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.
970868
XXXXXXXXXX T. Murphy
(613) 957-8953
February 10, 1999
Dear Sir:
Re: Protective Trusts
This is in reply to your letter dated March 27, 1997 concerning protective trusts. We apologize for the delay in responding to your letter.
In your letter you ask whether it is necessary for the property of the trust to form part of the settlor's estate to meet the requirements of a protective trust as set out in Income Tax Technical News No. 7. Therein, the last bullet under the heading "Protective Trusts" states:
The trust will terminate upon the death of the settlor unless it is terminated at an earlier date. (When the settlor dies, any property held by the trust will devolve in accordance with the terms of the settlor's will or, if the settlor dies intestate, the property of the trust will devolve in accordance with the laws of intestacy that are relevant to the estate.)
The above does contemplate that the property will form part of the settlor's estate. If it did not, there would be valuation issues with respect to the interest of the settlor in the trust on death.
However, please note that 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 will not be 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
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