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: Will units of a trust, which will receive on redemption and as a reduction of what would otherwise form part of the proceeds of redemption, any income generated by a sale of a trust asset to fund the redemption (to the exclusion of non-redeeming unitholders), satisfy the condition in paragraph 259(5)(b) of the definition of "qualified trust"?
Position: No.
Reasons: No provision in the Act to carve-out income from proceeds of disposition in such a manner. Inconsistent with the scheme of the Act in respect of section 259.
XXXXXXXXXX 2001-007264
G. Kauppinen
August 24, 2001
Dear Sirs:
Re: Subsection 259(5) - Definition of Qualified Trust
This is in reply to your facsimile transmission dated March 1, 2001 regarding paragraph (b) of the definition of the "qualified trust" in subsection 259(5) of the Income Tax Act ("Act").
Specifically, you have asked if the units of the trust would be considered to be "identical in all respects" within the meaning of paragraph (b) of the definition of "qualified trust" in subsection 259(5) of the Act where the terms, conditions, rights and interests of each unit in the Trust will be the same with respect to the Trust in every respect except as follows.
In order to accommodate a beneficiary redeeming his or her units in the trust, it is assumed that the trust will be required to dispose of a portion if its investments at the time of the redemption. If trust earns income or realizes capital gains as a result of such disposition, such income earned or capital gains realized on the sale of investments will be paid to the redeeming beneficiary (and not the other beneficiaries) and the recovered cost of the investment to the trust will be paid to the beneficiary as proceeds of redemption of the unit.
For example:
1. Two persons each buy a unit in the trust for $10.
2. The trust buys a single investment property for $20.
3. One beneficiary subsequently redeems his units at a time when the trust has a fair market value of $26.
4. On the sale of the investments, the trust receives $13, $3 of which is income and/or capital gains, and the balance of which is the cost of the investment.
5. The trust makes payable to the redeeming beneficiary the income/capital gains of $3 and proceeds of redemption (from the sale of the trust asset) of $10.
You state that such a system would be to avoid prejudicing any non-redeeming beneficiary. Since the sale of the asset is to solely fund the redemption of the unitholder who wishes to cash out, then the other unitholder's should not have to currently bear the tax cost of effecting the redemption.
Opinions concerning proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. For more information concerning advance tax rulings, please refer to Information Circular 70-6R4 dated January 29, 2001, issued by the Canada Customs and Revenue Agency. Copies of information circulars and interpretation bulletins are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. However, we can provide you with the following general comments.
In the following, we assume that the income or loss generated on the disposition of a trust asset would be in the form of a capital gain or capital loss.
In our opinion, there is little merit in the argument that the system you describe above avoids prejudicing any non-redeeming beneficiary since the taxable gain or allowable loss generated on the sale of a trust asset to fund a redemption depends entirely upon which assets the trustee of the trust chooses to liquidate. For example, if the trustee of the trust chooses to liquidate assets which have no unrealized gains in order to fund redemptions, then it is, in theory, the non-redeeming beneficiaries who will bear the "tax cost" of the current redemption since the other assets of the trust (assumed to have unrealized gains) will generate taxable gains when they are ultimately disposed of in order to fund redemptions in the future.
Notwithstanding the foregoing, the definition of proceeds of disposition in the Income Tax Act does not include a provision for a reduction of what would otherwise be the redeeming unitholder's share of the fair market value of the assets held by the trust by the income (assumed to be a capital gain) generated by the sale of an asset to generate funds to pay the redemption.
In addition, the scheme of the Act with respect to section 259, and in particular the election under subsection 259(3), is to provide a "look-through mechanism" for each unitholder to the underlying property held by the trust. For example, pursuant to paragraph 259(1)(f) of the Act, where the trust disposes of a property, each unitholder is deemed to have disposed of his or her share of that property for his or her share of the trust's proceeds of disposition. Pursuant to paragraph 259(1)(g) of the Act, where a unitholder disposes of a unit, he or she is deemed to have disposed of his or her share of all of the property held by the trust for his or her share of proceeds of disposition equal to the fair market value of all the property held by the trust at that time. It seems to us that a system such as you describe would be inconsistent with the basic construction of section 259 of the Act.
In view of the foregoing, it is our opinion that units of a trust with rights such as you describe would not satisfy condition (b) under the definition of "qualified trust" in subsection 259(5) of the Act that all the interests of the beneficiaries under the trust are described by reference to units of the trust all of which are identical to each other.
We trust our comments are of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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