9 June 1997 Income Tax Severed Letter 9714705 - Twenty one year rule — see 970488

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.

SUMMARY: 21-year rule – see ^CAIXRCV 970488—ITA-104(4), 159(6.1)—Response to taxpayer request to amend theIncome Tax Actto grandfather certain pre-1972 trusts from the 21-year deemed realization rule in subsec. 104(4) of theIncome Tax Act.

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. the taxpayer has written the TSO requesting an exemption from the 21 -year deemed disposition rule or amendment of the legislation as the trust was created before 1972, has no liquid assets and has successive capital interests contingent on the death of the current beneficiaries.

POSITION:

1. No change in legislation warranted.

REASONS:

Taxpayer has option to apply to provincial court to have the trust varied & property distributed under 107(2); alternatively subsection 159(6.1) allows trusts election to spread payment of taxes arising on deemed disposition over 10 years charging interest at the prescribed rate.

971470 XXXXXXXXXX L. Holloway (613) 957-2104

Attention: XXXXXXXXXX

Re: XXXXXXXXXX

We are writing in response to your letter of January 17, 1997 to our Legislative Policy Division concerning a request to amend the Income Tax Act (the "Act") to grandfather certain pre-1972 trusts from the 21-year deemed realization rule in subsection 104(4) of the Act.

The role of Revenue Canada is to administer and enforce the Act as passed by Parliament, while the Department of Finance is responsible for tax policy relating to the current Act as well as any proposed changes. While Revenue Canada does not have the authority to grant your request, we offer the following comments for your consideration.

We have not encountered a situation similar to the one you have outlined in connection with the 21-year deemed realization rule. The terms of the trust described, however, are not that unusual; i.e., the will of the deceased ensures that the property will pass to all his grandchildren should the "intended grandson", not survive the deceased's daughter and son-in-law.

Your January 17, 1997 letter to the Calgary Tax Services Office states that terms of the trust do not provide the trustee with either the power to distribute assets prior to the death of the income beneficiaries or with the power to amend the trust. It is our understanding, however, that in Alberta it is possible to vary or terminate a trust with the approval of the Court of Queen's Bench pursuant to section 42 (copy attached) of the Alberta Trustee Act. It would be advisable to obtain legal advice on this matter.

On the assumption that the court agrees that the trust will be terminated and the property distributed to the capital beneficiary, the combined provisions of subsections 104(5.3) and 107(2) of the Act would provide a tax-deferred rollover of the property from the trust to the capital beneficiary. Court approval to terminate the trust would likely require the consent of all the trust beneficiaries.

If the court does not agree to terminate the trust, the trust would be subject to the 21-year deemed realization rule on January 1, 1999. There is some relief in the Act with respect to the payment of tax. Subsection 159(6.1) of the Act provides that the trust may elect to pay the income tax arising from the 21-year deemed realization rule in up to 10 annual instalments provided appropriate security is furnished. Payment of tax deferred by making the election is subject to interest at the prescribed rate in effect at the time the election was made. Even though the property is not generating an income stream to the trust, it would appear that the trust may have the option of borrowing against the value of the property to pay the taxes.

As far as the capital gains exemption for qualified farm property is concerned, it would appear that even though the 21-year deemed realization rule would apply, the gain itself would be trapped in the trust as no beneficiary can be said to be currently entitled to enforce payment of the gain. This is a potential problem with all deemed gains and historically it has been dealt with by distributing the property that is the subject of the deemed gain to the beneficiary. It must be noted that the adjusted cost base of the property would be increased to its fair market value on January 1, 1999 pursuant to subsection 104(4) of the Act, thus reducing the amount that would be subject to tax at a later time. As any problems with the trust being subject to tax will arise only if the court does not agree to terminate the trust we do not believe these issues need to be pursued further at this time.

We trust our comments will be of assistance to you.

Yours truly,

T. Murphy A/Section Chief Trusts Section Resources, Partnerships and Trusts Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch

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