Section 107

Subsection 107(1)

Administrative Policy

2016 Ruling 2015-0606771R3 - Disclaimer of trust interest

no disposition from disclaimer

An estate (that was a testamentary trust) holding appreciated assets has five grandchildren who would receive as residuary beneficiaries under the estate following the death of “Ms. A and Mr. B” (presumably siblings or siblings in law, and parents of the grandchildren). CRA ruled that a disclaimer by the grandchildren - resulting in a distribution of the residue of the trust assets to Ms. A and Mr. B on an intestacy – would not result in any of the grandchildren receiving proceeds of disposition, and that such distribution would occur under s. 107(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2) disclaimer resulting in a rollout of estate assets under an intestacy 372
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition disclaimer of interest in estate 83

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Example of gain computation on sale of capital interest (p. 267)

[C]onsider a beneficiary who holds a capital interest in a Canadian resident inter vivos personal trust. The capital interest has not been acquired for consideration by the beneficiary, who is the only capital beneficiary under the trust. The trust holds a single capital property, which has an adjusted cost base of $500 and a fair market value of $1,000. Under subsection 107(1.1), the beneficiary's cost of the capital interest is deemed to be nil. The cost amount to the beneficiary of her capital interest in the trust, as determined for the purposes of subsection 108(1), is $500. Assume that the beneficiary were to sell the capital interest in the trust for proceeds of disposition of $1,000. Paragraph 107(1)(a) provides that for the purpose of computing the beneficiary's capital gain, if any, from the disposition of the capital interest in the trust, the adjusted cost base is deemed to be the greater of its adjusted cost base, as otherwise determined, to the taxpayer immediately before the disposition ($0) and the cost amount to the taxpayer immediately before the disposition ($500). Accordingly, the beneficiary would realize a capital gain of $500 on the disposition of the capital interest in the trust. If instead of disposing of the capital interest, the trust sold its capital property and realized a $500 capital gain, which the trust allocated to the beneficiary pursuant to a designation made under subsection 104(21), die capital gain deemed to have been realized by the capital beneficiary would be the same as the gain that the beneficiary would have realized if the capital interest in the trust had been disposed of to a third party.

The Canada Revenue Agency (CRA) has illustrated the manner in which paragraph 107(1)(a) applies in computing the capital gain on the deemed disposition of a capital interest in a trust in a 2004 technical interpretation. [fn 20: …2004-0061841E5]

Potential for double taxation (p. 270)

The sale or other disposition of a capital interest in a trust could give rise-to double taxation to the purchaser of the interest when the trust disposes of its property to a third party following the acquisition of the trust interest by the purchaser. Because the inside cost of the trusts property is not increased as a result of the transfer of the capital interest in the trust, gain may be realized on the subsequent sale….

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Potential for s. 107(1)(c) to result in double taxation (pp. 144-145)

When the beneficiary is itself a trust, paragraph 107(1)(c) reduces its loss by the amount of any dividends that it is deemed to have received under subsection 104(19) or (20), even if the beneficiary trust flowed out those amounts to its beneficiaries. Consequently, there is a possibility that paragraph 107(l)(c) could result in double taxation by reducing a trust's loss on the disposition of a capital interest in another trust, and by reducing a loss of a beneficiary of the first mentioned trust from the disposition of an interest in the trust. Subparagraph 107(2)(c)(ii), which is discussed in detail in chapter 4 and is intended to prevent double counting, may not apply to the application of paragraph 107(l)(c) to both taxpayers because this rule applies only to losses realized by the same taxpayer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Articles of Treaties - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(35) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379

Subsection 107(1.1) - Cost of capital interest in a trust

Articles

Alycia Calvert, "Incorporation of an Energy Trust", Resource Sector Taxation, Vol. IV, No. 3, 2006, p. 286.

Goodman, "The Tax Treatment of Commercial Trusts", 1989 Canadian Tax Journal, July-August issue, p. 1053

Subsection 107(1.2)

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Purpose (p. 265)

[S]ubsection 107(1.2))…is intended to prevent the beneficiary from realizing a loss on the valuation of the trust interest as a result of non-taxable distributions made to the beneficiary when no economic loss has actually been incurred.

Subsection 107(2) - Distribution by personal trust

Cases

Chan v. The Queen, 2001 DTC 5570, 2001 FCA 302

damages from trustees not distributed out of trust assets

A taxpayer, who was the beneficiary of a trust established by his father and mother who were the trustees, received approximately $1.8 million in settlement of an action brought against them in respect of their handling of assets of the trust. In affirming a finding of the Tax Court that the monies received were proceeds of disposition of his capital interest in the trust rather than being property distributed to him by the trust in satisfaction of his capital interest in the trust as contemplated by s. 107(2), Sexton J.A. noted that the taxpayer had failed to demonstrate that the property which was transferred to him was indeed property distributed out of the trust assets.

