7 October 1996 Income Tax Severed Letter 9621455 - Non-resident trusts — meaning of prescribed circumstances

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:

Whether property acquired by a trust (the "first trust") as a consequence of a distribution of income and/or capital from another trust which had acquired the property in prescribed circumstances would be considered to have been acquired by the first trust in prescribed circumstances.

POSITION:

No

REASONS:

The property acquired by a trust that is a beneficiary of another trust as a consequence of a distribution of trust income and/or trust capital would not qualify as "prescribed circumstances" defined in reg. 5909

962145 XXXXXXXXXX O. Laurikainen

Attention: XXXXXXXXXX

October 7, 1996

Dear Sirs:

Re: Clause 94(1)(b)(i)(B) of the Income Tax Act

This is in response to your request for our views concerning the interpretation of the above provision of the Income Tax Act (the "Act") in the following hypothetical example:

1) A trust ("Trust A") not resident in Canada acquires property (the "Property") by virtue of a repayment of a loan from a person described in clause 94(1)(b)(i)(A) of the Act ("Mr. X") with whom Trust A was not dealing at arm's length.

2) A second trust, ("Trust B") which also is not resident in Canada is beneficially interested in Trust A.

3) Trust A distributes the Property referred to in paragraph 1) above to Trust B as part of a distribution of income and/or capital.

4) Mr. X is beneficially interested in Trust B.

You question whether Trust B would be viewed has having acquired the Property "in prescribed circumstances" for the purposes of subparagraph 94(1)(b)(i) of the Act.

Our Comments

Section 5909 of the Regulations to the Act defines the term "prescribed circumstances" as follows:

For the purposes of subparagraph 94(1)(b)(i) of the Act, property shall be considered to have been acquired in prescribed circumstances where it is acquired by virtue of a repayment of a loan.

In the above example Trust B acquires the Property from Trust A ((i.e. a person described in clause 94(1)(b)(i)(B)) as a consequence of a distribution of income and/or capital by Trust A. Therefore the Property could not be considered to have been acquired by Trust B in "prescribed circumstances" for the purposes of the preamble to subparagraph 94(1)(b)(i) of the Act. Moreover clause 94(1)(b)(i)(B) requires merely that the person referred to therein (i.e. Trust A) acquired property from a person described in clause 94(1)(b)(i)(A) and there is no exception for the case where the property is acquired (i.e. by Trust A) in prescribed circumstances. As a result, subsection 94(1) of the Act will apply to Trust B provided the requirements for its application are otherwise satisfied.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of information Circular 70-6R2 and are not binding on Revenue Canada.

We hope that the above is of assistance to you.

for Director Reorganizations and Foreign Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch