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. Is there one trust or two successive trusts created by the trust indenture?
2. Whether the trust receiving the property may be considered to be created by the deceased's will for the purposes of subsection 70(6) in order to allow the Competent Authority to enter into an agreement pursuant to Article XXIX-B(5) of the Canada - US Convention?
Position: 1. One trust. 2. No.
Reasons: 1. Interpretation of the trust indenture.
2. Question of fact and law; interpretation of the Act.
July 6, 2010
Jim Wilson HEADQUARTERS
Manager Income Tax Rulings
Competent Authority Services Division Directorate
International and Large Business Directorate Yannick Roulier
427 Laurier, 5th floor (613) 957-2134
Ottawa ON K1A 0L5
2009-034591
Foreign spouse trust - Article XXIX-B(5) of the Canada - U.S. Convention
XXXXXXXXXX ("Deceased")
This is in reply to your memorandum dated October 26, 2009, wherein you ask our views with respect to a request for a Competent Authority Agreement pursuant to paragraph 5 of Article XXIX-B of the Canada - United States Tax Convention ("Convention"). All statutory references in this memorandum are to the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended to the date of the present ("Act").
Background
We understand the facts of the situation submitted to be as follows:
1. On XXXXXXXXXX , The Deceased acquired a parcel of land located in XXXXXXXXXX (the "Land"), as per the documents reporting the transfer attached to your opinion request ("Documents").
2. On XXXXXXXXXX , the Deceased signed a trust indenture ("Original Trust Indenture") establishing the terms of a trust ("Trust").
3. The Original Trust Indenture has been modified XXXXXXXXXX on XXXXXXXXXX ("Final Amendment").
4. The Final Amendment stated, among other things, the following:
- While living, the Deceased is a trustee of the Trust, along with his spouse, XXXXXXXXXX his sons, and a friend;
- If there is any property in the Trust while the Deceased is living, he is entitled to receive all of the income and principal from such property as requested by him;
- Upon the Deceased's death, the trustees are to deal with the Trust property as property of the "Marital Trust", which implied the following:
- The Deceased's spouse will be entitled to all the income in the trust, and
- The trustees may pay to her all or any part of the principal.
5. The Original Trust Indenture and the Final Amendment are both governed and administered in accordance with XXXXXXXXXX law ("State law").
6. Pursuant to the terms of the Deceased's will concluded on XXXXXXXXXX ("Will"), all residual estate property would have to be transferred to the Trust upon the Deceased's death. In XXXXXXXXXX , the Deceased died.
7. The taxpayer's representative has confirmed to you (orally we assume) that although the Trust has been set up before the Deceased's death, no property has been transferred to the Trust before the Deceased's death, neither at the time of the Original Trust Indenture signature nor at any other moment.
8. The Deceased has always been a resident of the United States since he acquired the Land; the same is true for the other trustees of the Trust for the time they were acting as such.
9. The Land has been transferred by the Deceased's estate ("Estate") to the Trust before the date of your memorandum, i.e. within the period ending XXXXXXXXXX months after the Deceased's death.
10. The Estate approached the Competent Authority to conclude an agreement pursuant to paragraph 5 of Article XXIX-B of the Convention ("Agreement") in order that the transfer of the Land could be considered achieved on a rollover basis to a spouse trust for Canadian tax purposes.
These facts are based on your opinion request, including the representative's letter requesting the Agreement, the Will, the Final Amendment and the Documents, a copy of which documents were attached to your request. We also acknowledge receipt of the information provided to us on March 3, 2010 during a discussion between John Maggiore and the officer affected to this file. Note that all the facts pertaining to this particular situation are not fully repeated herein and one should refer to these documents for additional detail, where necessary.
Questions
More specifically, your questions are as follows:
1. Are the Trust and the Marital Trust two different trusts?
2. Can the trust receiving the Land be considered to be created by the Will for the purposes of subsection 70(6) in order to allow the Competent Authority to enter into the Agreement?
Based on our understanding of the facts described above, we are of the view that the Trust and the Marital Trust is a unique trust which would not meet the requirements of subsection 70(6) assuming the Deceased and the Trust were residents of Canada. Therefore, it is our view that the Competent Authority cannot enter into the Agreement sought under paragraph 5 of Article XXIX-B of the Convention.
On the one hand, we are of the view that the Original Trust Indenture and the Final Amendment established the terms of a unique trust. The fact that the trustee is to deal with the Trust property as property of the "Marital Trust" does not result in the creation of a successive trust, but implies a change in the duties and obligations of the trustee with effect at the Deceased's death. We reach this conclusion based, among other things, on the followings: The terms of the Final Amendment establish one global relation concerning property owned in the Trust for the benefit of different beneficiaries.
- There are successive sets of rules dealing with property owned in the Trust (XXXXXXXXXX ).
- The duties of the trustee have to be undertaken on a continuing basis pursuant to the Final Amendment (XXXXXXXXXX ).
- The Final Amendment refers to "the trust" and "this trust" (see for example XXXXXXXXXX ).
- The trustee is otherwise allowed to establish separate trusts in specific circumstances; for the benefit of XXXXXXXXXX entitled to property owned in the Trust (XXXXXXXXXX ), and for the purpose of applying the federal and state estate tax marital deduction (XXXXXXXXXX ).
On the other hand, pursuant to our understanding of the State law, a trust is generally not created until a transfer to the trust occurs unless resulting from a declaration of trust. Consequently, it is arguable that the Trust has been created by the transfer of the Land pursuant to the Will after the Deceased's death. However, this statement per se does not result in the Trust being created by the Will for the purposes of subsection 70(6) and paragraph 5 of Article XXIX-B of the Convention.
It is a question of fact whether the terms of a particular will provide for the creation of a trust. We are of the view that the transfer of the Land to the Trust might be considered to be a transfer as a consequence of the death of the Deceased pursuant to paragraph 248(8)(a). However, we are also of the view that the Trust was not created by the Will or under the terms of the Will as required by paragraph 70(6)(b) as extended by subsection 248(9.1). In order to be so, we are of the view that the Will would have to direct the establishment and terms of all of the constitutive elements of the Trust.
On another matter, we note that the terms of the Final Amendment seem to comply with the requirements of subparagraph 70(6)(b)(ii). In this respect, we understand that no person other than the Deceased's spouse may, before the spouse death, receive or otherwise obtain the use of any of the income or capital of the Trust. In order for this condition to be met, there is generally no requirement that the spouse be given access to the capital, only that nobody else has such right of access.
We trust the above comments will be of some assistance.
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 taxpayers.
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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