Words and Phrases
distribute

See Also

Mariano v. The Queen, 2015 DTC 1209 [at 1331], 2015 TCC 244

delegation of power of appointment to promoter not authorized

The taxpayers were participants in leveraged donation transactions, which were intended to result in a step-up of the adjusted cost base of courseware licences (e.g., on how to use Microsoft products) under ss. 69(1)(c) and 107(2) (apparently with a view to avoiding s. 248(35)) before the licences were donated by them at a higher stipulated value to a registered charity ("CCA").

The licences were gifted to a Canadian–resident Trust with a corporate trustee. Ostensibly, the licences then were distributed to the program participants such as the taxpayers after they had been added as capital beneficiaries, with the participants then donating them to CCA.

After noting that there was no wording in the Trust Deed authorizing the Trustee to delegate any power to appoint capital beneficiaries or the power to determine the amount of any distribution of property to them, Pizzitelli J found that the participants had not been validly appointed as capital beneficiaries, and there had not been a proper distribution to them of any capital property of the Trust, as the Trustee had had no involvement in their applications to be approved as capital beneficiaries nor in the determination of what property which was distributed to them, which was done by an individual, associated with the promoter, pursuant to a computer algorithm.

See summaries under s. 118.1 – total charitable gifts and s. 104(1).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Other courseware licences valued at modest initial cost, given relevant wholesale market and depressive effect of huge volumes purchased 289
Tax Topics - General Concepts - Ownership no acquisition of unascertained property 66
Tax Topics - General Concepts - Sham taxpayer involvement in deceit unnecessary 357
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) void for lack of certainty of objects 208
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts no gift where no intent for impoverishment and where gifted property not yet identified 526
Tax Topics - Income Tax Act - Section 248 - Subsection 248(35) attempted use of initial gift to step-up ACB under s. 69(1)(c) 238

Chan v. The Queen, 99 DTC 1215 (TCC), aff'd supra

sale rather than distribution

When the taxpayer discovered that his mother and father had established a trust in his favour and that they were about to complete the sale of the principal asset of the trust, he sued the trustees. A week later, the action was settled by one of the trustees agreeing to pay him two lump sums in consideration for a release.

Bonner TCJ. found that the settlement gave rise to a disposition by way of sale pursuant to s. 107(1) rather than representing a distribution of property (i.e., the cash) pursuant to s. 107(2). Bonner TCJ. stated (at p. 1218):

"The word 'distribute' in the context of subsection 107(2) refers to an allotment of trust property to a beneficiary in accordance with his proportionate share ... . The Appellant's father demanded and received consideration as provided in the form of the deed of release and disclaimer ... . The transaction was, quite simply, a sale."

Administrative Policy

19 January 2017 External T.I. 2015-0576751E5 F - Trust, Disposition of depreciable property, Assumption

s. 107(2) generally available where beneficiary assumes trust debt

Does s. 107(2) apply where a trust distributes property to a beneficiary on condition that the beneficiary assume a debt of the trust to a financial institution? CRA responded:

Under subsection 248(1), a personal trust is defined, among other things, as a trust in which no beneficial interest was acquired for consideration payable directly or indirectly to the trust or to any person or partnership that has made a contribution to the trust by way of transfer, assignment or other disposition of property. …

The question of whether the assumption by the beneficiary of the debt of the trust constitutes consideration for the acquisition of a beneficial interest in the trust is a question of fact….

To the extent that assumption by the beneficiary of the debt does not cause the trust to lose its personal trust status and all other conditions for the application of subsection 107(2) are satisfied, the rollover under that subsection applies to the distribution of the property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) s. 13(7)(e) applicable to s. 107(2.1) distribution but not s. 104(5) deemed disposition 257
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Personal Trust non-commital as to whether assumption of debt could constitute tainting consideration 175
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.1) s. 13(7)(e) applicable to depreciable property distribution 117
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) trust cannot have a NAL relationship with itself 39

2016 Ruling 2015-0606771R3 - Disclaimer of trust interest

disclaimer resulting in a rollout of estate assets under an intestacy
Background

Ms. A and Mr. B. are income and capital beneficiaries, as well as the trustees, of the estate (a testamentary trust) of their late father, Mr. X. In the event that Ms. A or Mr. B dies before the Estate assets are exhausted, the contingent residual beneficiaries of the Estate are the five Grandchildren. Should Ms. A (or Mr. B) predecease her (or his) children, they will each receive a portion of her (or his) remaining interest in the Estate. The 21-year deemed disposition rule in s. 104(4) will occur on XXX.

Proposed transactions

The Grandchildren will disclaim any capital and income residual interest that they would ultimately receive in the Estate (if they survive Ms. A and Mr. B and there are residual assets) for no consideration. They will make no direction regarding who is entitled to receive the benefit from disclaiming their interest. As a result of the disclaimer by the Grandchildren, the residue of the Estate will be “subject to an intestacy because at that time there will be no beneficiaries other than Ms. A and Mr. B.” Such residue will be distributed to Ms. A and Mr. B in accordance with the laws of intestacy. Prior to making such distributions, the trustees of the Estate shall pass a resolution that the distributions of all of the residual assets will be in satisfaction solely of the capital interests of Ms. A and Mr. B in the Estate.

Effect of transactions

Each of Ms. A and Mr. B will have the benefit of their respective portions of the Estate assets during their respective lifetimes and have the potential to be able to make gifts to their children as they determine appropriate. On their deaths these assets and the balance of any assets they have accumulated in their own personal estates are to be distributed to their families and any other beneficiaries in accordance with their respective wills. This is acceptable to the five Grandchildren.

Rulings

The disclaimers by the Grandchildren will not result in any of them being considered to have received any proceeds of disposition for purposes of ss. 40(1), 106(2) and 107(1).

Subject to s. 107(2.001), s. 107(2) will apply to the distribution of the Estate assets to Ms. A and Mr. B.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) no disposition from disclaimer 91
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition disclaimer of interest in estate 83

12 May 2016 External T.I. 2014-0552341E5 - Subsection 107(4.1)

tainting effect of one 75(2) property

CRA confirmed that a personal trust was tainted under s. 107(4.1) when it was settled with a gold coin by one of the capital beneficiaries – so that until the settlor died, none of the other property in the trust could be rolled out under s. 107(2) to the other capital beneficiaries even though such property had been acquired in an arm’s length purchase from an arm’s length vendor. Whether the vendor of such property was still in existence or not was irrelevant.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(4.1) application of s. 75(2) to only one property in a trust can taint all the other trust property 158

9 October 2015 APFF Financial Strategies and Financial Instruments Roundtable Q. 8, 2015-0593091C6 F - Assumption of a debt by a beneficiary of a trust

CRA generally accepts that loss of a s. 107(2) rollover can be avoided, where a trust owes debt to a capital beneficiary, by refinancing the debt with a bank

CRA considers (e.g., 2013-0488061E5) that the s. 107(2) rollover does not apply to the property of a personal trust which is distributed to a capital beneficiary to pay a debt owing to the beneficiary. In order to avoid this result in the case of a real property subject to a mortgage owing to the capital beneficiary, the trust can pay off the mortgage with a fresh mortgage financing from a bank, and then distribute the encumbered property to the beneficiary.

12 December 2014 External T.I. 2013-0511391E5 F - Deemed disposition of capital interest in personal trust

full step-up of properties distributed in satisfaction of an estate's capital interest in an inter vivos personal trust

The sole beneficiary of an inter vivos trust (the "Trust"), whose interest under the Trust had vested indefeasibly, died, as a result of which his capital interest passed as part of his estate to his beneficiary. The sole asset of the trust was all the shares of a corporation (the "Property"). What is the cost to the estate of the deceased beneficiary of the Property distributed by the Trust in satisfaction of the capital interest therein of the estate?

CRA noted that the deceased was deemed on death to have disposed of his capital interest for its fair market value which, under s. 107.4(4) "was at least equal to the FMV of the Property of the Trust" and that, under s. 70(5)(b), "the estate was deemed to have acquired the capital interest at its FMV."

The Trust was deemed by s. 107(2)(a) to have disposed of its Property to the estate for its cost amount. After noting that "paragraph 107(1.1)(b) would not deem the cost of the interest in the Trust of the estate to be nil because it would acquire the interest from a person who was the beneficiary immediately before such acquisition," and that under s. 108(1) – "cost amount" – (a), "the cost amount of the [estate's] interest in the Trust was deemed to refer to the cost amount, immediately before the distribution, of each of the properties distributed to the beneficiary," CRA stated (TaxInterpretations translation):

…as in this case, the cost amount of the Property to the Trust would correspond to the cost amount to the estate of the capital interest in accordance with subsection 108(1), the application of paragraph 107(2)(b) would ensure that the cost of the property to the estate would be equal to the ACB of its capital interest, and thus, generally, to its cost determined in accordance with paragraph 70(5)(b).

