as section 74.1 of the Act would be required before any specific comments could be provided.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 21 of IC 70-6R2 and are not binding on the Department.

Yours truly,

for Section Chief
Financial Institutions Section
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch