26 August 2011 External T.I. 2010-0379431E5 - Deemed Disposition of Trust Property on Death

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:
1. In light of Nussey and pursuant to the terms of the trust and operation of law, whether the deemed disposition should be reported on the final return of the trust or the settlor's terminal T1 return
2. The alter ego assets so distributed, if forming part of the trust created under settlor's will, would preclude the trust from being a testamentary trust

Position:
1. Final Return of the Trust
2. Depends

Reasons:
1. Reading of 104(4)(a)(ii.1)
2. Question of fact

XXXXXXXXXX
									2010-037943
									Dominic Tiu
									(416) 973-8002

August 26, 2011

Dear XXXXXXXXXX :

Re: Deemed Disposition of Trust Property on Death

This is in reply to your letter dated August 30th, 2010 describing a hypothetical alter ego trust the terms of which provide that immediately prior to the death of the settlor, the trust properties are to be distributed to the settlor or alternatively, the trust properties may be deemed to revert to the settlor by operation of law under the laws governing the trust. You have requested our views as to whether

1) In light of Nussey Estate v. The Queen (2002) 2 CTC 2284 and pursuant to the terms of the trust or by operation of law, the deemed disposition of the trust properties would be reported on the final return of the trust or on the settlor's terminal T1 return.

2) The assets of the alter ego trust so distributed, if forming part of a trust created under the settlor's will, would preclude the trust from being a "testamentary trust" within the meaning of subsection 108(1).

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

In response to your first question, it is our opinion that where a trust that otherwise meets the requirements in the Income Tax Act to be an alter ego trust and has not made the election referred to in subparagraph 104(4)(a)(ii.1), the trust is, at the end of the day on which the settlor's death occurs, deemed to have disposed of each property (other than an exempt property) that was a capital property of the trust (other than an excluded property or depreciable property) for proceeds equal to its fair market value at the end of that day and to have reacquired the property immediately after that day for an amount equal to that fair market value. In our view, under either alternative you have described, it is only upon the death of the settlor that an obligation may arise to distribute or return the trust properties to the settlor, notwithstanding any term or condition stating that the obligation thereupon is to have retroactive effect. For purposes of the Act, the trustees may thereafter be viewed as holding the trust property for the settlor (if the facts so indicate); however, until such time as the trust property has actually been distributed to the personal representative(s) of the settlor (and additional steps have been taken as are necessary to wind-up the trust) the alter ego trust is considered to continue to exist for tax purposes.

In response to your second question, where the legal effect of all of the terms and conditions of the alter ego trust are such that, as a consequence of the death of the settlor the alter ego trust's properties would pass pursuant to the terms of the trust, the properties so distributed, if contributed to a trust created pursuant to the settlor's will, would preclude the trust from being a "testamentary trust" within the meaning of subsection 108(1) of the Act.
Where, as a consequence of the death of the settlor of an alter ego trust, the alter ego trust's properties are held to or for the benefit of the settlor and would thereupon form part of the settlor's estate, the properties so distributed, if contributed to a trust created under the settlor's will, would not preclude the trust from being a "testamentary trust" within the meaning of subsection 108(1) by reason only that the properties were previously held by the alter ego trust.

It would, of course, be a question of fact as to what would be the legal implications of the terms and conditions of any particular trust, having regard to the relevant laws governing that trust.

Yours truly,

Phil Kohnen
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch