30 November 1997 Ruling 9818683 - 21-YEAR DEEMED DISPOSITION RULE

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:

1) For the purposes of sections 106 and 107, will the spouse be considered to have received proceeds of disposition when she releases or surrenders a portion of her income and discretionary capital interest in the trust?

2) Does the proposed variation of the trust to permit a distribution of certain property before the application of the 21-year rule constitute a disposition by the trust or of any beneficial interest in the trust?

3) Can subsection 107(2) be utilized on the distribution of the trust property to the capital beneficiaries?

4) Will subsection 245(2) apply to the proposed transactions?

Position TAKEN:

1) No	2) No 	3) Yes	4) No

Reasons FOR POSITION TAKEN:

1) Consistent with the position in IT-385R2 and in previous rulings (973094, 972779 & 970604)

2) The variation is not significant enough to consider that there has been a disposition (972779).

3) The Distribution pursuant to subsection 107(2) is consistent with Finance's comments contained in the Technical Notes regarding the 21-year rule.

4) This issue was referred to the GAAR Committee and it was recommended that GAAR not apply to the proposed transactions.

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Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted estate and your subsequent correspondence of XXXXXXXXXX, in respect of the income tax consequences arising out of the proposed transactions described below.

We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:

(a) in an earlier return of the taxpayers or related persons;

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;

(c) under objection by the taxpayers or related persons;

(d) before the courts; or

(e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons.

In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:

"Trust" means the trust created by the last Will and Testament ("Will") of XXXXXXXXXX

"Trustees" means XXXXXXXXXX

"Mr. G" means the deceased, XXXXXXXXXX

"Mrs. G" means the deceased's wife, XXXXXXXXXX

"Child A" means XXXXXXXXXX

"Child B" means XXXXXXXXXX

"Child C" means XXXXXXXXXX

"Adult Contingent Beneficiaries" means the children of XXXXXXXXXX

"Minor Contingent Beneficiaries" means the minor grandchildren of XXXXXXXXXX

"Contingent Income Beneficiaries" means XXXXXXXXXX

"Opco" means XXXXXXXXXX

"Publico" means XXXXXXXXXX

"Adjusted cost base" has the meaning assigned by section 54 of the Act.

"Capital property" has the meaning assigned by section 54 of the Act.

"Paid-up capital" has the meaning assigned by subsection 89(1) of the Act.

"Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

The names and addresses of the taxpayers who are parties to this ruling request, as well as the tax services office or tax centre where their returns are filed, are listed in Schedule A.

Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:

FACTS

1. The Trust was established on XXXXXXXXXX, the date of death of Mr. G, and is a "testamentary trust" as defined in subsection 108(1) of the Act and a "personal trust" as defined in subsection 248(1) of the Act.

2. The relevant terms of Mr. G's Will provide that the residue of his estate is to be held in trust as follows:

a) An amount equal to $XXXXXXXXXX per week is payable to Mrs. G for her lifetime. At the discretion of the Trustees, this amount may be increased by reason of a rise in the cost of living or devaluation of currency which materially reduces the benefit of the payment as compared to the use and purchasing power as of the date of the Will. This amount may be increased from income or capital as required.

b) The balance of the net income from the residue of the estate is to be paid to those of Child A, Child B and Child C (individually a "First Beneficiary" and collectively, the "First Beneficiaries") who are then alive. Such amounts are to be paid equally to the First Beneficiaries during Mrs. G's lifetime.

c) If any of the First Beneficiaries predecease Mrs. G leaving a spouse or children, then such First Beneficiary's share of the income will be paid to the deceased First Beneficiary's surviving spouse until his or her death (in the case of all the First Beneficiaries) or remarriage (in the case of Child B's spouse), and thereafter to the deceased First Beneficiary's child or children equally (the "Adult Contingent Beneficiaries"). In the event that all of the children of a deceased First Beneficiary predecease the deceased First Beneficiary's spouse, then on the deceased First Beneficiary's spouse's death or remarriage, as applicable, the income goes to such of Mr. G's other issue as are then alive at such date in equal shares per stirpes.

d) On Mrs. G's death, the Trust is to be divided into three equal parts, one for each of the First Beneficiaries, each part to be adjusted as set forth in the Will to account for amounts advanced to each of them during Mr. G's lifetime. There is a gift over to the child or children of a predeceased First Beneficiary who are then alive or if there are no such children then to Mr. G's issue who are then alive in equal shares per stirpes.

e) The Trustees may encroach on the capital of the Trust for the benefit of Mrs. G in the event of sickness, accident or emergency.

