5 April 2004 External T.I. 2003-0050671E5 - attribution of property transferred to a trust

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. Would 75(2) apply if settlor is one of two or more trustees acting in a fiduciary capacity and the trustees do not have the power to add beneficiaries?

2. Would 75(2) apply if the settlor is not a beneficiary but the terms of the trust give the settlor's spouse a power of appointment, exercisable by will, to distribute the trust's property as she chooses?

3. Would the response be different if the terms of the trust specifically preclude the settlor from being appointed a beneficiary?

Position: 1. Generally no.

2. Where the power of appointment would allow the settlor to be appointed as a capital beneficiary, yes.

3. If it is clear that the provision which precludes the settlor from becoming a capital beneficiary of the trust also precludes the spouse from exercising that power of appointment in favour of her spouse, the condition in paragraph 75(2)(a) would presumably not be met.

Reasons: Reiteration of past positions set out in 2000-0042505, 1999-0013065,2002-0116535, 2002-139205,2002-0162855.

XXXXXXXXXX 	Annemarie Humenuk
		2003-005067
Attention:  XXXXXXXXXX 

April 5, 2004

Dear XXXXXXXXXX:

Re: Application of subsections 75(2) and 107(4.1) to a trust

This is in reply to your letter of November 21, 2003, concerning the application of subsections 75(2) and 107(4.1) to various scenarios involving a trust.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

The particular circumstances outlined in your letter appear to relate to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, it is not our practice to comment on transactions involving a specific taxpayer except by way of an advance income tax ruling. If your situation involves a proposed transaction and you wish to receive confirmation of the income tax consequences resulting from the transaction, we invite you to submit a request for an advance income tax ruling. If, on the other hand, your situation involves the application of subsection 75(2) to a trust that has already been established, you should direct your enquiries to your local tax services office. In addition, it should be noted that the tax consequences applicable to a trust cannot be determined without a complete review of all the relevant facts, including the trust indenture or agreement which creates the trust. Nevertheless, we are prepared to provide the following general comments concerning the application of subsection 75(2).

Income earned on property held in a trust will be attributed to the person who transferred the property to the trust (referred to in this letter as the "settlor") where any of the conditions described in subsection 75(2) apply. Your questions relate to two particular terms of a trust deed that may give rise to the application of subsection 75(2). You would like clarification of the circumstances under which the settlor of a trust can be a trustee of that trust without giving rise to the application of subsection 75(2) and you would like clarification of whether subsection 75(2) would apply where the possibility of reversion of the property to the settlor is contingent on a power of appointment held by the settlor's spouse.

It is a question of fact as to whether property is held by a trust under either of the conditions described in paragraphs 75(2)(a) or (b). When the settlor is one of two or more co-trustees acting in a fiduciary capacity in administering the trust property and there are no specific terms outlining how the trust property is to be dealt with, but rather the property is subject to standard terms ordinarily found in trust indentures, we accept that paragraph 75(2)(b) will generally not be applicable.

With respect to the condition described in subparagraph 75(2)(a)(ii), it is a question of fact as to whether the settlor can, after the creation of the trust, determine who will receive the property from the trust. Where the beneficiaries under a trust are named in the trust indenture and cannot be modified (i.e., the settlor cannot select additional beneficiaries after the creation of the trust), subparagraph 75(2)(a)(ii) is generally not considered applicable. This is true even though the settlor may be able to determine the amount of the trust property that is to be distributed to the beneficiaries already identified in the trust documents. However, subparagraph 75(2)(a)(ii) is worded broadly and there could be exceptions to this general position depending on the particular arrangement. When the settlor is one of two or more co-trustees acting in a fiduciary capacity in administering the trust property and there are no specific terms outlining how the trust property is to be dealt with, but rather the property is subject to standard terms ordinarily found in trust indentures, we accept that paragraph 75(2)(a)(ii) is also not generally applicable.

With respect to the condition described in subparagraph 75(2)(a)(i) as it applies to the situation where the settlor is not a capital beneficiary of the trust, but can be appointed as a capital beneficiary under the terms of a power of appointment exercisable through the will of the settlor's spouse, it is our view that subsection 75(2) would normally apply to such a situation. In this regard, we note that the word "may" as used in subparagraph 75(2)(a)(i) means that subsection 75(2) applies even though there is only a possibility that the property will revert to the settlor. We would like to stress that the condition found in subparagraph 75(2)(a)(i) does not refer to the notion of control or certainty in order for the condition to be met. Accordingly, where the donee of the power may appoint the settlor as a capital beneficiary of the trust, there is a possibility that the property transferred to the trust will revert to the settlor such that subsection 75(2) applies.

On the other hand, if the power of appointment is clearly limited by the terms of trust such that it prevents the donee of the power from appointing the settlor as a capital beneficiary of the trust or otherwise allowing the property to revert to that person directly or indirectly, subparagraph 75(2)(a)(i) would not generally be applicable because the property could not revert to the settlor under the terms of the trust. As stated above however, the application or non-application of subsection 75(2) to a particular situation must be evaluated on its own merits.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance to you.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch