11 March 1999 Internal T.I. 9832537 - DISPOSITION - PROBATE AND INCOME TAX ISSUES

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 certain transactions result in a disposition of property.

Position: TSO advised to instruct client to request an advance income tax ruling.

Reasons: Involves proposed transactions.

March 11, 1999

	Regina Tax Services Office	Headquarters
M. Fitzgerald	Trusts Section
	Director	T. Murphy

	Attention:	Lorette Shaw
		Client Services
		983253

Beneficial Ownership of Property

We are writing in reply to your Round Trip Memorandum of December 4, 1998, wherein you asked whether the documents enclosed with your request would result in the transferor retaining beneficial ownership of the property described therein.

We would first like to point out that the Department has a procedure to deal with requests for confirmation of the tax consequences of transactions which a taxpayer is contemplating. That procedure is set out in Information Circular 70-6R3 (copy attached) and the transferor's representative should be directed to request an advance income tax ruling in accordance with the procedures set out therein.

We will provide some general comments on the proposal and the documents for your information.

In essence, you have an arrangement pursuant to which the mother purports to:

1. transfer title to real property from her as sole owner to her three children as joint tenants by way of an unregistered transfer, which transfer is only to be registered, and presumably with retroactive effect, should the mother own the property on her death,

2. transfer title to certain securities accounts from her as sole owner to her and her daughter as joint tenants, and

3. by way of "Trust Declaration" provide that:

a) the mother is the beneficial and actual owner of all property,

b) the transfers were simply to avoid legal expenses and probate charges in the event of the mother's death, and

c) the children will ensure compliance with the provisions of their mother's last will and testament as if the transfers of the property had not been made.

To further complicate matters, there is a paragraph in the Trust Declaration purporting to be a Power of Attorney with respect to the securities registered in the securities accounts pursuant to which the mother and each of the children appoint the mother and the daughter or either one of them to deal with the securities as they see fit.

An express trust is generally described as one where the person creating it (the settlor) has expressed his or her intention to have property held by one or more persons (the trustees) for the benefit of one or more persons (the beneficiaries). Stated another way, for a valid express trust to exist there must be certainty of intention (the settlor must intent to create a trust), subject matter (the property of the trust) and beneficiaries (those who are to benefit). While the settlor may be one of the trustees, there must be an actual transfer of property to the trustees for the trust to be created. The trustees are responsible for the management and control of the trust property in accordance with the terms of the trust. Generally, they must act together in all decisions and cannot delegate to a co-trustee. The beneficiaries are not entitled to direct the trustees in the management and control of the trust property; their rights are essentially to compel the trustees to administer the trust in accordance with its terms.

In our opinion, the Trust Declaration does not create an express trust. There is no description therein of the persons who are to be the settlor, the trustees and the beneficiaries. Additionally, there is no specific description of the securities that are to be transferred (reference to an account is not sufficient) or of the administration thereof. With respect to the land, it would seem that there is no transfer at all. The Power of Attorney is further support that there is no trust. A power of attorney gives a person power to deal with property that he or she does not legally own. A trustee does not need a power of attorney as a trustee holds legal title.

Futhermore, if there were a valid express trust, there would be a disposition of all the property at its fair market value on its transfer to the trust. There would be a change in the beneficial ownership of the property as the distribution of the property on an "as if" basis would mean that there are other (contingent) beneficiaries of the trust in addition to the mother. We also note that the clause is not a power to appoint beneficiaries under the trust as explained further below.

As the purpose to the arrangement is to reduce legal and probate fees on the mother's death, we shall now consider the general purpose of probate, and how a true joint tenancy or an express trust eliminates the need for probate.

A grant of probate becomes necessary due to certain provincial statutory requirements or third party requests for confirmation that the executor (for example) has the lawful authority to deal with property of an estate. The assets for which a grant of probate is generally necessary include real property, bank accounts, shares and bonds.

A joint tenancy is a form of ownership of property wherein the joint tenants have concurrent ownership and possession of the same property. The interest of each joint tenant is identical.

The property cannot be sold or mortgaged without the consent of both joint tenants. By operation of the law dealing with property held in joint tenancy, in the event of the death of one of the joint tenants, the property will belong solely to the surviving joint tenant. As the deceased joint tenant has no interest in the property on death, it does not form part of the deceased's estate and, thus, it is not necessary for a grant of probate to be obtained.

The same rationale holds true where the transferor transfers property to an express trust and retains only the right to income and capital for life, with the interests of the other beneficiaries vesting in possession on the transferor's death. I.e., the income and capital interests do not form part of the transferor's estate as they terminate on death.

