1999 Ruling 9914253 - RELEASE OF INCOME INTEREST

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 the variation to the trusts cause a disposition of trust property?

2) Will the surviving sons be considered to have received proceeds of disposition where they release and surrender their income interests in an testamentary trust and there is no direction concerning who is entitled to receive the benefit?

3) Do subsections 56(2), 105(1) or 246(1) apply?

4) Can subsection 107(2) be utilized on the distribution of the trust property to the capital beneficiaries?

Position TAKEN:

1) No 2) Yes 3) No 4) Yes

Reasons FOR POSITION TAKEN:

The release of an income interest in a trust for no consideration and the related tax consequences is commented on in IT-385R2 and has been the subject~of various rulings and opinions.

1) IT-385R2, Income Interests and previous rulings such as 9337153 & 9226153.

2) previous rulings such as 9337153 & 9226153

3) IT-385R2 and previous rulings 933715, 920>536 & 922165.

4) Previous rulings 962997, 920536 & 922165.

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XXXXXXXXXX 991425
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Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance Income Tax Ruling
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We are writing 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, none of the issues involved in this ruling request are:

a) in an earlier return of the taxpayer or a related person;

b) being considered by a tax services office and/or a taxation centre in connection with a tax return previously filed by the taxpayer or a related person;

c) under objection by the taxpayer or a related person;

d) before the courts; or

e) the subject of a ruling previously issued by this Directorate to the taxpayer or a related person.

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:

a) "Surviving Son" means XXXXXXXXXX, individually.

b) "Surviving Sons" means XXXXXXXXXX, collectively.

c) "Spouse" means Mr. A or Mrs. A, as is appropriate in the context.

d) "Mr. A" means XXXXXXXXXX.

e) “Mrs. A" means XXXXXXXXXX.

f) "Trustees" means XXXXXXXXXX.

g) "Adjusted cost base" has the meaning assigned by section 54 of the Act.

h) XXXXXXXXXX.

i) "Trust A" means the trust created by the terms of XXXXXXXXXX last will and testament for the benefit of her son, XXXXXXXXXX and his issue.

j) "Trust B" means the trust created by the terms of XXXXXXXXXX last will and testament for the benefit of her son, XXXXXXXXXX and his issue.

k) "Trust C" means the trust created by the terms of XXXXXXXXXX last will and testament for the benefit of her son, XXXXXXXXXX and his issue.

l) "Trust D" means the trust created by the terms of XXXXXXXXXX last will and testament for the benefit of her son, XXXXXXXXXX and his issue.

m) "Trusts" means Trusts A, B, C and D as described above, collectively, that is, all the trusts created by the terms of XXXXXXXXXX last will and testament or by the terms of XXXXXXXXXX last will and testament which are still existing as of the date of this ruling.

n) "Grandchildren" currently means XXXXXXXXXX.

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, leaving a will which, among other things, made provision for his wife who is now deceased, for his three sons and for the issue of such sons; one son is now deceased, leaving two Surviving Sons.

2. Mrs. A died on XXXXXXXXXX, leaving a will which, among other things, made provision for her husband who predeceased her, for her three sons and for the issue of such sons; one son is now deceased, leaving two Surviving Sons.

3. In accordance with the terms of wills of each of Mr. and Mrs. A, the Trustees are currently holding the remainder of the estate of Mr. A and Mrs, A, the main provisions of which are as follows:

(a) Following the death of both Mr. A and Mrs. A, the Trustees shall pay $XXXXXXXXXX to each of the sons then alive and divide the residue of the estate into equal parts for each son living at that time and shall pay the net income from the investment of the trust property to each of the sons during their lifetime; and

(b) Upon the death of any of the sons, that son's share of the capital shall be distributed in equal shares per stirpes to that son's issue alive at that time.

4. The capital held for the son who is now deceased was distributed to his issue upon his death in accordance with the terms of the wills.

5. The Trusts are resident in Canada, are "testamentary trusts" as defined in subsection 108(1) of the Act and are "personal trusts" as defined in subsection 248(1) of the Act.

6. The Surviving Sons and Grandchildren are all currently adults and resident in Canada.

7. At this time there are XXXXXXXXXX great-grandchildren who have an interest in the Trusts; they are all currently minors and resident in Canada.

8. The combined assets of Trust A and B consist of shares of publicly traded corporations with an estimated fair market value of $XXXXXXXXXX and cash in the amount of $XXXXXXXXXX. The adjusted cost base of the shares currently held in Trust A and B is $XXXXXXXXXX.

