26 February 1999 External T.I. 9830105 - BLIND TRUSTS

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: Is there a disposition of property on its transfer to a blind trust?

Position: There is no disposition if there is no change in beneficial ownership and the conditions in draft subsection 107.4(1) are met.

Reasons: Law and policy.

XXXXXXXXXX T. Murphy
983010
February 26, 1999

Dear XXXXXXXXXX:

Re: Blind Trusts

This is in reply to your letter of November 19, 1998, concerning the transfer of assets to a blind trust. You have asked for confirmation that both the transfer of assets to a blind trust and the return of those assets to the transferor will not result in a fair market value disposition of those assets by either the transferor or the trust, respectively, pursuant to paragraph (e) of the definition of disposition in section 54 of the Income Tax Act (the “Act”). I.e., that the transfers will occur at the adjusted cost base of the assets. Further, you have asked for confirmation that any capital gain realized on the assets while they are held in the trust will be attributed to the transferor.

Income Tax Technical News No. 7, under the heading “Protective Trusts,” outlines the conditions under which a transfer to such a trust will not be a fair market value disposition. The conditions set out therein are equally applicable to blind trusts.

Where the conditions are met, the trust is considered to have acquired the assets at the adjusted cost base of the assets to the transferor and on the return of those assets the transferor is considered to have reacquired them at that same adjusted cost base. Generally, there is no gain or loss on deemed disposition of the transferor’s capital interest in the trust upon the return of the assets. Subsection 75(2) of the Act will attribute the income and gains on the assets to the transferor while the assets are held in the trust.

On December 23, 1998, the Department of Finance released draft legislative proposals on trusts. Draft subsection 107.4(1) of the Act provides for a “qualifying disposition” of property if the conditions set out therein are met. Draft subsection 107.4(3) of the Act generally provides for the rollover of property on a qualifying disposition and deems the trust’s cost of the assets to be the cost amount (adjusted cost base in the case of capital property) to the transferor.

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) of the Act, 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.

The criteria we will consider in determining whether there is a change in beneficial ownership on the transfer of assets to a trust remain as set out in the above referenced publication, a copy of which is attached for your information.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R3.

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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