This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] (a) In a particular situation, should a trust obtain an advance certificate before the repayment of a note as provided for in subsection 159(2)?
(b) If so, and in the event that the trustee has failed to obtain such a certificate and the trust has a tax liability at the time of repayment of the note, could the directors of the corporation acting as trustee be liable for payment of the trust's tax liability?
Position: (a) We are of the view that a transaction in which a legal representative transfers, to an unsecured creditor as payment, all of the taxpayer's property in its custody as legal representative, is a transaction described in 159(2). (b) We are of the view that an employee or director of a corporation authorized by law to be a trustee who is acting in the course of his or her duties for the corporation should generally not be considered to be a legal representative of the taxpayer for whom the corporation is the legal representative.
Reasons: Legislative analysis.
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Certificate before distribution
A trust acquired a property valued at $50 million (the "Property") in consideration for the issuance of a note payable of the same amount. The only asset of the trust is the Property.
The trust then disposed of the Property and used the proceeds of disposition to repay the note issued at the time the Property was acquired.
The sole trustee of the trust is a corporation.
Questions to the CRA
Assuming that in fact there is a trust:
(a) In this situation, should the trust obtain an advance certificate for distribution under subsection 159(2) before the note is repaid?
(b) If so, and in the event that the trustee has failed to obtain such a certificate and the trust has a tax liability at the time of repayment of the note, are the directors of the corporation acting as trustee liable for payment of the trust's tax liability?
CRA Response to Question 35(a)
Pursuant to subsections 159(2) and (3), a legal representative of a taxpayer must obtain a clearance certificate before distributing property in the possession or control of the legal representative; otherwise, the legal representative will be personally liable for any amounts for which the taxpayer is liable under the Act on or before the distribution of the property. It is generally not necessary to obtain a clearance certificate before a distribution where the legal representative retains sufficient property to pay any tax liability.
We are of the view that the term "distributing" used in subsection 159(2) has a broad enough meaning to include a transaction by the legal representative that has the effect of greatly diminishing the value of the property in the legal representative’s custody. Furthermore, we are of the view that a transaction whereby a legal representative transfers, to an unsecured creditor as payment, all of the taxpayer's property in its custody as legal representative, would be a transaction coming within these terms.
CRA Response to Question 35(b)
By virtue of Article 1274 of the C.C.Q., in order for a legal person to be a trustee in Quebec, the legal person must be authorized by law, as is the case, for example, for a trust company covered by the Act respecting trust companies and savings companies.
The definition of "legal representative" in subsection 248(1) explicitly provides that a trustee is a legal representative. The fact that the trustee in the present situation is a corporation does not preclude the corporation from being a legal representative.
Whether a director of a corporation, which is the legal representative of a taxpayer, is also the legal representative of that taxpayer is a question of fact to be determined according to the particulars and circumstances of each situation. However, we are of the view that an employee or director of a corporation authorized by law to be a trustee who acts in the course of the trustee’s duties for the corporation should generally not be considered to be the legal representative of the taxpayer for whom the corporation is the legal representative.
October 8, 2010
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