4 December 1996 External T.I. 9624905 - ATTRIB ON TRUST PROP GIFTED FROM BENEFIC, INDIRECT

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 75(2) applies in various situations involving
1) the payment of a debt with a gift from a beneficiary, 2&3) possible indirect transfers to the trust from the beneficiary &
4) whether an agreement or covenant between the trust & beneficiary can avoid the application of 75(2)

Position:

1) question of fact as to whether the gift by beneficiary is applied against debt so that the trust no longer holds the property
2&3) it is likely that an indirect gift has been made so that 75(2) does apply
4) unable to offer meaningful comment without full details, including the covenant or agreement to vary the terms of the trust

Reasons:

each situation described might fall within 75(2) in a particular fact situation

A. Humenuk
XXXXXXXXXX 962490

Attention: XXXXXXXXXX

December 4, 1996

Dear Sirs:

Re: Attribution of Trust Income

We are replying to your letter of July 8, 1996, in which you ask whether subsection 75(2) of the Income Tax Act (the Act) would apply in the various situations outlined in your letter. We apologize for the delay in responding to your letter.

As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve a specific taxpayer and a completed transaction, you may wish to submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we can offer you the following general comments which may be of assistance.

The issue in the first situation described in your letter is whether subsection 75(2) of the Act would apply when a trust receives an amount as a gift from a beneficiary and the trust then uses that amount to repay a debt owing to the bank. The debt to the bank was incurred in order to make a prior distribution to that beneficiary. Without further details concerning the purpose of each transaction in the series, it would appear that the amount of "gift" to the trust is actually a revocable contribution by the beneficiary. As a result, subsection 75(2) of the Act may well be applicable in a particular situation.

In both the second and third situations described in your letter, a series of transactions occur by which the trust receives an amount as a gift, although not directly from anyone who is a beneficiary of that trust. In the second situation, it is the settlor of the trust who makes the gift and in the third situation, it is the sole beneficiary of another trust who makes the gift. In each case, the beneficiary of the trust who receives the property makes a gift of same amount either to the settlor of the trust or to the other trust of which the other person who made the gift was the beneficiary.

It is a question of fact as to whether property held by a trust has been received directly or indirectly from a person described in subsection 75(2) of the Act. However, in the situations you describe, it seems very likely that the property acquired by the trust from either the settlor or the individual who is a beneficiary of another trust can be considered to have been received indirectly from the person who is a beneficiary of the trust. Assuming that the beneficiary may become entitled to that property by way of a distribution from the trust, it is our view that subsection 75(2) of the Act is likely to apply.

Your final question is whether the application of subsection 75(2) of the Act can be avoided through the use of a separate agreement or contract between the trustee and the beneficiary wherein the parties agree that any property or substituted property received from the beneficiary will not revert to that beneficiary. We are not prepared to give general comments of application with respect to the tax consequences arising from a side agreement or variation in the trust agreement.

Lastly, we draw your attention to Information Circular 88-2 dealing with the general anti-avoidance rule, section 245(2) of the Act, which may be of interest to you. If transactions are structured to circumvent subsection 75(2) of the Act in circumstances where it is reasonable to consider that the provision should apply, then subsection 245(2) of the Act may apply to the transaction or series of transactions.

We trust our comments will be of assistance to you.

Yours truly,

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