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.
Principal Issues: In the particular situation, the trustee/beneficiary exercised a power to add beneficiaries to the trust. We are asked if, having regard to all the circumstances, there was a disposition to the trust of its assets or, a disposition to any existing beneficiary of all or part of an interest held in the trust.
Position: 1. There is no disposition to the trust. 2. The trustee/beneficiary may be viewed as having made a gift inter vivos to the new beneficiaries of part of the interest the trustee held in the trust and as such there may be deemed proceeds of disposition pursuant to subparagraph 69(1)(b)(ii). The remaining existing beneficiaries may each be viewed as having disposed of part of an interest in the trust but there appear on the facts to be no proceeds of disposition for purposes of the Act.
Reasons: 1. No variation to the trust was needed to add the new beneficiaries. 2. The trustee who exercises the power to add beneficiaries may be viewed as having voluntarily transferred part of the interest held to the new beneficiaries. The existing beneficiaries, other than the trustee, do not direct to whom the interest is transferred; there is no basis in the facts given to find that the the existing and new beneficiaries do not deal at arm's length for purposes of subparagraph 69(1)(b)(i).
November 20, 2008
XXXXXXXXXX Tax Services Office HEADQUARTERS
Aggressive Tax Planning, Audit Division Robin Maley
(613) 957-8283
Attention: XXXXXXXXXX
2008-028141
XXXXXXXXXX
This is in response to your email of June 11, 2008, concerning the tax consequences of adding XXXXXXXXXX beneficiaries to the XXXXXXXXXX (the "Trust") on XXXXXXXXXX. In particular, you have asked whether the addition of beneficiaries to the Trust pursuant to the terms of the Trust would have resulted in a disposition of either the Trust's property or of any part of any existing beneficiaries' interests in the Trust.
All statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
Facts
Our understanding of the facts may, very briefly, be summarized as follows:
XXXXXXXXXX (Settlor) established the Trust on XXXXXXXXXX with $XXXXXXXXXX for the benefit of XXXXXXXXXX (collectively, the "Existing Beneficiaries"). At the time the Trust was created, the trustee of the Trust was XXXXXXXXXX, the XXXXXXXXXX of Settlor.
The relevant terms of the Trust are as follows:
- under clause XXXXXXXXXX of the Trust indenture, the trustee may pay all or part of the net income of the Trust to one or more of the Beneficiaries to the exclusion of the others and in such proportions as the trustee determines and any part of the net income of the Trust that is not distributed will form part of the Trust's capital prior to the wind-up of the Trust;
- under clause XXXXXXXXXX of the Trust indenture, the trustee may distribute all or part of the capital to one or more of the Beneficiaries of the Trust to the exclusion of the others and in such proportions as the trustee determines prior to the wind-up of the Trust;
- under clause XXXXXXXXXX of the Trust indenture and the definition of "Time of Division", unless all beneficiaries die or otherwise cease to be beneficiaries before that time, the Trust will be wound up on either XXXXXXXXXX or XXXXXXXXXX as determined by the trustee of the Trust, and the Trust property will be divided equally among all the beneficiaries of the Trust who are alive at that time;
- under clause XXXXXXXXXX of the Trust indenture, XXXXXXXXXX, as Protector of the Trust, has the power to remove any trustee of the Trust by giving notice to the trustee in writing;
- under clause XXXXXXXXXX of the Trust indenture, the trustee has the power to add beneficiaries to the Trust (other than Settlor) but the addition of a beneficiary must be evidenced by a deed naming the person to be added and stating the date upon which the addition is to be effective;
- under clause XXXXXXXXXX of the Trust indenture, decisions of the trustee must be evidenced in writing and passed by a resolution of the majority of trustees (note, however, that there has always been only one trustee); and
- under clause XXXXXXXXXX of the Trust indenture, the decisions of the trustee will be made in Canada such that the Trust will, at all times, be resident in Canada.
On XXXXXXXXXX, XXXXXXXXXX, as trustee of the Trust, added XXXXXXXXXX individuals, XXXXXXXXXX ("New Beneficiaries"), as beneficiaries of the Trust. The New Beneficiaries do not appear to be related to the Existing Beneficiaries.
On XXXXXXXXXX, XXXXXXXXXX resigned as trustee of the Trust and XXXXXXXXXX became the trustee of the Trust.