The proceeds of disposition of the capital interest by the Trust also would be equal to the cost of the interest established under s. 70(5)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 70 - Subsection 70(5) push-down onto property distributed by inter vivos personal trust of s. 70(5)(b) cost of indefeasibly vested capital interest in the trust 174

10 October 2014 APFF Roundtable, 2014-0538261C6 F - Disposition of capital interest/personal trust

issuance of note by trust is not distribution of trust property

Where a discretionary personal trust issues a note to a beneficiary in satisfaction of her capital interest, CRA considers that "the issuance of a note does not constitute the distribution of property of a trust to a beneficiary," so that s. 107(1) would not apply to deem her to have a high ACB for her capital interest, and s. 107(2) would not apply to the note issuance. See detailed summary under s. 108(1) – cost amount.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Cost Amount note issuance is not trust property distribution to a beneficiary 201
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) non-deductible interest on note issued to beneficiary 176

16 June 2014 STEP Roundtable Q. 8, 2014-0526551C6 - STEP CRA Roundtable Q8 - June 2014

transfer to settle debt not a distribution

When a personal trust with appreciated property is wound-up and a portion of the property is transferred to the capital beneficiary is settlement of a debt owing to him or her. Does the s. 107(2) rollover apply? After noting that Chan indicated that a distribution under s. 107(2) is an allotment made in accordance with the beneficiary's interest and not made for consideration, CRA stated:

Under the law of equity, fiduciary duties are imposed on a trustee and are enforceable by the beneficiaries of a trust. In our view, the settlement of the debt owing by the trust to the beneficiary would not constitute a distribution undertaken by the trustee under a fiduciary duty to a beneficiary qua beneficiary, but rather, the fulfilment of requirements imposed on a debtor.

It cannot be said that a transfer that settles a debt can also constitute a distribution for purposes of subsection 107(2) of the Act. …The settlement of the debt by the transfer of property to the creditor does not occur by virtue of rights of the holder of the interest as a beneficiary under the trust. It occurs by virtue of the rights held as a creditor.

27 January 2014 Internal T.I. 2012-0472161I7 - Gifts by Will

gifts v. distributions made to charities

The Deceased had three wills in respect of defined components of her estate (the "Trust"), including a second will in respect of the "Secondary Estate." CRA found that the second will did not accord the trustees the discretion to make a gift to specified Charities, so that s. 118.1(5) did not deem distributions made to the Charities to have been gifts made by the Deceased.

Respecting the potentially competing application of ss. 118.1(3) and 107(2) on the distribution of capital property of the trust to discretionary capital beneficiaries including charities, where the will accords the trustees with the discretion to make charitable gifts, CRA stated that this determination should be made based on the "specific wording of the trust agreement and ... whether the intention of the trustee was to have the trust make a distribution to the charity as a donation of capital property of the trust, or in settlement of a capital interest which the charity may have in the trust."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts gifts. v. distributions made to charities 198
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(5) gifts. v. distributions made to charities 62

19 December 2013 External T.I. 2013-0503481E5 - Distribution of property by a trust

transfer to settle debt

After referring to 2013-0488061E5 (below) and 2013-0488381E5, CRA stated:

[A] transfer of property by a trustee in settlement of a debt cannot also be a distribution for purposes of subsection 107(2)…; it is one or the other. A distribution is the fulfilment of a fiduciary duty owed to the beneficiary in respect of the trust property. Thus, for the portion of a transfer of value that settles a debt owing by the trust, the preamble to subsection 107(2) of the Act is not met, and by extension, paragraph 107(2)(a) will not apply.

Words and Phrases
distribution

19 November 2013 Internal T.I. 2013-0499021I7 - Distribution of property by a trust

transfer to settle debt

In commenting further on its position in 2013-0488061E5 (immediately below) and 2013-0488381E5 that the distributions of trust property in satisfaction of trust debt were not eligible for rollover treatment under s. 107(2), CRA stated:

It cannot be said that a transfer that settles a debt can also constitute a distribution for purposes of subsection 107(2) of the Act. In order for both a distribution for purposes of subsection 107(2) and a settlement of debt to occur, it is our view that two transfers of property must occur. Note that the settlement of the debt by the transfer of property to the creditor does not occur by virtue of rights of the holder of the interest as a beneficiary under the trust. It occurs by virtue of the rights held as a creditor.

2 July 2013 External T.I. 2013-0488061E5 - 107(2) distribution

transfer to settle debt

A child of the settlor of a discretionary trust who now is the sole trustee and one of the beneficiaries distributes all the trust real property to herself prior to the 21st anniversary date of the trust, with a portion of that distribution being in repayment of all the trust debt owing to her. After stating that "where property is distributed by a trust to a beneficiary in satisfaction of their capital interest in that trust, subsection 107(2) should apply provided that the preconditions for application are met," CRA went on to indicate in the following example (described in greater detail in the full text) that there would be no rollover to the trust under s. 107(2)(a) with respect to the transfer of that portion of the real property which repaid the debt:

The trust transfers a property to the beneficiary with a cost amount of $75 and a fair market value of $120, with a portion of the property repaying a $15 debt owing by the trust to the beneficiary. Under paragraph 107(2)(a) the trust is deemed to have disposed of $105/$120 of the property (being the portion distributed in partial or total satisfaction of the beneficiary's interest) for proceeds equal to its proportionate cost amount, being $65.63 ($75 x (105/120)). As the $15 debt was settled with a portion of the asset with a cost amount of $9.37 ($15/$120 x $75), the trust would recognize a gain of $5.63 (proceeds of $15 less cost of $9.37) on the disposition of that portion of the asset required to settle the debt.

23 January 2013 Internal T.I. 2012-0465081I7 - Subsection 107(2) – a disposition by a NR Trust

Respecting a distribution of Canadian real property by a personal trust resulting in a disposition of the beneficiary's capital interest, CRA rejected a suggestion that s. 107(2)(a) deemed there to be a disposition of the property before its actual distribution, with the result that there was no disposition for purposes of the Act as at that time there was no change in the beneficial ownership of the property:

The phrase "immediately before that time" as used in paragraph 107(2)(a) of the Act, qualifies only the words "... its cost amount to the trust..." for the purposes of determining the proceeds of disposition. It is our position that paragraph 107(2)(a) does not deem a disposition of property to occur by the non-resident trust to the beneficiary prior to the actual disposition time....[W]hen the non-resident trust actually makes the distribution of the real property to the beneficiary, subsection 116(3) of the Act will need to be complied with. CRA has also taken the position that section 116 will also need to be complied with upon the disposition of the capital interest in the trust by the non-resident beneficiary.

2 June 2011 External T.I. 2011-0399501E5 - TCP distributed by N/R trust to N/R beneficiary

A non-resident inter vivos trust distributes its shares of a private Canadian real estate corporation (Canco) in satisfaction of the capital interest of its sole non-resident benficiary. S. 107(2.1) rather than (2) applied:

[S]ubsection 107(2) is not applicable in this case because the shares of Canco would not qualify as property described in any of subparagraphs 128.1(4)(b)(i) to (iii). The conclusion that the Canco shares might qualify as "Canadian real, immovable or resource property" is not relevant for the application of subsections 107(2), 107(2.1) and 107(5), as this expression is not used under those provisions.

30 April 2003 External T.I. 2002-015604 -

A trust distributes shares of a Canadian corporation to its beneficiary on the condition that the beneficiary assumes indebtedness on a loan owing by the trust. The amount of the debt assumed generally will be an eligible offset used in calculating the beneficiary's proceeds of disposition of a part of its capital interest.

9 January 1997 T.I. 963753

S.105(1) does not apply to a distribution of property to which s. 107(2) is applicable.

29 July 1996 External T.I. 5-961381 -

In finding that s. 107(2)(b) rather than 69(1)(c) applied to the acquisition by a resident of Canada of property in satisfaction of an interest in a non-resident estate, RC stated that "the reference to a trust in subsection 107(2) of the Act includes a non-resident trust even if it is not subject to income tax in Canada".

23 July 1996 External T.I. 5-960222 -

S.107(2)(b) will apply to determine the cost of property distributed to a Canadian beneficiary of a non-resident personal trust. However, because the non-resident trust is not a "taxpayer" (i.e., it does not carry on business in Canada, does not hold taxable Canadian property and is not subject to s. 94 of the Act), ITAR 26(3) and (5) would not apply to step up the cost base of the property to the beneficiary.

24 July 1992 T.I. 921652 (March 1993 Access Letter, p. 75, ¶C104-041)

It is a question of law whether, upon the variation of a trust, the distribution of property can be said to be made under the terms of a testator's will or another trust, for the purposes of the meeting of "testamentary trust", "personal trust" and s. 248(8)(a).

22 July 1992 T.I. 920965 (March 1993 Access Letter, p. 75, ¶C104-040)

A variation of trust affecting only administrative or investment powers, or containing provisions for naming replacement trustees, or extending or amending powers of the trustees (such as an authorization to "freeze" some or all of the assets of the trust) would not normally result in the creation of a new trust. However, serious consideration would be given to the addition of discretionary beneficiaries given that there would be a resulting disposition of interests in the trust.

4 March 1992 T.I. (Tax Window, No. 17, p. 20, ¶1783)

Where a personal trust is wound up and the assets distributed to the sole beneficiary, such property will be considered to have been received by the beneficiary in exchange for his capital interest pursuant to s. 107(2), with the result that the rollover will be available.

90 C.R. - Q25

Where the deceased directed in his will that capital properties be held by the executors in trust for a particular beneficiary for a period of years following which the property is distributed to the taxpayer, the cost of the property of the taxpayer will be determined under s. 107(2) rather than s. 69(1)(c).

ATR-38 (10 July 89)

Under the terms of a will, although the widow is entitled to the income and the children to the residue on her death, the trustee (who is the widow) is entitled to encroach for her benefit or for the benefit of the children. The rollover in s. 107(2) applies to the distribution by the estate pursuant to this power of encroachment to the adult children of shares held by the estate.

85 C.R. - Q.24

The lawful transfer, by the trustee of a discretionary trust for the children of the trustee, of 5% of all the shares held in a corporation by the trust to his son, is eligible for the rollover.

85 C.R. - Q.25

Where the trustees of a spouse trust have the power to encroach for her benefit, she is a capital beneficiary and the distribution is subsection to s. 107(2), not s. 106(3).

IT-209R "Inter-Vivos Gifts of Capital Property to Individuals Directly or Through Trusts"

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

CRA denial of s. 107(2) where beneficiary issued a promissory note (pp. 283-4)

[T]he CRA takes the position that if the beneficiary is instead issued a promissory note by the personal trust in satisfaction of her capital interest in the trust, subsection 107(2) does not apply, and the rollover that would otherwise be available in respect of the distribution is denied…. [fn 42: 2014-0538261C6] …

The CRA's conclusions in this technical interpretation may represent an overly narrow reading of subsection 107(2). No authority is cited for the proposition that the issuance of a promissory note to a beneficiary does not constitute a "distribution of property" to the beneficiary; in light of the expansive definition of "property" in subsection 248(1), a promissory note issued to the beneficiary should qualify as property, and the issuance of the note by the trust may well constitute a distribution within the meaning of the Act. In practical and economic terms, this is equivalent to a distribution of cash that is subsequently advanced to the trust by the beneficiary…

Charity as beneficiary or donee (p. 285)

[I]s subsection 118.1(3), which provides for a charitable donation tax credit, or subsection 107(2) applicable on the distribution of capital property of a trust to a discretionary capital beneficiary that is a Canadian registered charity? A similar issue arises in the context of testamentary trusts by virtue of subsection 118.1(5),…[fn 45: 2012-047216117]…In the CRA's view…[i]f the facts indicate that the trust distributed capital property to a charity in satisfaction of a capital interest, subsection 107 (2) generally applies. If however, the facts suggest that the capital property of the trust was given to the charity as a gift, and not in satisfaction of any capital interest, subsection 118.1(3) generally applies.

Timing of disposition of distributed property (p. 286)

[T]he CRA believes that the date of actual distribution is the time when property is distributed for the purposes of subsection 107(2). This complicates the position of a trust described in paragraph 104(4)(a) that has non-resident capital beneficiaries and is deemed to dispose of its property at fair market value first on the death of the spouse and again when the property is actually distributed to the non-residents….

CRA position re unnamed partnership, with named-beneficiary partners, as a beneficiary (pp. 292-4)

[T]he CRA was recently asked, in the context of an unpublished request for a technical interpretation, whether subsection 107(2) applies to a distribution of property by a Canadian-resident personal trust to a newly formed limited partnership, all of whose partners are individual beneficiaries under the trust. The CRA declined to confirm that the rollover provision was applicable in respect of a distribution proposed to be made to the limited partnership, unless the deed of settlement of the trust was amended or varied to include the partnership as a named beneficiary.

In this case, the beneficiaries of the trust were defined in the deed of settlement to include certain named individuals, their children, and more remote issue. Each of the beneficiaries was a non-resident of Canada for the purposes of the Act. The terms of the trust provided the Canadian-resident trustees with the discretion to pay or transfer to all or any one or more of the adult beneficiaries of the trust or to apply for the benefit of all or any one or more of the beneficiaries of the trust the whole or any part of the capital thereof in such manner as may be determined by the trustees in their absolute and uncontrolled discretion.

The trustees proposed to distribute certain property of the trust to a newly formed limited partnership governed by and established pursuant to the laws of Ontario. Each of the partners, including the general partner, was an individual who was also a beneficiary under the trust. The property of the trust to be distributed was composed solely of real, property situated in Canada.

The taxpayer’s representative had argued that a distribution of property by the trust to the partnership constituted a distribution to the partnership as a beneficiary under the trust in satisfaction of the partnership s capital interest therein. The trust provided that the trustees could, in their discretion, distribute the property to or for the benefit of all or any one or more of the individual beneficiaries….

[T]he only question at issue was presumably whether the trustees had, as a matter of trust law, the power to distribute property to the beneficiaries of the trust in their capacity as partners of the partnership. …

There appears to have been a very compelling position that subsection 107(2) should apply to a direct distribution of trust property to the partnership on the basis that the partnership should be regarded as a beneficiary under the trust, even without a variation of the terms of the trust. The trustees clearly had the discretion to encroach on capital for the purpose of distributing trust property to the partnership if the distribution would benefit one or more of the individual beneficiaries under the trust….[T]he CRA was not prepared to confirm that the provision applied. This position appears to be contrary to the meaning of a "beneficiary" in general trust law, which includes any person or partnership that may receive a distribution of property under the trust; it also appears to run counter to the broad definition of a "beneficiary" under a trust in subsection 108(1),…

Distribution of life insurance policy (p. 298)

On the distribution of a life insurance policy in Canada," as defined in subsection 138(12), the CRAs view is that subsection 107(2) takes precedence over subsection 148(7), and the policy may therefore be distributed on a tax-deferred rollover basis -for the purposes of the Act. [fn 78: 2011-0391781E5]

Wolfe D. Goodman, "Distributing Property That is Subject to a Life Interest, Before the 21st Anniversary", Goodman on Estate Planning, Vol. VII, No. 4, 1999, p. 562.

Hayhurst, "Transactions in Income and Capital Interests in Trusts", 1988 Conference Report, c. 38

Discussion of the dividing line between a distribution in satisfaction of any part of a capital interest and an encroachment on capital in respect of a capital interest.

Subsection 107(2.001) - No rollover on election by a trust

Administrative Policy

16 June 2014 STEP Roundtable, 2014-0526581C6 - STEP CRA Roundtable - June 2014 - Q18

property-by-property, election procedure

Can a trust make the s. 107(2.001) election on a property by property basis? As there is no prescribed form, how is the election made? CRA stated:

…The words "a property" refers to a singular property, such that the election can be used in respect of only one property of all the property distributed. For example, if the property being distributed is shares of a corporation, the trust may elect in respect of a single share… .

As a prescribed form is not available for the election, a letter should be filed with the trust's … Return for the year the distribution occurs… . A list of the information that should be included in the letter is provided on page 31 of the 2013 T3 Trust Guide... .

11 July 2013 External T.I. 2012-0471061E5 - Subsection 107(2.001) election

///?p=18479">18 April 2013 T.I. 2012-0470391E5): The s. 107(2.001) election can be applied on a property-by-property basis - for example, on a single share or several shares, but not on a fraction of a share.

There are currently no prescribed forms for s. 107(2.001) or s. 107(2.11). Instead, a letter should be filed with the trust's T3 form. CRA sets out detailed requirements for a s. 107(2.11) (see the letter for a full list). Information to be included in a s. 107(2.001) election is set out in the T3 Trust Guide (at the time of writing, p. 28 of cra-arc.gc.ca/E/pub/tg/t4013/t4013-12e.pdf).

Subsection 107(2.002) - No rollover on election by a beneficiary

Administrative Policy

16 June 2014 STEP Roundtable, 2014-0526581C6 - STEP CRA Roundtable - June 2014 - Q18

election procedure, gain if election

As there is no prescribed form, how is the election made? CRA indicated that the beneficiary should include in a letter attached to beneficiary's T1 Return (or in an election sent separately if the return is filed electronically): a declaration that the beneficiary is electing under s 107(2.11); his or her name, address and ID number (e.g., SIN); the distributed property's description, cost amount and FMV; the ACB of his or her capital interest in the trust; a description , address and country of residence of the trust and the name and address of the trustees.

CRA stated:

Under paragraph 107(2.002)(b), the cost amount of the capital interest to the beneficiary is deemed, for purposes of subparagraph 107(l)(a)(ii), to be nil. Generally, the beneficiary's proceeds of disposition in respect of the capital interest are calculated in accordance with paragraph 107(2.l)(d). The beneficiary will be treated as having disposed of the capital interest for an amount equal to the fair market value of the property, less the portion of the distribution that is a payment to which paragraph (h) or (i) of the definition of "disposition" in subsection 248(1) applies, and any eligible offset as defined in subsection 108(1). As a result, the beneficiary may realize a capital gain on the disposition of their capital interest in the trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.001) property-by-property, election procedure 121
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.11) election procedure 59

11 October 2013 External T.I. 2013-0496431E5 - Subsection 107(2.002) election

Subsection 107(2.002) lacks a prescribed form. For the taxation year in which the non-resident trust distributes property, the beneficiary should send a letter to CRA with their return (or mail separately if the return was filed electronically) stating:

  • a declaration to elect under subsection 107(2.002) of the Act;
  • the name and address of the beneficiary;
  • the beneficiary's CRA identification number (for example, social insurance number, business number etc.);
  • the taxation year;
  • a description of the property being distributed in satisfaction of the capital interest in the trust;
  • the cost amount of the property to the trust;
  • the fair market value of the property at the time of the distribution;
  • the adjusted cost base of the beneficiary's capital interest in the trust;
  • description and name of the trust;
  • name and address of the trustee(s); and
  • country of residence of the trust.

Also included is a general description of the gains consequences of making the election.

