9 January 1997 External T.I. 9637535 - CAPITAL INTEREST DISTRIBUTION

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:

1. Whether the provisions of subsection 107(2) will
apply to a distribution of property to a
beneficiary who has contingent capital interests by
virtue of capital encroachment provisions
2. Whether the provisions of subsection 107(2) will
apply where the trustee makes a distribution which
is in breach of trust
3. Whether 105(1) will apply to a distribution of
property which is subject to the provisions of
subsection 107(2)

Position:

1 and 2.

Subsection 107(2) applies where property is
distributed in satisfaction of a beneficiary's

capital interest in the trust.

3. No

Reasons:

1 and 2.

The powers of the trustee are found in the trust
documents or in the various applicable statutes,

not in the Income Tax Act.

3. Where 107(2) applies, the distribution of property
would not be considered a benefit from a trust.

XXXXXXXXXX 963753

Attention: XXXXXXXXXX

January 9, 1997

Dear Sirs:

Re: Request for Technical Interpretation

This is in reply to your letter of October 29, 1996, wherein you requested a technical interpretation with respect to subsection 107(2) of the Income Tax Act (the "Act").

Subsection 107(2) of the Act provides a rollover on the distribution of property from a personal trust to a beneficiary in satisfaction of all or part of the beneficiary's capital interest in such trust. Where a power to encroach on capital has been exercised in favour of a
capital beneficiary, the facts of the particular case will determine whether a distribution of property to the beneficiary is in satisfaction of the beneficiary's capital interest in the trust such that subsection 107(2) of the Act would be applicable. It should be noted that subsection 107(2) of the Act does not empower the trustee to make the distribution; that power must be found in the terms of the trust or under a court order or a power granted to the trustee under the applicable statute that concerns the trustee's powers in respect of the various elements of the trust property. If there is a question regarding the extent of the power to encroach on capital, the trustee may seek the court's advice pursuant to the applicable governing statute. For subsection 107(2) of the Act to apply, the distribution must be legally effective and in accordance with the terms of the trust and relevant statutes. Where subsection 107(2) of the Act is applicable to a distribution of property, subsection 105(1) of the Act would not apply to that particular distribution of property.

The above comments are provided in accordance with paragraph 22 of Information Circular 70-6R3.

Yours truly,

Acting Section Chief
Trusts Section
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch