10 February 1999 External T.I. 9701605 - PROTECTIVE TRUSTS

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: Does the last criterion set out in Income Tax Technical News No 7 on protective trusts require the property to form part of the settlor's estate?

Position: Yes.

Reasons: The criterion was based on the conclusion that change in legal ownership without any change in beneficial ownership would require that the property form part of the settlor's estate. If it did not, there would be valuation issues re the interest of the settlor in the trust on death.

									970160
XXXXXXXXXX 						T. Murphy
(613) 957-8953
Attention:  XXXXXXXXXX 

February 10, 1999

Dear Sirs:

Re: Protective Trusts

This is in reply to your letters of January 15, 1997 and April 1, 1997 concerning the Department's position on protective trusts as set out in Income Tax Technical News No. 7. We apologize for the delay in responding to your letter.

Your query concerns a revision or expansion of the last criterion concerning protective trusts set out therein. Specifically, you ask whether there would be a disposition on the transfer of capital property to a trust if the trust agreement provides that on the death of the settlor ("Mr. X"), the trustees of the trust are to deal with the trust property in the same manner as if it formed part of his estate, that is, in accordance with the provisions of his last will, if any, and if none, in accordance with applicable intestacy laws. As an alternative, the trustees are given the power to transfer all or part of the trust property to Mr. X's estate.

It is intended that the trust continue beyond the death of Mr. X and you also ask that the trusts provided for after the taxpayer's death be viewed as testamentary trusts.

It appears the interpretation you seek relates to specific taxpayers and proposed transactions. As such, it should be the subject of a request for an advance income tax ruling as set out in Information Circular 70-6R3 dated December 30, 1996. However, we offer the following general comments that may be of assistance to you. They are based on the assumption that the trust is valid in law.

In our opinion, there would be a disposition of the property by Mr. X on its transfer to the trust. We do not agree that there has been no change in Mr. X's beneficial ownership of the property. The effect of the "as if" clause is to provide for other (contingent) beneficiaries of the trust. We also note that the clause is not a power to appoint beneficiaries under the trust as explained further below.

It is also our opinion that the continuing trust would be an inter vivos trust not a testamentary trust. The trust was created and effective during Mr. X's lifetime and does not become a testamentary trust on his death. Further, if the trustees have the authority pursuant to the terms of the inter vivos trust to transfer property of the trust to new trusts which will be created after the death of Mr. X, the new trusts will not be testamentary trusts. They will not be created by Mr. X on and as a consequence of his death and property will be contributed to them otherwise than by Mr. X on or after his death and as a consequence thereof.

On December 23, 1998, the Department of Finance released draft legislative proposals on trusts. Draft subsection 107.4(1) provides for a "qualifying disposition" of property if the conditions set out therein are met. Draft subsection 107.4(3) generally provides for the rollover of property on a qualifying disposition, while draft subsection 107.4(4) generally provides that the proceeds of disposition on a subsequent disposition of the capital interest are not less than the fair market value of the net assets of the trust attributable to the capital interest.

A disposition of property by a Canadian resident person to a Canadian resident trust, other than a trust described in paragraphs (a) to (e.1) of the definition of trust in subsection 108(1), is a qualifying disposition where the disposition does not result in a change in the person's beneficial ownership of the property and the person has no power to appoint beneficiaries under the trust other than a power exercisable only by a will or other testamentary instrument.

In our opinion, the power to appoint beneficiaries would have to be a general power if the person is to have no change in beneficial ownership. As well, a power with a gift over to named heirs in default of the exercise of the power would mean that the person has not retained all of the beneficial ownership of the property as those who will take in default are contingent beneficiaries under the trust.

We understand that a general power may exclude the assets of the trust from the value of the deceased's estate for probate purposes (additionally, as the capital interest of the deceased ceases on death, it is not included in the estate for probate purposes). Property over which the deceased has a general power which is exercised in the deceased's will is, however, generally available for payment of debts of the deceased. In the context of the draft trust proposals, the availability of the property to pay debts of the deceased ensures the collection of any taxes owing.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R3.

We trust our comments will be of assistance to you.

Yours truly,

R.S. Biscaro, CA
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch