9 December 1998 External T.I. 9802615 - 21-YEAR DEEMED DISPOSITION RULE

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. Whether a trust with more than one beneficiary including charities as contingent beneficiaries can qualify under paragraph (g) of the definition of "trust" in subsection 108(1) of the Act?

2. Whether a perpetual fund trust can qualify under paragraph (g) of the definition of "trust" in that subsection?

Position: 1. No 2. No.

Reasons: Interests not vested indefeasibly and there are interests which may become effective in the future.

XXXXXXXXXX 						M. Lemire
							980261
Attention:  XXXXXXXXXX 

December 9, 1998

Dear Sirs:

This is in reply to your letter of January 28, 1998 in which you requested our views on the interpretation of paragraph 104(4)(a) and paragraph (g) of the definition of “trust” in subsection 108(1) of the Income Tax Act (the “Act”). We apologize for the delay in response. You presented two factual situations for our consideration.

Scenario 1

There are four income beneficiaries under a trust. The terms of the will provide that on the death of any of the first three income beneficiaries, his or her 25% share of the income is to be divided equally among the surviving beneficiaries. If a beneficiary should become bankrupt or a similar event occur, his or her right to receive the income ceases until “remedied.” On the death of all three beneficiaries, the residue is to be divided among four charities. On the death of the fourth beneficiary, the residue is to be divided the same among the charities. (The residue is not to be divided between the survivors first and then devolve to the charities as in the case with the other three income beneficiaries.)

Scenario 2

There are two perpetual fund trusts created under the terms of a deceased taxpayer’s will. In the first trust, the sole income beneficiary is a charity. In the second trust, there are various charities as income beneficiaries. Each of the trust’s income must be paid annually to its beneficiaries in predetermined percentages which remain constant from year to year and the income must be used by the charities for charitable purposes as specified in the will. The terms of the deceased taxpayer’s will also provide that should any of the named charities cease to function at any time and should no gift-over be mentioned in the will, the trustees of the trusts must use the funds for another charity doing similar charitable work, benefiting at all times as far as possible those persons whom the original gift intended to benefit.

Since the scenarios you presented are actual fact situations, we are not able to provide any specific comments other than by way of an advance income tax ruling. The procedure for requesting an advance tax ruling is laid out in Information circular 70-6R3 dated December 30, 1996. Nevertheless, we are prepared to provide some general comments.

Our Comments

Subsection 104(4) of the Act provides a general rule that every trust will be deemed to have disposed of certain properties and to have reacquired them every 21 years. Paragraph (g) of the definition of “trust” in subsection 108(1) of the Act provides an exception to this general rule. More particularly, paragraph (g) of that definition requires all interests in the trust to have vested indefeasibly and that there be no interest which may become effective in the future. Paragraph (e.1) of the definition of “trust” in subsection 108(1) of the Act also specifically lists certain trusts as exceptions to this general rule.

You are of the view that all interests in the trusts described in the two scenarios above have vested indefeasibly. We point out, however, that even if all interests in a trust may be vested indefeasibly, a trust may not fall within paragraph (g) of the definition of “trust” in subsection 108(1) of the Act if there is any interest in the trust which may become effective in the future.

In scenario 1 described above, it is our view that the trust does not fall within paragraph (g) of the definition of “trust” in subsection 108(1) of the Act. First, we are of the view that the trust’s interests are not vested indefeasibly since the surviving beneficiaries inherit on the death of a beneficiary and the beneficiaries may lose their entitlements if certain events occur. It is also our opinion that there are interests in the trust which will become effective at a future date. For example, the charities’ interests in the trust will become effective at the time of the income beneficiaries’ death.

In scenario 2 described above, we are also of the opinion that the two trusts do not meet the wording of paragraph (g) of the definition of “trust” in subsection 108(1) of the Act as there is possible substitution if the named charities under the trusts cease to exist. Although these two trusts would be somewhat similar to a cemetery care trust, the existing wording of paragraph (e.1) of the definition of “trust” in subsection 108(1) of the Act does not specifically cover the two trusts described in scenario 2 above. However, as most of perpetual fund trusts would qualify as “registered charities” under the Act, if so registered, any deemed disposition of such trusts’ assets because of the 21-year rule would result in no tax consequences.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996.

We trust our comments will be of assistance to you.

Yours truly,

T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch