6 January 1997 External T.I. 9640845 - TRUST AND ARM'S LENGTH DEALINGS

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 two trusts are considered to be dealing arm's length
notwithstanding that they have the same financial institution as

trustee.

Position:

The fact that two trusts have the same financial institution as
trustee will not, in and by itself, be sufficient to conclude
that these two trusts are not dealing at arm's length.

Reasons:

Analogy with subsection 256(4) of the Act and the combined
comments in bracket in paragraphs 22(a) and 23 of IT-419R

XXXXXXXXXX 5-964084

Attention: XXXXXXXXXX

January 6, 1997

Dear Sirs:

Re: TRUST & ARM'S LENGTH DEALINGS

We are replying to your letter of December 9, 1996, wherein you requested our opinion as to whether two trusts are considered to
be dealing at arm's length notwithstanding that they have the same public company as trustee.

As explained in Information Circular 70-6R3, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions 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 completed transactions, you should submit all relevant facts and documentation to the appropriate tax services office for their views. We are therefore not in a Position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

Interpretation Bulletin IT-419R (IT-419R) provides some criteria used by Revenue Canada to determine whether or not persons deal with each other at arm's length under the Income Tax Act.

The determination as to whether two trusts are dealing at arm's length can only be established following a review of all of the relevant facts pertaining to the particular situation. In fact, as mentioned in paragraph 15 of IT-419R "sometimes unrelated persons may deal with each other at arm's length, sometimes they may not, depending on all the circumstances. By providing general criteria to determine whether there is an arm's length relationship between unrelated persons for a given transaction, it must be recognized that all encompassing guidelines to cover every situation cannot be supplied. Each particular transaction or series of transactions must be examined on its own merits."

Paragraphs 22 and 23 of IT-419R deal specifically with the relationship between a trust and other persons. These paragraphs read as follows:

"A trust and legal entities, such as a corporation, that the trust controls are considered not to be dealing at arm's length. Unless the facts indicate otherwise, a trust is considered not to be dealing at arm's length with:

(a) its settlor subject to the comments in 23 below (unless the settlor has maintained some degree of influence over the trustee, this
general presumption may be ignored when the trustee of the trust is a professional trustee, e.g., a public trust company); or

(b) its beneficiaries.

As with any relationship that the Act does not define as non-arm's length, it is a question of fact whether or not the above persons are dealing at arm's length.

However, in view of the usual intimate (and often frequent) dealings of the above persons, it will be generally assumed that they do not deal at arm's length. According to subsection 104(2), a trust is deemed to be an individual in respect of trust property and, pursuant to the definition in subsection 248(1), an "individual" is a person. Therefore, in section 251, a reference to the word person includes a trust.

23. If property is settled in a trust and, as a result, the settlor transfers all of the usual rights of ownership of the property, the settlor might be dealing at arm's length with the trust. However, not only must the settlor lose his or her ownership rights in a legal sense, but the trustee of the trust must also be free of influence exercised by the settlor."

IT-419R does not deal specifically with the relationship between two trusts. However, in our opinion, the fact that two trusts have the same financial institution as their trustee will not, in and by itself, be sufficient to conclude that these two trusts are not dealing at arm's length.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.

Yours truly,

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