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 a variation of a testamentary trust to permit the trustees to distribute the trust property prior the application of the 21-year rule constitute a disposition by the trust or of any beneficial interest in the trust?
2) Can 107(2) be utilized on the distribution of the trust property to the Grandchildren?
Position: 1) No. 2) Yes.
Reasons: The variation is not of such significant nature that the Department would consider any disposition. Distribution pursuant to 107(2) consistent with Finance’s technical notes in the context of the 21-year rule.
XXXXXXXXXX
XXXXXXXXXX 3-981867
XXXXXXXXXX
XXXXXXXXXX, 1998
Dear XXXXXXXXXX:
Re: the Testamentary Trust Created by the XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted trust and beneficiaries under the trust in respect of the income tax consequences arising out of the proposed transactions described below. We also acknowledge your correspondence of XXXXXXXXXX.
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; or
(e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons, with the exception of ruling 3-972779, dated XXXXXXXXXX, 1998.
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:
“Mr. A” means XXXXXXXXXX.
“Daughters” means XXXXXXXXXX.
“Trust” means the Trust created by the terms of the XXXXXXXXXX last will and testament.
“Trustees” means XXXXXXXXXX.
“Widow” means XXXXXXXXXX surviving spouse, XXXXXXXXXX.
“Grandchildren” currently means XXXXXXXXXX.
“Grandchild” currently means XXXXXXXXXX individually.
“Great-grandchildren” currently means XXXXXXXXXX collectively.
“Set of Great-grandchildren” means the children of a Grandchild whose interest in the Trust has not vested indefeasibly.
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. A died on XXXXXXXXXX.
2. Mr. A left a last will and testament dated XXXXXXXXXX, which governed Mr. A’s real and personal property situated in XXXXXXXXXX.
3. Probate of the will was granted on XXXXXXXXXX, by the Supreme Court of XXXXXXXXXX to the Trustees.
4. The Trust is resident in Canada, is a “testamentary trust” as defined in subsection 108(1) of the Act, and is a “personal trust” as defined in subsection 248(1) of the Act.
5. In accordance with the terms of the will, XXXXXXXXXX% of the residue of the Mr. A’s XXXXXXXXXX estate was distributed equally to his Daughters while the remaining XXXXXXXXXX% is held in the Trust upon the following terms:
a) the Trustees have the discretion to pay all or any portion of the income of the Trust to any one or more of the Widow and the Grandchildren for as long as the Widow is alive;
b) upon the death of the Widow, the Trust property shall be divided into such number of equal shares as there are Grandchildren then living and each such share shall be held in the Trust for one such Grandchild;
c) the income from such share shall be accumulated until such Grandchild attains the age of XXXXXXXXXX or marries, whichever first occurs, thereafter the income shall be paid to such Grandchild;
d) one-third of the capital of such share shall be paid to such Grandchild at age XXXXXXXXXX, one-half of the remainder of the capital shall be paid to such Grandchild at age XXXXXXXXXX and the balance of the capital shall be paid to such Grandchild at age XXXXXXXXXX;
e) if such Grandchild dies before attaining the age of XXXXXXXXXX, such share shall be divided equally among his or her children; and
f) if such Grandchild dies before attaining the age of XXXXXXXXXX, leaving no children him or her surviving, then such share shall be held for his or her siblings.
6. The Widow passed away on XXXXXXXXXX.
7. There are currently XXXXXXXXXX Grandchildren ranging in age from XXXXXXXXXX.
8. There are currently XXXXXXXXXX Great-grandchildren ranging in age from less than one year to XXXXXXXXXX years.
9. XXXXXXXXXX of the Grandchildren and XXXXXXXXXX of the Great-grandchildren are residents of the United States of America.
10. The remainder of the Grandchildren and Great-grandchildren are residents of Canada.
11. There is no power to encroach upon the capital of the Trust for the benefit of any of the beneficiaries of the Trust.
12. The Trust property includes several commercial real estate properties in XXXXXXXXXX (the “Real Estate”).
13. The Real Estate has significant accrued capital gains.
14. Pursuant to subsection 104(4) of the Act, the Trust will be deemed to have disposed of its capital property on XXXXXXXXXX (the “deemed disposition day”).
PROPOSED TRANSACTIONS
1. Pursuant to the terms of the will, a XXXXXXXXXX share of the Trust property has now vested indefeasibly in each of the XXXXXXXXXX Grandchildren who have attained the age of XXXXXXXXXX. Prior to the Trust’s deemed disposition day, each such share of the Trust property will be distributed to each such Grandchild. The distribution will be made pursuant to subsection 107(2) of the Act in full satisfaction of each such Grandchild’s capital interest in the Trust.
2. Pursuant to the terms of the will, XXXXXXXXXX share of the Trust property has now vested indefeasibly in each of the XXXXXXXXXX grandchildren who are between the ages of XXXXXXXXXX. Prior to the Trust’s deemed disposition day, each such share which corresponds to a XXXXXXXXXX% interest in each of the Trust property will be distributed to each such Grandchild. The distribution will be made pursuant to subsection 107(2) of the Act in partial satisfaction of each such Grandchild’s capital interest in the Trust.
3. Pursuant to the terms of the will, XXXXXXXXXX share of the Trust property has now vested indefeasibly in the one Grandchild who is between the ages of XXXXXXXXXX. Prior to the Trust’s deemed disposition day, that share which corresponds to a XXXXXXXXXX% interest in each of the Trust property will be distributed to that Grandchild. The distribution will be made pursuant to subsection 107(2) of the Act in partial satisfaction of the Grandchild’s capital interest in the Trust.
4. An application will be made to the Supreme Court of XXXXXXXXXX to vary the terms of the Trust to permit the Trustees to encroach on the capital of the Trust in order to distribute the Trust property to the XXXXXXXXXX Grandchildren whose interests have not vested indefeasibly prior to the deemed disposition day. Since the children of those XXXXXXXXXX Grandchildren are contingent beneficiaries under the Trust, it is expected that the court will require a portion of the Trust property to be set aside for them.
5. Pursuant to the variation of the Trust, XXXXXXXXXX new trusts will be created for each set of Great-grandchildren. They will initially be settled with a nominal amount by the Trustees of the Trust. The new trusts will be resident in Canada.
6. Each new trust for a Set of Great-grandchildren will have the following terms:
a) Until the earlier of the date upon which the Grandchild attains the age of XXXXXXXXXX years or the date of death of the Grandchild (the “Vesting Date” ), the income derived from the new trust will be paid to each member of such Set of Great-grandchildren in equal shares if more than one;
b) if the Grandchild has no children, the income will be accumulated and added to the capital of the new trust;
c) Upon the Vesting Date, the property of the new trust will be divided among the living members of such Set of Great-grandchildren in equal shares if more than one; such share will be paid or transferred to each member of such Set of Great-grandchildren who has attained the age of majority; for each such member who has not attained the age of majority, such share will be retained in the new trust and kept invested and income therefrom will be paid to or for the benefit of such member until he or she attains the age of majority when such share will be paid or transferred to him or her;
d) if the Grandchild has no children living at the Vesting Date, the property of the new trust will be distributed to the Grandchild; and
e) if the Grandchild is deceased on the Vesting Date leaving no children living, the property of the new trust will be distributed to the Grandchildren then living, in equal shares if more than one.
7. The fair market value of the Great-grandchildren’s interests in the Trust will be determined, after obtaining a valuation by a qualified actuary, pursuant to negotiations with the Public Trustee of XXXXXXXXXX.
8. Once court approval of the variation is obtained, all Trust property (including the Real Estate) remaining after the distribution in 15, 16 and 17 above, with the exception of the cash amount in 23 below, will be distributed to the XXXXXXXXXX Grandchildren in full satisfaction of their remaining capital interests in the Trust.
9. Subsequent to the distribution in 22 above, the Trust property will consist of cash in an amount equal to the fair market value of the Great-grandchildren’s contingent interests in the Trust as determined pursuant to negotiations with the Public Trustee of XXXXXXXXXX. That property will be distributed by the Trustees to the XXXXXXXXXX new trusts in satisfaction of the Great-grandchildren’s contingent interests in the Trust.
10. All transactions will be completed prior to the deemed disposition day.
PURPOSE OF THE PROPOSED TRANSACTIONS
11. The purpose of the proposed transactions is to ensure that there will be no deemed disposition of the Trust property on the deemed disposition day pursuant to subsection 104(4) of the Act.
12. The purpose of the XXXXXXXXXX new trusts is to reflect the fact that the value of the contingent interests of each Set of Great-grandchildren is different. The value of the contingent interest in the Trust depends upon the probability of the parent of that Set of Great-grandchildren dying before attaining the age of XXXXXXXXXX.
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 variation of the Trust to permit the Trustees to encroach on the capital of the Trust in order to distribute Trust property to the XXXXXXXXXX Grandchildren whose interests in the Trust have not vested indefeasibly and to pay amounts to the XXXXXXXXXX new trusts in satisfaction of the Great-grandchildren’s contingent interests will not, in and by itself, result in a disposition for income tax purposes of any property of the Trust or any beneficiary’s interest in the Trust for purposes of sections 106 or 107 of the Act.
B. The distribution of the Real Estate held by the Trust to the XXXXXXXXXX Grandchildren will be subject to the provisions of subsection 107(2) of the Act.
C. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of Rulings A and B 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 court approval of the variation is obtained and the proposed transactions are completed before the deemed disposition day.
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
(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
XXXXXXXXXX
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1997
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1997
Email this Content