13 January 2000 External T.I. 9928085 - SURRENDER OF INCOME INTEREST IN TRUST

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) Is a beneficiary considered to have received proceeds of disposition where the beneficiary releases and surrenders an income interest in an testamentary trust for no actual consideration and makes no direction concerning who is entitled to receive the benefit as a result of the release or surrender?

2) What are the tax consequences of a distribution of trust property to beneficiaries resident in Canada in satisfaction of the beneficiaries' capital interest in the trust?

Position: 1) No 2) Typically no capital gain or loss arises as a result of such a disposition of a capital interest in a trust

Reasons: 1) 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. 2) The interaction of 107(2), 107(1)(a) and the definition of cost amount in 108(1)

XXXXXXXXXX 992808
A. Humenuk
January 13, 2000

Dear XXXXXXXXXX:

Re: Surrender of an Income Interest in a Testamentary Trust

This is in reply to your letter of October 19, 1999, in which you asked for confirmation of the tax consequences arising from the surrender of your income interest in a testamentary trust resident in Scotland. As we discussed on December 3, 1999 (XXXXXXXXXX\Humenuk), confirmation of the tax consequences of a proposed transaction will only be provided in response to a request for an advance income tax ruling for which a fee is charged. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R3, Advance Income Tax Rulings (a copy of which is enclosed for your convenience).

Although we are not able to comment specifically on the situation described in your letter, the comments in paragraph 9 of Interpretation Bulletin IT-385R2, Disposition of an Income Interest in a Trust, describe the tax consequences of a release or surrender of an income interest in a trust for no consideration where the holder of the income interest does not direct in any manner who is entitled to receive the benefits as a result of the release or surrender. Interpretation bulletins provide the Canada Customs and Revenue Agency's (the CCRA) technical interpretations of income tax law. While these interpretation bulletins do not have the force of law, they can generally be relied upon as reflecting the CCRA's interpretation of the law to be applied on a consistent basis.

With respect to your second question concerning the distribution of property from a testamentary trust to a beneficiary resident in Canada in satisfaction of all or part of the beneficiary's capital interest in such trust, a beneficiary of a personal trust (which includes a testamentary trust) will generally not realize a capital gain as a result of such a distribution by reason of the interaction of subsection 107(2), paragraph 107(1)(a) and the definition of "cost amount" in subsection 108(1) of the Income Tax Act.

As a result of the interaction of these provisions, the adjusted cost base and the proceeds of disposition of a beneficiary resident in Canada equal the cost amount of the property distributed to the beneficiary from the personal trust in satisfaction of all or part of the beneficiary's capital interest in that trust. Consequently, the beneficiary would not realize a capital gain or loss on the disposition of such an interest.

It should be noted that subsection 107(2) does not empower the trustee to make a distribution of capital to a beneficiary; that power must be found in the terms of the trust or under a court order or under a power granted to the trustee under the applicable statute that concerns the trustee's powers in respect of the various elements of the trust property. In order for subsection 107(2) to apply, the distribution must be legally effective and in accordance with the terms of the trust and relevant statutes. As a result, it is the terms of the trust and relevant law which will determine whether it is possible to distribute the assets to the capital beneficiaries pursuant to subsection 107(2).

While the draft legislation released by the Department of Finance on December 17, 1999 proposes to amend some of the above noted provisions of the Income Tax Act, the tax consequences related to a distribution of property from a personal trust to a beneficiary who is resident in Canada in satisfaction of all or part of the beneficiary's capital interest in such trust would not change under the proposals.

Please note that our comments only address the Canadian tax implications on this topic.

Yours truly,

T. Murphy
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

Att.

- 3 -