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) Does the release or surrender of an income interest in an inter vivos trust where there is no direction concerning who is entitled to receive the benefit constitute a disposition for no proceeds for the purposes of subsection 106(2)?
2) Has there also been a disposition of a capital interest in the trust for no proceeds?
3) Do subsections 56(2) & (4) and 74.1(2) apply?
4) Can subsection 107(2) be utilized on the distribution of the trust property to the capital beneficiaries?
Position TAKEN:
1) Yes 2) Yes 3) No 4) Yes
Reasons FOR POSITION TAKEN:
The release of an income interest in a trust for no consideration and the related tax consequences is commented on in IT-385R2 and has been the subject of various rulings and opinions.
1) IT-385R2, Income Interests and previous rulings 9337153 & 9226153.
2) Position re income interests applies to capital interests 9506285.
3) IT-385R2 and previous rulings 933715, 920536 & 922165.
4) Previous rulings 962997, 920536 & 922165.
XXXXXXXXXX 3-970604
XXXXXXXXXX
XXXXXXXXXX, 1997
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers and your subsequent correspondence of XXXXXXXXXX, in respect of the income tax consequences arising out of the proposed transactions described below.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:
(a) in an earlier return of the taxpayers or related persons;
(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;
(c) under objection by the taxpayers or related persons;
(d) before the courts; and
(e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons.
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.
"Trustee" means XXXXXXXXXX.
"Settlor" means XXXXXXXXXX.
"Holdco" means XXXXXXXXXX.
"Opco" means XXXXXXXXXX.
"Mr. J" means XXXXXXXXXX.
"Mrs. J" means XXXXXXXXXX.
"Child A" means XXXXXXXXXX.
"Child B" means XXXXXXXXXX.
"Child C" means XXXXXXXXXX.
"Child D" means XXXXXXXXXX.
The names and addresses 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 relevant facts, proposed transactions and purpose thereof is as follows:
FACTS
1. Mr. J and his family are in business in the XXXXXXXXXX area. Holdco is a corporation whose Articles contain the usual "private company" provisions including the restriction that shares may only be transferred on consent of the majority of the directors or shareholders. So far as can be determined, Holdco was a "shelf company" which was organized on XXXXXXXXXX, at which time, XXXXXXXXXX common shares of the company were allotted and issued to Mr. J's solicitor for the subscription price of $XXXXXXXXXX. The next day, the solicitor (the "Settlor") settled those shares on the trustees of an inter vivos trust pursuant to the Trust Agreement dated XXXXXXXXXX, 1967.
2. Also, on XXXXXXXXXX, a large number of preference shares of Holdco were allotted and issued to Mr. J in consideration of the transfer of property by him to the corporation. On XXXXXXXXXX most of those shares were redeemed, and since that date Mr. J has owned XXXXXXXXXX preference shares of the corporation having a paid-up capital of $XXXXXXXXXX. The preference shares are voting (XXXXXXXXXX), entitled to a non-cumulative dividend of XXXXXXXXXX% per annum on the amount paid-up on the preference shares, non-participating, and redeemable by the corporation for $XXXXXXXXXX per share or $XXXXXXXXXX in all. On XXXXXXXXXX Holdco was amalgamated with other corporations and continued thereafter under the same name (Holdco) without any change in its issued share capital.
3. At all material times the issued shares in the capital of Holdco have consisted of XXXXXXXXXX preference shares owned by Mr. J and XXXXXXXXXX common shares owned by the Trust. Mr. J therefore controls XXXXXXXXXX% of the votes and the Trust controls XXXXXXXXXX% of the votes at all meetings of shareholders. But for the preference to the first $XXXXXXXXXX on liquidation, virtually all of the equity or value of the share capital of Holdco belongs to the Trust.
4. Mrs. J, who is now about XXXXXXXXXX years of age, is the wife of Mr. J. They have four children: Child A, Child B, Child C and Child D ranging in age from about XXXXXXXXXX. Mr. and Mrs. J also have XXXXXXXXXX grandchildren ranging in age from about XXXXXXXXXX.
5. The management and investment provisions are set out in paragraph 4 of the Trust Agreement.
6. Paragraph 5 of the Trust Agreement provides that income is to be paid for life to Mrs. J and the Trustee has the power to encroach on capital for her benefit. Although there is power to encroach on capital for the benefit of Mrs. J, the Trustee has no power to make a distribution of property to any other beneficiary prior to her death. On the death of Mrs. J, the Trust property is to be distributed to the children of Mr. J with income being paid to them up to certain stated ages which they have already attained and thereupon the capital of the Trust is to be distributed to them equally. The remainder interests of the four children are therefore vested. In the event that any one or more of Mr. J's children is not living at the time of the death of Mrs. J, the Trust Agreement provides that there are gifts over to the issue of the children of Mr. J. If any child is then dead the Trust property may be "sprinkled" by power of appointment but in default of such appointment there is a gift over per stirpes to the issue of each child. The interests of the issue of those children (the XXXXXXXXXX grandchildren) are contingent.
7. Paragraph 6 of the Trust Agreement provides specific instructions in the event that any person becomes entitled to a share of the Trust funds before attaining the age of 21 years.
8. The balance of the Trust provisions are administrative in nature.
9. The Trust is resident in Canada and is a "personal trust" as defined in subsection 248(1) of the Act. The year-end of the Trust is December 31.
10. Since the settlement of the Trust in XXXXXXXXXX, the Trust has owned just one property, namely, all of the common shares of Holdco. The fair market value of the Trust property (XXXXXXXXXX common shares of Holdco) has increased substantially since XXXXXXXXXX. No formal appraisal or estimate of the fair market value of the Trust property has been made at any time. However, it may be reasonable to estimate that the fair market value of the Trust property at the present time is in the range of $XXXXXXXXXX.
11. The fair market value of the Trust property is in this range at the present time because of property owned by Holdco. Such property consists mainly of the following:
- cash, loans receivable, and mortgages receivable;
- a substantial portfolio of investments, mainly in shares of public corporations;
- about XXXXXXXXXX parcels of real estate from which it derives rental income (these parcels are leased mainly to corporations controlled by members of Mr. J's family); and
- all of the issued shares of Opco.
12. For income tax purposes, the Trust has never had taxable income. Since the Trust was established, the only dividends it has received have been capital dividends from Holdco (i.e., dividends in respect of which elections have been made pursuant to subsection 83(2) of the Act.) Capital dividends totalling $XXXXXXXXXX were received as follows:
XXXXXXXXXX
On all of those occasions the Trust made a designation pursuant to subsection 104(20) of the Act as it read in its application to those taxation years and paid the same amounts as capital dividends to Mrs. J. All of the capital dividends received by Mrs. J were subsequently lent by her to Holdco. The company has from time to time repaid a portion of the loans and currently is indebted to Mrs. J in the amount of about $XXXXXXXXXX on open account.
13. On XXXXXXXXXX the Trust filed an election pursuant to subsection 104(5.3) of the Act, in prescribed form and within the prescribed time, to defer the deemed disposition date to January 1, 1999 (unless Mrs. J dies before that date). Such deemed disposition would have otherwise occurred on January 1, 1993 by reason of paragraph 104(4)(b) of the Act. On this form Mr. J is identified as the "designated contributor" in respect of the Trust and Mrs. J and Child A, B, C, and D are listed as "exempt beneficiaries" under the Trust.
PROPOSED TRANSACTIONS
14. Under seal and for no consideration Mrs. J will execute a Deed of Disclaimer to release and surrender all her interests in the Trust in respect of any future payments not due and payable at the time the release and surrender is executed. She will not direct in any manner who is entitled to receive the benefits under the Trust. The text of the operative part of the Deed of Disclaimer will be:
XXXXXXXXXX
Mrs. J will seek and receive independent legal advice in connection with the Deed of Disclaimer immediately before the execution thereof.
15. The Deed of Disclaimer will be delivered to the Trustee of the Trust and thereupon the Trustee will distribute all of the property of the Trust, consisting of XXXXXXXXXX common shares of Holdco, equally to each of the four children of Mr. J by the execution and delivery of a transfer of XXXXXXXXXX common shares in the capital of Holdco to each of them. Each Child will forthwith deliver the transfers to the directors of Holdco. Pursuant to the Articles of Holdco all of its directors will consent to the transfer of those shares. The transfers will be recorded in the books and records of Holdco, the old share certificate for XXXXXXXXXX common shares will be cancelled and new certificates issued for XXXXXXXXXX common shares to each Child.
16. The Trust will then be without assets and its existence terminated. The Trustee will in due course file the final return of income of the Trust.
PURPOSE OF PROPOSED TRANSACTIONS
17. The purpose of the proposed transactions is to make certain that there will be no deemed disposition of the Trust property on January 1, 1999 pursuant to paragraph 104(4)(b) and paragraph 104(5.3)(a) of the Act.
RULINGS GIVEN
Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as described herein, our advance income tax rulings are as follows:
A. Mrs. J will not be considered to have received any proceeds of disposition for the purposes of subsections 106(2) and 40(1) of the Act as a result of executing the Deed of Disclaimer.
B. Subsection 106(3) of the Act will not apply in respect of the proposed transactions described herein.
C. The provisions of subsections 56(2), 56(4) and 74.1(2) of the Act will not apply in respect of the proposed transactions described herein.
D. The distribution of the property held by the Trust (the common shares of Holdco) to the capital beneficiaries (Child A, B, C & D), will be subject to the provisions of subsection 107(2) of the Act so that the Trust will be deemed to have disposed of the shares for proceeds of disposition equal to their cost amount to the Trust immediately before that time, and each of the capital beneficiaries will be deemed to have acquired their common shares of Holdco at a cost equal to their proportionate share of that amount.
E. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of Rulings A to D above as a result of the proposed transactions described herein.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and is binding on Revenue Canada provided that the Deed of Disclaimer is worded and executed as described in paragraph 14 above and the proposed transactions are completed and effective within six months of the date of this letter.
Nothing in this letter should be construed as implying that Revenue Canada has agreed to or accepted:
(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares, or
(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.
Yours truly,
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1996
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