23 June 1997 External T.I. 9713135 - RELEASE INCOME INTEREST & 107(2)

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.

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:

Consequences of a release or surrender of an income interest in a trust, followed by a distribution of the assets of the trust to the capital beneficiaries.

Position:

The consequences of a release or surrender of an income interest for no consideration are set out in paragraph 9 of IT-385R2. The terms of the trust and relevant provincial law will determine whether it is possible to distribute the assets to the capital beneficiaries pursuant to subsection 107(2) of the Income Tax Act.

Reasons: As above.

XXXXXXXXXX 971313

Attention: XXXXXXXXXX

June 23, 1997

Dear Sirs:

Re: Subsections 106(2) and 107(2) of the Income Tax Act

This is in reply to your letter of May 13, 1997, concerning a release or surrender of an income interest in a trust followed by a distribution of all the property of the trust to the capital beneficiaries.

We advise that paragraph 9 of Interpretation Bulletin IT-385R2 represents the Department's current views on the release or surrender of an income interest in the circumstances described therein. The reference in that paragraph to "validly" requires consideration of the terms of the trust indenture and the relevant provincial law. These items are also relevant in determining whether the release or surrender of an income interest in a trust will result in an acceleration of the interests of the capital beneficiaries.

With respect to the laws of the province of Québec, which we assume are those relevant to your enquiry, Article 1286 of the Civil Code of Québec, provides a mechanism for an income beneficiary to release or surrender an income interest in a trust. The right passes to other income beneficiaries and if no other income beneficiaries exist, the right passes to the capital beneficiaries. It does not provide for a distribution of property to the capital beneficiaries, but instead gives them the right to the income until such time as the conditions set out in the trust indenture for the final distribution of assets are met. However, it is our understanding that under Article 1294 or Article 1296 of the Civil Code of Québec, it is possible to petition the Superior Court of Québec for an order to terminate the trust and thus permit the trust to distribute the capital to the capital beneficiaries.

In our opinion, there can be no valid distribution of trust capital and, consequently, the provisions of subsection 107(2) of the Income Tax Act would not be operative until such time as the court orders the termination of the trust and permits the distribution of the capital to the capital beneficiaries.

With respect to your enquiry as to what constitutes a "sufficient surrender" it would seem that this is governed by Article 1286 of the Civil Code of Québec as noted above. If "simple notice to the trustees" is sufficient under that article it would also be sufficient for purposes of paragraph 9 of Interpretation Bulletin IT-385R2.

While we trust our comments will be of assistance to you, please note that they do not constitute an advance income tax ruling and, consequently, they are not binding on the Department.

Yours truly,

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