2 December 1998 External T.I. 9812375 - DEFINITION OF "TRUST", (G)

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:

Whether a pre-1972 spousal trust which is distributable on the death of the spouse is subject to the deemed disposition rule in 104(4), or is exempt therefrom by virtue of being excluded from the definition of trust pursuant to paragraph (g) of the definition in subsection 108(1).

Position:

NOT exempt prior to the spouse’s death, but it appears that (g) would apply on the spouse’s death by virtue of the interests in the trust being determined at that time.

Reasons:

While the spouse is alive, the interests of the other beneficiaries are not “in possession.”

The definition of “trust” in 108(1) is meant to apply on an on-going basis. Thus, it may become operative subsequent to a time at which it is not operative. If the criteria in (g) are met at the time at which 104(4) would otherwise apply, 104(4) will not apply.

XXXXXXXXXX 	J.D. Brooks
		981237
Attention: XXXXXXXXXX 

December 2, 1998

Dear Sirs:

This is in reply to your letter of August 21, 1998 in which you requested our views on the application of the 21-year deemed disposition rule contained in subsection 104(4) of the Income Tax Act to pre-1972 spousal trusts as defined in subsection 108(1) of the Act. Your query pertains to pre-1972 spousal trusts which are immediately distributable on the spouse’s death.

Our Comments

You have asked for an advance income tax ruling pertaining to a general scenario; however, we only provide advance income tax rulings on a fee-for-service basis and for identified taxpayers. Such rulings are considered to be binding on the Department but only with respect to the taxpayers to whom they are issued. If you would like to receive a binding advance income tax ruling with respect to a specific taxpayer, you should submit a request for such in accordance with the details stated in our Information Circular 70-6R3 dated December 30, 1996. On the other hand, should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation (including identification numbers) to the appropriate Tax Services Office for their comments. Nevertheless, we are prepared to provide some general comments.

As you are aware, paragraph 104(4)(a.1) provides that pre-1972 spousal trusts described therein shall be deemed to dispose of certain types of property on the day that is the later of the day on which the spouse dies and January 1, 1993. When this provision applies, the relevant properties are deemed to be disposed of and reacquired at their fair market value.

However, the definition of “trust” in subsection 108(1) provides for certain types of trusts being excluded from the definition of “trust” for purposes of the 21-year rule in subsection 104(4). Where the criteria in paragraph (g) of that definition are met, the 21-year deemed disposition rule will not apply. It is our view that a pre-1972 spousal trust would generally not be able to satisfy the criteria while the spouse is alive since the interests of the capital beneficiaries would generally not be effective until the spouse’s death. However, the definition of “trust” is meant to apply on an on-going basis and thus, at the time of the spouse’s death, if all the interests in the trust are vested indefeasibly and there is no interest which may become effective in the future, the requirements of paragraph (g) would generally be satisfied and thus the 21-year rule would not apply.

We would point out that the special meaning of “trust” found in paragraph (g) does not apply to a pre-1972 spousal trust if that trust has elected under subsection 104(5.3) or if it elected for its first taxation year ending after 1992 that the special meaning of “trust” not apply. Thus, in that case, there would be a deemed disposition and reacquisition at fair market value on the spouse’s death (or at January 1, 1993 if the spouse died before 1993).

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not an advance income tax ruling and consequently, is not binding on Revenue Canada.

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