30 November 1996 Ruling 9704263 - VARIATION OF A TRUST

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:

Do changes in definition of income for trust purposes result in disposition of trust interests by the trust beneficiaries?

Position:

No

Reasons:

As changes would not allow the Income Beneficiaries to access the capital of the trust, nor allow the Capital beneficiaries access to Income we can rule there has been no disposition as a consequence of the proposed transactions.

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XXXXXXXXXX 							970426
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Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX - Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted trust and it's respective beneficiaries. We also acknowledge the additional information provided in your letters of XXXXXXXXXX.

We understand that none of the issues involved in the ruling request, to the best of your knowledge and that of the taxpayers involved:

i) is in an earlier return of the taxpayers or a related person,

ii) is being considered by an office of Revenue Canada in connection with a previously filed tax return of the taxpayers or a related person,

iii) is under objection by the taxpayers or a related person,

iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired, and

v) is the subject of a ruling previously to the taxpayers or a related person issued by the Directorate.

In this letter, unless otherwise indicated, all statute references are to the Canadian Income Tax Act and Regulations (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:

"Trust" means XXXXXXXXXX to permit the Income Beneficiaries to accelerate the enjoyment of their income interests as set out in paragraph 3.

"Settlor" means XXXXXXXXXX

"Holding Company" means XXXXXXXXXX

"Opco" means XXXXXXXXXX

"Income Beneficiaries" refers collectively to the following adult grandchildren of the Settlor:

XXXXXXXXXX

"Capital Beneficiaries" refers collectively to the following great-grandchildren of the Settlor as of XXXXXXXXXX (currently all minors):

XXXXXXXXXX

The addresses and tax account numbers of the taxpayers who are parties to this ruling request, as well as the tax services office or tax centre where their returns are filed, are listed in Schedule A.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows.

Facts

1. The Settlor established the Trust, which provides that certain relatives of the Settlor who are all now adults are the Income Beneficiaries, and the children of these relatives, who are all minors, are the Capital Beneficiaries. As originally settled, the Trust provided for the income to be accumulated and added to capital until XXXXXXXXXX, at which time all the income would become payable to the Income Beneficiaries.

2. The principal asset of the Trust is the shares of the Holding Company, a corporation with its head office in XXXXXXXXXX. In XXXXXXXXXX, as part of an estate freeze, the Holding Company acquired all the growth shares of Opco. In XXXXXXXXXX all the assets of the Holding Company, consisting of shares of Opco, were sold at a significant profit. The current assets of the Holding Company consist of marketable securities and near cash investments.

3. The income of the Trust is to be distributed for the XXXXXXXXXX and subsequent years to the Income Beneficiaries as follows:

- one-quarter of the gross annual income shall be divided in equal shares per capita among the Income Beneficiaries who are alive each of the years XXXXXXXXXX;

- one-third of the gross annual income shall be divided in equal shares per capita among the Income Beneficiaries who are alive each of the years XXXXXXXXXX; and

- following the time of division or XXXXXXXXXX, whichever first occurs, the Trustee shall divide the net income from the Trust Fund in equal shares per capita among the Income Beneficiaries who are alive at that time.

4. The time of division is the date of death of the first to die of the Income Beneficiaries.

5. There have been two successive sole trustees of the Trust since its establishment.

XXXXXXXXXX

6. Both trustees have encountered several administrative difficulties with the Trust and they found, together with their investment managers, that they were constrained from maximizing overall returns on the Trust's assets. The duty to "maintain an even hand" had required them to make investments that produced both reasonable income and capital growth, but not necessarily maximized returns. There has also been some uncertainty created by the use of the term "gross annual income", which is not defined. The gross annual income could be either that of the Holding Company or that of the Trust, or to some extent both, and potentially gross income could be doubled up if dividends are paid to the Trust by the Holding Company and the gross incomes are aggregated.

7. In addition, the annual income to be received by the Income Beneficiaries has been an unknown amount until after the end of the year. This uncertainty has created considerable difficulty for the Income Beneficiaries; it is virtually impossible for them to undertake any meaningful cash flow and financial planning.

Proposed Transactions

8. The proposal, embodied in the Deed of Arrangement, is that a change be made in the method for calculating the distributions to the Income Beneficiaries of the Trust. The method proposed will compute distributions based on a three year rolling average after-tax rate of return. For each of the three years in the "rolling average", the after-tax growth in the value of the Trust's assets will be computed. The average of these three previous year's growth rates (the "Average Annual Rate of Return") will be the basis for the distribution in the fourth year.

9. The distribution to the Income Beneficiaries in a year will be calculated by multiplying the opening after-tax fair market value of the assets of the Trust including its underlying interest in the Holding Company's investments, by the Average Annual Rate of Return and then multiplying this product by the "Distribution Percentage" to obtain the distribution for the year in question. The Distribution Percentage is:

XXXXXXXXXX

10. In no event will the annual distribution be less than the previous year's distribution. Where it is determined that the amount to be distributed based on the formula is less than the previous year's distribution, the current year's distribution will be adjusted to the amount of the prior year's distribution. The new system will also provide that the current year's distribution cannot exceed XXXXXXXXXX% of the previous year's distribution. The Deed of Arrangement will also limit income distributions in any one year to the amount of cash dividends the Trust receives from Holding Company in that year, ensuring there will be no encroachment on capital of the Trust on behalf of the Income Beneficiaries. These provisions will have the effect of providing the Income Beneficiaries with a stable annual income, and ensuring some growth to the Capital Beneficiaries. In determining the appropriate Distribution Percentage (XXXXXXXXXX%) for the years XXXXXXXXXX and onward, various asset mixes were tested and compared with the results using a rigid asset mix. Rates of return for the last 10 years were used in these projections. Provided these rates of return are a reasonable indication of future rates of return, the new formula will provide an after-tax increase for the Capital Beneficiaries and should also provide a slightly greater after-tax return for the Income Beneficiaries over the longer term.

11. The concurrent increase in returns for both groups will be due to the trustee having increased opportunity to invest the Trust's assets to maximize returns.

Purpose of Proposed Transactions

12. The principal reason for revising the method of distribution is that it will enable the investment managers to adopt a balanced portfolio strategy (both theoretically and historically the strategy that provides the highest average yield) which certainly in the longer term will provide the greatest asset base for the Capital Beneficiaries, and a greater income for the Income Beneficiaries.

Rulings Requested and Given

Provided that the preceding statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and the purpose thereof, and the proposed transactions are carried out as described above we confirm the following:

A. There will not be a disposition of any income or capital interest in the Trust as a result of the proposed transactions described herein.

B. The provisions of subsections 56(2), 56(4), 74.1(2) and 105(1) of the Act will not apply in respect of the proposed transactions described herein.

C. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of Rulings A to B above as a result of the proposed transactions described herein.

The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada provided that the Deed of Arrangement is signed and effective within six months of the date of this letter.

Yours truly,

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

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