3. Mrs. G is XXXXXXXXXX of age. XXXXXXXXXX. Mrs. G has income needs of approximately $XXXXXXXXXX per year.

4. Child A is XXXXXXXXXX of age, is married and currently has XXXXXXXXXX adult children and XXXXXXXXXX minor grandchildren.

5. Child B is XXXXXXXXXX of age, divorced and currently has XXXXXXXXXX adult children.

6. Child C is XXXXXXXXXX of age, is married and currently has XXXXXXXXXX adult children.

7. Mrs. G, Child A and Child C are residents of Canada. Child B currently resides in XXXXXXXXXX and has done so for more than 10 years.

8. The trust is the sole shareholder of Opco and currently holds: XXXXXXXXXX Preference Shares which have a paid-up capital ("PUC") of $XXXXXXXXXX, an adjusted cost base ("ACB") of $XXXXXXXXXX and a fair market value (FMV) of $XXXXXXXXXX; and XXXXXXXXXX Common Shares having a PUC of $XXXXXXXXXX, an ACB of $XXXXXXXXXX and an estimated FMV of $XXXXXXXXXX.

9. Opco, a taxable Canadian corporation, has an authorized capital of XXXXXXXXXX shares divided into XXXXXXXXXX Voting Common Shares without par value and XXXXXXXXXX Non-Voting Preference Shares with a par value of $XXXXXXXXXX each. The holders of Preference Shares are entitled, in the discretion of the directors and in priority to the Common Shares, to non-cumulative dividends at the rate of XXXXXXXXXX% per annum calculated on the amount of PUC on the Preference Shares. The holders of Common Shares, at the discretion of the directors and subject to the rights of the holders of Preference Shares, may be entitled to dividends paid out of profits or surplus available for distribution provided that such payment would not reduce the value of net assets to an amount less than the PUC on all issued Preference Shares.

10. The Trust holds, as an investment, XXXXXXXXXX common shares of Publico which have an ACB of $XXXXXXXXXX and an estimated FMV of $XXXXXXXXXX as at XXXXXXXXXX.

11. The Opco and Publico shares are capital property to the Trust.

12. The Trust has not previously elected that the 21-year deemed disposition rule in subsection 104(4) of the Act not apply. As a consequence, the Trust will be subject to the 21-year deemed disposition rule on XXXXXXXXXX.

PROPOSED TRANSACTIONS

13. The authorized capital of Opco will be altered as follows:

a) The existing Common Shares will be redesignated as Class "C" Common Shares and rights and restrictions will be attached to these shares such that the dividends that may be paid will be subject to the rights of the holders of preference shares, any payment of dividends out of profit or surplus available for distribution will not reduce the value of net assets to an amount less than the aggregate of the amount of PUC on all issued Class "A" Preference Shares and the redemption amounts of all issued Class "B" and Class "C" Preference Shares and on liquidation, dissolution or winding-up such shares will, subject to the rights of the holders of Class "A", "B", and "C" Preference Shares and Class "A" Voting Common Shares, share pro-rata with the Class "B" Non-Voting Common Shares.

b) A new class of common shares, Class "B" Non-Voting Common Shares with a par value of $XXXXXXXXXX each, will also be created. Except for the lack of a voting right, these shares would be the same as the Class "C" Common Shares.

c) A new class of common shares, Class "A" Voting Common Shares with a par value of $XXXXXXXXXX each, will be created. These shares will vote but will not be entitled to participate in the profits of Opco and on liquidation, dissolution or winding-up will not be entitled to receive an amount greater than the PUC of such shares.

d) The existing Preference Shares will be redesignated as Class "A" Preference Shares, which will have new provisions by which such shares will be redeemable and retractable at a redemption price equal to their PUC and have priority over the Class "B" and "C" Preference Shares, but in all other respects the rights of this class of shares will remain the same.

e) A new class of preference shares, Class "B" Preference Shares, will be created without par value and with a redemption/retraction amount to be determined by the directors at the time of issuance. These shares have priority over the Class "C" Preference Shares and, each year, are entitled to, in the discretion of the directors and in priority to the Common Shares, non-cumulative dividends at the rate of 6% per annum on the redemption amount.

f) A new class of preference shares, Class "C" Preference Shares, will be created with a par value of $XXXXXXXXXX each and with share rights generally the same as, but ranking subsequent to, the Class "B" Preference Shares.