On XXXXXXXXXX, XXXXXXXXXX, as protector of the Trust removed XXXXXXXXXX as trustee of the Trust and appointed XXXXXXXXXX, a corporation resident in XXXXXXXXXX, as trustee of the Trust. XXXXXXXXXX owns XXXXXXXXXX% of the outstanding shares of XXXXXXXXXX. At this time, the Trust's assets consisted of XXXXXXXXXX Shares of XXXXXXXXXX and XXXXXXXXXX Shares of XXXXXXXXXX, and other cash and deposits of $XXXXXXXXXX.
As no variation of the Trust indenture is required in order to add the New Beneficiaries to the Trust, there is no resettlement of the Trust as a result of that addition of the New Beneficiaries nor is there any deemed disposition of the Trust's property at that time. While it is our view that the addition of the New Beneficiaries varies the rights of the Existing Beneficiaries such that they are considered to have disposed of a portion of their interest in the Trust, it is also our view that paragraph 69(1)(b) will not apply to deem the Existing Beneficiaries (other than XXXXXXXXXX) to have received proceeds of disposition as a result of the addition of the new beneficiaries. As explained below, we believe a reasonable argument can be made that XXXXXXXXXX has made an inter vivos gift to the New Beneficiaries such that subparagraph 69(1)(b)(ii) applies.
A beneficiary's beneficial interest in a trust that is wholly discretionary is essentially a right of that beneficiary to be considered by the trustee as to whether or not any trust property (income or capital or a mixture thereof) should, in the trustee's discretion, be distributed or paid to or otherwise transferred or used for the benefit of that beneficiary. That right to be so considered or the right to have that right protected by a Court is enforceable as such, although the right does not necessarily give to the beneficiary any entitlement to any proprietary or ownership interest or right to or in the discretionary trust's property: see Gartside v. I.R.C., [1968] A.C. 553 (HL); Vestey v. I.R.C. (1979), 54 T.C. 503 (HL). It should be noted that, in certain circumstances, the beneficiaries of a discretionary trust may be able to, collectively, collapse the trust and obtain the trust's property.
When additional beneficiaries are added to a trust, whether as a result of a variation of the trust or pursuant to the terms of the trust, the rights of the existing beneficiaries as described in the previous paragraph are arguably diminished and as a result, each of the existing beneficiaries realizes a disposition of a part of the bundle of rights that forms his or her interest in the discretionary trust. Thus, it is our view that the Existing Beneficiaries did realize a disposition of part of their interest in the Trust when the New Beneficiaries were added to the Trust.
Notwithstanding our view that the addition of the New Beneficiaries results in a disposition of a part of the Existing Beneficiaries' interests in the trust, it is our view that the addition of the New Beneficiaries will not result in any actual or deemed proceeds of disposition in respect of that disposition other than to the Existing Beneficiary who is the trustee of the Trust. Our conclusion in this regard is based on substantially the same reasons as set out in paragraph 9 of Interpretation Bulletin IT-385R2, "Disposition of an Income Interest in a Trust", in respect of the release or surrender of an income interest in a trust.
However, to the extent that XXXXXXXXXX, as trustee of the Trust has made an inter vivos gift to the New Beneficiaries of a portion of his interest in the Trust, subparagraph 69(1)(b)(ii) may apply. Note that subparagraph 69(1)(b)(ii) is not dependant on finding that XXXXXXXXXX was not dealing at arm's length with the New Beneficiaries. Since XXXXXXXXXX is also a beneficiary of the Trust who has realized a disposition of a part of his interest in the Trust as a result of the addition of the New Beneficiaries, we believe that a reasonable argument can be made to apply subparagraph 69(1)(b)(ii) to the portion of his interest that has been disposed. For assistance with respect to the valuation of the portion of the interest so disposed, we suggest that you contact the Valuation Services Section of Compliance Programs Branch.
While the terms of the Trust clearly allow the trustee to add additional beneficiaries, it seems odd that a trustee would exercise discretion to add beneficiaries who have no common characteristics with the existing beneficiaries and in a manner that seems inconsistent with the Settlor's intent in establishing the Trust. We would suggest that you ask the trustee for the reasons for adding each of the New Beneficiaries, as it may be a step in a series of transactions to accomplish some other purpose.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. 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 taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Robin Maley
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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