Where a parent transfers property into joint tenancy with a child, the Department's historical position is that the parent has disposed of 50% of the parent's interest in the property. Pursuant to paragraph 69(1)(b) of the Act the deemed proceeds of disposition are equal to 50% of the fair market value of the property. The adjusted cost base of the interest disposed of would equal 50% of the adjusted cost base of the entire property pursuant to section 43 of the Act. On death, the remaining 50% interest in the property retained by the parent would be subject to the provisions of subsection 70(5) of the Act (assuming the property has not otherwise been disposed of before that time and the child survives the parent) and thus the remaining 50% interest would be deemed to have been disposed of immediately before death for fair market value proceeds. For purposes of subsection 160(1) of the Act, however, there is no transfer of property at death by the deceased parent to the child as the child takes by operation of law.

It is generally presumed that a transfer of property from a parent to a child is a gift to the child unless a contrary intent is evident. Where a contrary intent is evident, the presumption of gift is rebutted and the child then holds the legal title in trust for the parent and the parent's estate. This type of "in trust" arrangement is referred to in "trust law" as a resulting trust. Probate, to the extent it is necessary, is not eliminated in such a case as on the parent's death the property is part of the parent's estate.

Thus, in this case, the Trust Declaration would presumably be used as evidence that the mother's intention was not to make a gift of property to the children but rather as evidence that they were to hold the property for her and her estate on her death. This would mean that there is no joint tenancy, that all the property belongs to mother and is to be included in the mother's estate.

There is debate concerning whether resulting trusts should be recognized for income tax purposes and thus be subject to all the rules pertaining to trusts. Jurisprudence dealing with resulting trusts has considered situations where there was a gain on the disposition of property where the husband then alleged that he held one-half the property on a resulting trust for his wife. Thus, he argued, he was only subject to tax on one-half of the gain. The tax consequences of the resulting trust in the cases were limited to the treatment of the gain in year of disposition. For additional discussion of the cases and issues, see "Constructive and Resulting Trusts: Challenging the Tax Boundaries," Catherine Brown, Canadian Tax Journal, 1997, Volume 45, Issue Number 4, pp. 659 - 689.

Whether or not a resulting trust is recognized for income tax purposes, subsection 204(1) of the Income Tax Regulations would seem to require a T3 Trust Income Tax and Information Return (the "T3") to be filed. That regulation is not limited to trusts and estates. It applies to "[e]very person having control of, or receiving income, gains or profits in a fiduciary capacity, or in a capacity analogous to a fiduciary capacity...." The T3 is simply both an income tax return and an information return.

We also note that on December 23, 1998, the Department of Finance released draft legislative proposals on trusts. Draft subsection 107.4(1) provides for a "qualifying disposition" of property if the conditions set out therein are met. Draft subsection 107.4(3) generally provides for the rollover of property on a qualifying disposition, while draft subsection 107.4(4) generally provides that the proceeds of disposition on a subsequent disposition of the capital interest will not be less than the fair market value of the net assets of the trust attributable to the capital interest. Exceptions to this latter provision include a transaction to which subsection 107(2) applies.

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), 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.

We understand that a general power may exclude the assets of the trust from the value of the deceased's estate for probate purposes (as the capital interest of the deceased ceases on death it is not included in the estate for probate purposes either). Property over which the deceased has a general power which is exercised in the deceased's will is, however, generally available for payment of debts of the deceased. In the context of the draft trust proposals, the availability of the property to pay debts of the deceased ensures the collection of any taxes owing.

In our view, a transfer of assets to a trust together with a power of appointment as described above serves both to exclude the assets from the estate for probate purposes and to ensure that there is no fair market value disposition of the assets for income tax purposes. On death, the deceased's capital interest in the trust will be deemed to have been disposed of immediately before death for proceeds equal to the value of the assets of the trust.

An arrangement such as this one presents difficulties in that some of the documents are intended to convey one set of facts for certain purposes, and additional documents are intended to convey another set of facts for other purposes. E.g., here, the transfers of property are intended to be seen as inter vivos gifts and thus not subject to probate, while the so-called Trust Declaration is intended to show that the transfers are not inter vivos gifts for other purposes, including income tax purposes. As shown by the above analysis, a taxpayer cannot have it both ways.

In conclusion, based on the facts presented in this file it is our opinion that:

1. the Trust Declaration does not create a valid express trust,

2. there is no transfer of property to a joint tenancy arrangement, and

3. mother is left as the legal and beneficial owner of the property (resulting trust).

For your information, a copy of this letter will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayers. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for the latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.

We hope our comments are of assistance to you.

R.S. Biscaro, CA
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

Attachment