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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: When property is transferred from a trust which held the property under any of the conditions described in 75(2) to a trust which is not subject to any of the conditions described in 75(2), will 75(2) or 107(4.1) apply to the income or distributions from the second trust?
Position: 1. 75(2) will not apply to the second trust solely by reason of the fact that 75(2) applied to the first trust.
2. If the property was rolled to the second trust under 107.4(3), 107(4.1) will apply to a distribution from the second trust to a beneficiary unless at least one of the conditions in 107(4.1)(c) and (d) are not met.
Reasons: 1. There is no provision to extend the application of 75(2) to the second trust.
2. 107(4.1) was amended by S.C. 2001, c.17 to ensure that a trust could not avoid the application of 107(4.1) by transferring the property to be distributed from the trust to which 75(2) did apply to one to which it didn't.
XXXXXXXXXX 2001-006795
Annemarie Humenuk
Attention: XXXXXXXXXX
January 3, 2002
Dear Sir:
Re: Subsection 75(2) Following a Trust-to-Trust Transfer of Property
This is in reply to your letter of January 12, 2001, concerning the attribution of income earned on property transferred to a trust from another trust in circumstances where subsection 75(2) applied to the income earned on the property when it was held by the first trust. We apologize for the delay of our response.
You describe a scenario in which an inter vivos discretionary trust ("Trust X") was established by Mr. X. The only beneficiaries of Trust X are the three children of Mr. X. Under the terms of the trust, no additional beneficiaries may be added to the trust, the trust property cannot revert to Mr. X, the trust must have at least three trustees and all decisions regarding the trust's affairs must be agreed to unanimously by the trustees.
The current trustees of the trust are Mr. X, Mrs. X and an arm's length professional advisor. As Mr. X is one of the three trustees, you anticipate that subsection 75(2) applies. Consequently, you propose that a new discretionary trust ("Trust Y") be created with terms identical to Trust X, except that trustee decisions regarding the trust's affairs will have to be made by majority decision, provided that the majority will have to include the professional advisor. You state that the advisor will not be the agent of Mr. or Mrs. X, and that neither Mr. nor Mrs. X will have the power to remove the advisor or to add additional trustees. You also propose that Trust X will transfer all its property to Trust Y pursuant to the provisions of subsection 107.4(3). You ask for confirmation that subsection 75(2) will not apply to Trust Y and that a distribution of property from Trust Y to a beneficiary will not be subject to subsection 107(4.1).
The particular circumstances outlined in your letter appear to relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R4, Advance Income Tax Rulings, it is not our practice to comment on a proposed transaction involving a specific taxpayer, except by way of an advance income tax ruling. When the transaction related to the enquiry is completed, the enquiry should be addressed to the relevant tax services office. However, we offer the following general comments that may be of assistance to you.
It is a question of fact as to whether property is held by a trust under either of the conditions described in paragraph 75(2)(a) or (b). For example, with respect to the condition described in subparagraph 75(2)(a)(ii), it is a question of fact as to whether the person who transferred the property to a trust 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 person from whom the property was received by the trust 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 person from whom the property was transferred to the trust may be able to determine the amount of the trust property that is to be distributed to 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 situation.
With respect to paragraph 75(2)(b), it is our view that the condition in paragraph 75(2)(b) might not be met in respect of property which is contributed to the trust by a person who is one of two or more co-trustees acting in a fiduciary capacity in administering the trust property where the property is subject to standard terms ordinarily found in trust indentures and there are no specific terms outlining how the trust property is to be dealt with. However, a determination of whether this condition is met in respect of any particular property can only be made on a case by case basis following a review of all the facts and circumstances surrounding a particular situation.
In the situation where subsection 75(2) applies to property held by a trust and that property is then transferred to a second trust, subsection 75(2) will not apply to attribute the income earned by the second trust to the person from whom the second trust received the property directly or indirectly solely by reason of the fact that subsection 75(2) applied to the income earned by the first trust. In the example you gave in your letter, it would appear that the property transferred to Trust Y is not held under any of the conditions set out in subsection 75(2) such that subsection 75(2) would not apply to any property held by Trust Y. However, as a result of the addition of subparagraph 107(4.1)(b)(ii) by S.C. 2001, c.17, where subsection 75(2) was applicable at any time in respect of any property held by Trust X, subsection 107(4.1) will apply to any distribution of property from Trust Y after March 16, 2001, in satisfaction of all or part of a beneficiary's capital interest unless at least one of the conditions in paragraphs 107(4.1)(c) and (d) are not met.
As indicated in paragraph 22 of Information Circular 70-6R4, this opinion is not an advance income tax ruling and consequently, is not binding on the Canada Customs and Revenue Agency. We trust our comments are of assistance to you.
Yours truly,
T. Murphy
Manager
Trusts Section
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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