30 November 1996 Ruling 9717693 - Immigrant Trust and subsection 75(2)

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:

A non-resident taxpayer (U.S. Citizen) proposes to establish a trust in favour of his spouse before immigrating to Canada by gifting his share of certain community property (investment assets) to the trust. At the same time the spouse will gift her share of this community property to a trust in favour of the taxpayer. The trust agreements and other documents were structured to ensure that the attribution rules will not apply.

1) Do sections 74.1 and 74.2 and subsection 75(2) apply?

2) Is the exemption provided by subclause 94(1)(b)(i)(A)(III) available to these trusts?

3) Does GAAR apply to the proposed transactions?

Position TAKEN:

1) NO	2)	Yes	3)	No

Reasons FOR POSITION TAKEN:

No previous rulings on this type of scenario. Although there is a potential tax savings (investment income not taxable in Canada and is subject to a lower rate of tax in the U.S.) the tax planning involved is not a misuse or abuse of the Act.

XXXXXXXXXX 							3-971769
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This 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, none of the issues involved in this ruling request:

(a) are in an earlier return of the taxpayers or a related person;

(b) are being considered by a tax service office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(c) are under objection by the taxpayers or a related person;

(d) are before the courts; and

(e) are the subject of a ruling previously issued by this Directorate to the taxpayers or a related person.

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

"Mr. Y" means XXXXXXXXXX

"Mrs. Y" means XXXXXXXXXX

"Mr. X" means XXXXXXXXXX

"U.S. Portfolio Investments" means the following properties: certain shares in U.S. private companies and units of U.S. limited partnerships which hold U.S. real estate, portfolio investments in stocks, bonds and near cash instruments, a house (which will be sold) and moorage in XXXXXXXXXX or the cash received from their sale.

Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:

FACTS

1. Mr. and Mrs. Y are individuals who have been married to each other for over 18 years. Both are U.S. citizens and are residents of that country.

2. Mr. and Mrs. Y are domiciled in the State of XXXXXXXXXX and their assets include, among other things, U.S. Portfolio Investments. The State of XXXXXXXXXX has a community property regime which applies to the assets of married couples. The U.S. Portfolio Investments are property (the "Community Property") in which Mr. Y and Mrs. Y each own an undivided one-half interest (regardless of recorded legal ownership of the property). Joint ownership of the Community Property has been effective immediately from the date of acquisition of the property without any act on the part of either partner of the marriage.

PROPOSED TRANSACTIONS

3. Mr. Y (the "Settlor") will settle a trust ("Trust A") by making a gift of his one-half interest in the U.S. Portfolio Investments to the trust. The property will be held by the trustee in accordance with the terms of a trust agreement to be dated XXXXXXXXXX. Mrs. Y and her estate will be the beneficiary of Trust A. The trustee will be Mr. X (Mr. Y's brother). Mr. X is a resident of the U.S. and is not a resident of Canada. Under the terms of the trust the trustee will have the discretion to distribute or retain income or capital until the time of division. The trustee will not have a power to appoint additional beneficiaries. Mr. Y is also the "protector" of the trust and pursuant to the terms of the trust agreement the protector will have the power to remove or appoint a trustee but cannot be a trustee himself. However, these powers will not entitle the protector to direct, or override any decision made by, the trustee.

4. Mrs. Y (the "Settlor") will settle a trust ("Trust B") by making a gift of her one-half interest in the U.S. Portfolio Investments to the trust. The property will be held by the trustee in accordance with the terms of a trust agreement to be dated XXXXXXXXXX. Mr. Y and his estate will be the beneficiary of Trust B. The trustee will be Mr. X (Mr. Y's brother). Under the terms of the trust the trustee will have the discretion to distribute or retain income or capital until the time of division. The trustee will not have a power to appoint additional beneficiaries. Mrs. Y is also the "protector" of the trust and pursuant to the terms of the trust agreement the protector will have the power to remove or appoint the trustee but cannot be a trustee herself. However, these powers will not entitle the protector to direct, or override any decision made by, the trustee.

5. The trust agreement for both Trust A and Trust B provides that the settlement of property on the trust is irrevocable and that no part of the capital or income of the trust may be paid, lent or applied to or for the benefit of the settlor, may revert to the settlor, may be paid, lent or applied to or for the benefit of any person determined by the settlor, or will require the settlor's consent for the distribution of such capital or income. In addition, each agreement specifies that any income retained by the trust for 60 days past the calendar year end in which it is realized will be added to trust capital.

6. Separation of property agreements will be executed by Mr. Y and Mrs. Y which, under XXXXXXXXXX law, will provide that any distributions from Trust A and Trust B, respectively, will be his or her respective separate property.

7. Mr. and Mrs. Y will become residents of Canada. Their Canadian address will be XXXXXXXXXX. They will file their Canadian income tax returns with the XXXXXXXXXX Tax Centre and the tax services office responsible for these returns will be the XXXXXXXXXX TSO.

PURPOSE OF THE PROPOSED TRANSACTIONS

The establishment of the trusts will enable the investment income earned on the portfolio investments to be taxed only in the United States until such time as Mr. and Mrs. Y have been Canadian residents for a period totalling 60 months.

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. The provisions of subsection 75(2) will not apply in respect of the proposed transactions described herein.

B. Provided no income (including taxable capital gains) earned on the property gifted by a Settlor to Trust A or Trust B, or on property substituted therefor, is payable in the year to Mrs. Y or Mr. Y, respectively, section 74.1 or section 74.2, as the case may be, will not apply for that particular taxation year.

C. Trust A and Trust B each will be a personal trust as defined in subsection 248(1).

D. Subsection 94(1) will not apply to either Trust A or Trust B until the first day of the first taxation year of the trust during which the criteria in paragraphs 94(1)(a) and (b) are met.

E. Subsection 245(2) 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 are binding on Revenue Canada provided that the proposed transactions are completed and effective within six months of the date of this letter.

OPINION

In our opinion, where the power to encroach on capital has been exercised by the trustee in a taxation year and there are net taxable capital gains realized by the trust in that year, then subsection 104(13) may, depending on the circumstances, be applicable to the amount of the capital so distributed to the extent that it is less than or equal to the taxable portion of the capital gain realized by the trust. Therefore, with regard to ruling B above, if during a particular taxation year Trust A or Trust B has a net taxable capital gain and in that same year capital is distributed to Mrs. Y or Mr. Y, respectively, then subsection 104(13) may be applicable to the amount of capital so distributed to the extent that it is less than or equal to the net taxable capital gain. Consequently, section 74.1 or section 74.2 may apply for that particular taxation year.

Yours truly,

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