17 April 1996 External T.I. 9601865 - PROTECTIVE TRUST

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 ‚mis,

peut ne pas repr‚senter la position actuelle du ministŠre.

960186
XXXXXXXXXX G. Kauppinen
(613) 957-4363

April 17, 1996

Dear Sir:

Re: Paragraph "e" of the definition of Disposition in Section 54 of the Income Tax Act ("Act")("paragraph e")

This is in reply to your letter dated January 11, 1996,

regarding the transfer of property to an inter-vivos trust.

Since your scenario appears to apply to an actual proposed transaction it should be the subject of an advance income tax ruling request. However, we submit the following general comments for your consideration.

The following is the partial text of an announcement made at the November 1995 Canadian Tax Conference and published in
the February 21, 1996 edition of Revenue Canada's Income Tax Technical News.

"Revenue Canada has received a number of enquiries concerning whether the transfer of property to a protective trust results in a disposition of the property for income tax purposes. A protective trust would be established by a settlor to protect property in the event of some contingency such as deteriorating health.

It is our view that a trust will be considered a protective trust when its indenture contains all of the following terms:

- The settlor is the sole beneficiary of the trust.

- The settlor is entitled to so much of the annual income and any realized capital gains of the trust as he or she may request or, in the absence of such a request, such amounts as the trustees, in their absolute discretion, deem advisable. (For this purpose, the income of the trust is its net income calculated without reference to the provisions of the Act. Realized capital gains are capital gains as calculated in accordance with the provisions of the Act.)

- The property of the trust reverts to the settlor if the trust is terminated prior to the settlor's death.

- The trust will terminate upon the death of the settlor unless it is terminated at an earlier date.

(When the settlor dies, any property held by the trust will devolve in accordance with the terms of the settlor's will or, if the settlor dies intestate, the property of the trust will devolve in accordance with the laws of intestacy that are relevant to the estate.)

Transfers of property to a protective trust will not result in a disposition pursuant to paragraph (e) of the definition of "disposition" in section 54 of the Act. However, a protective trust is recognized for income tax purposes and is the owner of the property for all purposes of the Act.

The settlor will have an income and capital interest in the protective trust and subsection 75(2) will be applicable during the lifetime of the settlor while he or she is resident in Canada."

A discretionary capital encroachment power in favour of the settlor would not affect the forgoing conclusion. Also, the trustees could be the settlor and two others, where two of the trustees may bind the third with respect to distributions of capital. However, the settlor must retain the absolute right to request all or part of the annual income and any realized capital gains of the trust as described above.

We trust the forgoing is of assistance.

Yours truly,

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