9. The combined assets of Trust C and D consist of shares of publicly traded corporations with an estimated fair market value of $XXXXXXXXXX and cash in the amount of $XXXXXXXXXX.

10. A report prepared by XXXXXXXXXX has estimated the value of each beneficiary's interest as of XXXXXXXXXX expressed as a percentage of the total value of the Trusts as of that date.

11. Trusts A and B file an income tax return as if they were a single trust.

12. Trusts C and D file an income tax return as if they were a single trust.

Proposed Transactions

13. Pursuant to the XXXXXXXXXX, the Trustees will obtain all the relevant consents from the beneficiaries and enter into a deed of arrangement which, upon approval of the XXXXXXXXXX, will vary the terms of the Trusts to permit the Trustees to encroach upon the capital of the Trusts in order to distribute the property of the Trusts to the Grandchildren.

14. The Surviving Sons will execute a Renunciation to release or surrender their income interests in the Trusts for no consideration. They will not direct in any manner who is entitled to receive the benefits under the Trust. The text of the operative part of the Renunciation will state:

"I, Surviving Son, do hereby expressly disclaim now and forever, all my right, title and interest to and in the property of the Estates of Mrs A. and Mr. A."

15. Pursuant to the XXXXXXXXXX, an application to the Superior Court of Justice of XXXXXXXXXX will be made to appoint The Children's Lawyer of XXXXXXXXXX to represent all minor children and unborn persons who are issue of Mr. A and Mrs. A in the matter of the proposed variation to the Trusts.

16. Once court approval of the variation is obtained, the Trustees will transfer $XXXXXXXXXX to the Accountant of the Superior Court of Justice of XXXXXXXXXX to be held in trust for the great-grandchildren in equal shares per capita with representation to their issue, if any. The share designated for each great-grandchild will be paid to that greatgrandchild (or issue, if applicable) upon the later of the death of the Surviving Son who is that great-grandchild's grandfather and the date the great-grandchild reaches the age of majority.

17. The balance of the trust property will be distributed to the Grandchildren in amounts equal to the value of each one's interest in the Trusts and the Trusts will be wound up.

Purpose of Proposed Transactions

18. The purpose of the proposed transactions is to accelerate the entitlements of the Grandchildren to the capital of the Trusts as the Surviving Sons do not require the income from their life interests in the Trusts. This will enable the Trusts to distribute the property of the trusts to the Grandchildren, thereby mitigating the tax consequences which would otherwise arise upon the deemed disposition of the property under subsection 104(4) of the Act.

Rulings Given

Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as herein described, our advance income tax rulings are as follows:

A. The variations of the Trusts to permit the distribution of the trust property to the Grandchildren, if so approved by the court will not, in and by itself, result in a disposition as defined in section 54 of the Act of any property of the Trusts for income tax purposes or of any beneficiary's interest in the Trusts for the purposes of section 106 or 107 of the Act.

B. The Surviving Sons will not be considered to have received any proceeds of disposition for the purpose of subsection 106(2) of the Act as a result of executing their respective releases as described in 14 above.

C. The distribution of trust property to the Grandchildren as described in 17 above will be subject to the provisions of subsection 107(2) of the Act.

D. The act of consenting to the variation in the Trusts will not, in and by itself, result in the application of subsections 56(2),. 105(1) or 246(1) of the Act.

E. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of Rulings A to D 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 is binding on Revenue Canada provided that the Renunciation is as described in 14 above, court approval of the variation is obtained and the proposed transactions are completed and effective within six months of the date of this letter. However, the tax consequences which would otherwise arise upon the deemed disposition of the property under subsection 104(4) of the Act will only be mitigated if the transactions are carried out before the earlier of the end of such days as are described in subsection 104(4) of the Act.

The above noted rulings are based on the law presently in effect and do not take into account any amendments to the law which may be proposed or enacted in the future. Accordingly, the rulings are subject to the possible application of any subsequent enacted or proposed legislation. In this respect we have examined the proposed transactions in view of the proposed repeal of section 54 and the proposed amendment to include the definition of "disposition" in subsection 248(1) of the Act as set out in the draft legislation released December 23, 1998. We are of the opinion that the variations of the Trusts described in Ruling A would not, in and by itself, result in a disposition as defined in the proposed amendment to subsection 248(1).

Comments

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, adjusted cost base or V-day value 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

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