14. The trust will transfer certain of its property (XXXXXXXXXX Class "C" Common Shares of Opco and its XXXXXXXXXX shares of Publico) to Opco in exchange for consideration consisting of preference shares and common shares of Opco. The Trust and Opco will jointly file an election in accordance with the provisions of subsection 85(1) of the Act in respect of the transfer by the Trust of these properties to Opco pursuant to which they will elect for each property transferred, the lesser of the fair market value of such property and the adjusted cost base of such property to the Trust (the "elected amounts"). On the transfer of these properties by the Trust to Opco, Opco will issue to the Trust:

a) XXXXXXXXXX Class "A" Preference Shares having a PUC, ACB and a redemption amount of $XXXXXXXXXX,

b) XXXXXXXXXX Class "B" Preference Shares having a PUC of $XXXXXXXXXX and an ACB and redemption amount of $XXXXXXXXXX,

c) XXXXXXXXXX Class "C" Preference Shares having a PUC of $XXXXXXXXXX and an ACB and redemption amount of $XXXXXXXXXX, and

d) XXXXXXXXXX Class "B" Non-Voting Common Shares having a PUC and ACB of $XXXXXXXXXX and an estimated FMV of $XXXXXXXXXX.

The aggregate redemption amount of the Class "B" and Class "C" Preference Shares received by the Trust on the transfer will equal the ACB of the common shares of Opco and Publico held by the Trust before the transfer, less the PUC of the Class "B" Non-Voting Common Shares and Class "A" Preference Shares received by the Trust on the transfer.

15. The Trust will separately subscribe for XXXXXXXXXX Class "A" Voting Common Shares for $XXXXXXXXXX.

16. After implementing the above transactions, Opco's issued share capital, all held by the Trust, will be as follows:

						Shares			      	   PUC		   ACB			 	        FMV    

			XXXXXXXXXX 		Class "A" Common			XXXXXXXXXX
			XXXXXXXXXX 		Class "B" Common			XXXXXXXXXX
			XXXXXXXXXX 		Class "A" Preference		XXXXXXXXXX
 			XXXXXXXXXX 		Class "B" Preference			XXXXXXXXXX
			XXXXXXXXXX 		Class "C" Preference			XXXXXXXXXX
											XXXXXXXXXX 

17. The Trust will be varied, by order of the Supreme Court of XXXXXXXXXX, to provide for the following:

a) the inclusion of a trust ("Child B's Trust"), as an alternate beneficiary to Child B, the sole beneficiary of which will be Child B;

b) a specified interest for Mrs. G such that she is entitled to an income of $XXXXXXXXXX a week, as adjusted to deal with increases in the cost of living. Mrs. G's interest will be satisfied from the Class "A" Preference Shares and the Class "B" Preference Shares of Opco held by the Trust (see 24 below);

c) the distribution date for the Class "B" Non-Voting Common shares will be changed so that it is the earlier of the date of death of Mrs. G and XXXXXXXXXX; and

d) to clarify that the gift over of income and capital is to issue per stirpes not issue per stirpes who have attained the age of majority and to further provide that the payment of each such issue's share, together with any income accrued thereon, will be postponed until he or she has attained the age of majority.

18. Mrs. G XXXXXXXXXX, by executing a Deed of Disclaimer, will release or surrender Mrs. G's income interest and any discretionary capital interest in the Class "B" Non-Voting Common Shares and the Class "C" Preference Shares held by the Trust for no consideration. The Deed of Disclaimer will not direct in any manner who is to receive the benefits under the Trust.

19. Similarly, by executing a Deed of Disclaimer, the First Beneficiaries and the Adult Contingent Beneficiaries will release or surrender their interest in the Class "C" Preference Shares held by the Trust for no consideration and they will not direct in any manner who is to receive the benefits under the Trust.

20. The Contingent Income Beneficiaries will also release or surrender their interests in the Trust by executing a Deed of Disclaimer for no consideration and they will not direct in any manner who is to receive the benefits under the Trust.

21. The Class "B" Non-Voting Common Shares of Opco will be distributed to each of Child A, Child B or Child B's Trust, and Child C in equal shares prior to the deemed disposition date. In effecting this distribution, the provisions in the Will for equalization with respect to advances made to the First Beneficiaries by Mr. G during his lifetime will be taken into account.

22. As Child B is not a resident of Canada, at the time of the distribution the one-third interest in the Class "B" Non-Voting Common Shares otherwise distributable to Child B will be distributed to Child B's Trust, a Canadian resident trust. Child B's interest in this trust will be vested indefeasibly and its terms will, among other things, provide that:

a) the trust will be irrevocable and be established in accordance with the laws of the Province of XXXXXXXXXX;

b) the beneficiary will be Child B and upon his death, his estate;
c) the final distribution date will be the first to occur of the date of death of Child B or such earlier date as selected by the trustee;

d) the income of the trust will be paid to Child B no less frequently than annually; and

e) the trust will be administered by a Canadian-resident trustee or a majority of Canadian-resident trustees.

23. The Class "A" Voting Common Shares in the Company will continue to be held by the Trust.

24. The Class "A" Preference Shares and Class "B" Preference Shares will be held by the Trust with an aggregate redemption value of $XXXXXXXXXX to ensure that Mrs. G's income needs of approximately $XXXXXXXXXX per year are met. The Trustees will continue to have the power to encroach on capital in the same limited terms, as is currently the case, for Mrs. G's benefit. The capital that would be encroached on for such purposes will now be the Class "A" and "B" Preference Shares held by the Trust.

25. The Class "C" Preference Shares will be held by the Trust with a value of $XXXXXXXXXX, such value having been negotiated with the Public Trustee to cover the interests of the Minor Contingent Beneficiaries. On Mrs. G's death, the Class "C" Preference Shares will be available for the Minor Contingent Beneficiaries living at Mrs. G's death. However, the share of any such beneficiary, and any accrued income thereon, will be held by the Trust until such beneficiary has attained the age of majority.

26. As a result of the Proposed Transactions, the Trust will arrive at the deemed disposition date holding only Class "A", "B" and "C" Preference Shares and Class "A" Voting Common Shares, and Child B's Trust will hold its share of the Class "B" Non-Voting Common Shares.

PURPOSE OF PROPOSED TRANSACTIONS

27. The purposes of the proposed transactions are: 1) to transfer property of the Trust, upon which there is an accrued gain, to the beneficiaries of the Trust prior to the deemed disposition date to eliminate the deemed gain that would otherwise result and the significant tax liability to the Trust, the payment of which would require a partial liquidation of the Trust's property; 2) to ensure that sufficient property is left in the Trust so that Mrs. G's yearly income needs are satisfied; and 3) to determine the value of the Minor Contingent Beneficiaries' current interests in the Trust and to ensure that sufficient property remains in the Trust to allow for a specific interest for these Minor Contingent Beneficiaries.

RULINGS GIVEN

Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as described herein, our advance income tax rulings are as follows:

A. Mrs. G., the First Beneficiaries, the Adult Contingent Beneficiaries and the Contingent Income Beneficiaries will not be considered to have received proceeds of disposition for the purposes of sections 106 and 107 of the Act, as the case may be, as a result of executing their respective Deed of Disclaimer referred to in the proposed transactions.

B. The variation of the Trust, as described in 17 above, if so approved by the court, will not, in and by itself, result in a disposition for income tax purposes of any property of the Trust or any beneficiary's interest in the Trust for the purposes of section 106 or 107 of the Act.

C. Provided that the joint elections are filed in prescribed form and within the time set out in subsection 85(6) of the Act and subject to the application of the provisions in subsection 26(5) of the Income Tax Application Rules, the provisions of subsection 85(1) of the Act will apply to the proposed transfer of property described in 14 above with the result that:

(i) the "elected amounts" agreed upon by the Trust and Opco in respect of the transferred shares will be deemed pursuant to paragraph 85(1)(a) of the Act to be the proceeds of disposition to the Trust and the cost thereof to Opco,

(ii) the cost to the Trust of the Class "A", Class "B" and Class "C" Preference Shares of Opco received as partial consideration for the transferred property will be determined pursuant to paragraph 85(1)(g) of the Act, and

(iii) the cost to the Trust of the Class "B" Non-Voting Common Shares received as partial consideration for the transferred property will be determined pursuant to paragraph 85(1)(h) of the Act.

D. The distribution of the property held by the Trust to Child A, Child C and to Child B's Trust will be subject to the provisions of subsection 107(2) of the Act.

E. By virtue of paragraph (g) of the definition of "trust" in subsection 108(1) of the Act, Child B's Trust will not be subject to the 21-year deemed disposition rule in subsection 104(4) of the Act because it is a trust in which all interests have vested indefeasibly and no interest may become effective in the future, it is not a trust described in paragraph 104(4)(a) of the Act, and it is not a trust which has elected under subsection 104(5.3) of the Act.

F. The provisions of subsections 56(2), 56(4) and 105(1) of the Act will not apply in respect of the proposed transactions described herein.

G. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of Rulings A to F above as a result of the proposed transactions described herein.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and are binding on Revenue Canada provided that the proposed transactions described above are completed and effective on or before XXXXXXXXXX.

COMMENTS

Nothing in this letter should be construed as implying that Revenue Canada has agreed to or accepted:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares, or

(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

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