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Limitations of s. 107(2.002) election (pp. 303-4)

The effect of making an election under subsection 107(2.002) in respect of a distribution of a property made to a beneficiary in full or partial satisfaction of the beneficiary's capital interest in a trust is that the rollover provision in subsection 107 (2) does not apply in respect of the distribution; instead, the distribution occurs on a taxable basis. However, when the election is made, subsection 107(2.002) deems the cost amount of the beneficiary's capital interest in the trust to be nil for the purposes of subparagraph 107(l)(a)(ii). The beneficiary may therefore realize a gain on the deemed disposition of her capital interest in the trust pursuant to subsection 107(2.1). …

An election under subsection 107(2.002) may thus ensure that the beneficiary acquires the distributed property at a higher adjusted cost base, with the result that capital gains or income accrued by the non-resident trust before the distribution is not subject to tax in Canada on a subsequent disposition of the distributed property by a Canadian-resident beneficiary. However, the election may result in the current realization of gain on the deemed disposition of all or part of the beneficiary's capital interest in the trust pursuant to subsection 107(2.1), which by virtue of the election is deemed to have a nil cost amount. [fn 93: See…2015-0582701E5…and…2004-0062121E5] Accordingly, in many circumstances it may be more efficient, subject to applicable foreign tax considerations, for a non-resident trust to realize an actual disposition of the property before the distribution. …

The sole purpose of the election is to enable the beneficiary to acquire the distributed property at a cost equal to its fair market value,…[T]his purpose can be achieved in a variety of other ways, such as an actual disposition of the property (for example, a transfer to a wholly owned subsidiary of the trust) before the distribution, or even a sale of the property to the beneficiary in consideration for a promissory note, which is subsequently set off against a capital distribution made by the trust to the beneficiary. The imposition of tax on the beneficiary when an election under subsection 107(2.002) is made renders the election of limited use in most circumstances….

Subsection 107(2.01) - Distribution of principal residence

Administrative Policy

9 September 2013 External T.I. 2012-0464321E5 - Application of subsections 107(2) and 107(2.01)

specified and non-specified beneficiaries

A personal trust holds a principal residence of a specified beneficiary (as defined in subpara. (c.1)(ii) of the "principal residence" definition in s. 54), and has several other beneficiaries who are not specified beneficiaries.

If the trust distributes the principal residence to all the beneficiaries equally and makes a s. 107(2.01) designation, the designation will not be invalidated because the other beneficiaries are not specified beneficiaries (as only one such beneficiary is required). Respecting the reference in s. 107(2.01) to a distribution "by the trust to the taxpayer," the singular includes the plural.

If no election is made, then each beneficiary claiming the principal residence exemption must, in his or her own right, satisfy the requirements of ss. 40(2)(b) and (c), although s. 40(7) will deem a residence acquired by a beneficiary in satisfaction of a part of a capital interest in the trust to have been owned continuously since the trust last acquired it.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (c.1) specified and non-specified beneficiaries 152

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Use of s. 107(2.01) or (2.001) to address “inhabited” requirement in principal residence definition (pp. 305-6)

[S]ubsection 40(7) does not deem the beneficiary to have inhabited the property…as the definition in section 54 requires….

The election in subsection 107(2.01) addresses this issue by deeming the trust to have disposed of the residence immediately before the distribution under subsection 107(2), and to have reacquired the property at a cost equal to its fair market value at that time, thereby allowing the trust to claim the principal residence exemption under paragraph 40(2)(b)….

It may be possible for the trust to obtain an equivalent result pursuant to an election under subsection 107(2.001) in respect of the distribution. In this case, the gain in respect of the property is realized on the distribution, and the principal residence exemption may be claimed by the trust at that time.

Subsection 107(2.1) - Other distributions

Commentary

The following example illustrates the operation of s. 107(2.1).

Example

Bidco, which is a taxable Canadian corporation that recently acquired all the outstanding units of what, at the time of acquisition, was a Canadian unit trust and REIT (REIT) holds units of REIT with an adjusted cost base (“ACB”) and fair market value (“FMV”) of $1,000. REIT holds two assets, being units of a limited partnership (“LP”) with a FMV and ACB of $950 and $60, respectively, and a building with a FMV and undepreciated capital cost of $50 and $40, respectively (and with no mortgage). No significant taxable dividends from Canadian corporate subsidiaries of LP have been paid.

  1. REIT sells its LP units to Bidco for a $950 promissory note and realizes a capital gain of $890.
  2. REIT transfers the $950 note to Bidco (so that such note is extinguished by operation of law), with $890 of such amount being treated as a distribution of the $890 capital gain (consistently with a timely designation being made under ITA s. 104(21) in the REIT return for that year), and the balance of $60 being treated as the consideration for the redemption by it of 95% of its units.
  3. S. 107(2.1)(c) provides that the $890 capital gains distribution is treated as reducing the proceeds of disposition of the 95% of the units that are redeemed, so that their proceeds of disposition are $60 rather than $950. Furthermore, ss. 53(2)(h)(i.1)(A) and 53(2)(h)(i.1)(B)(I) provide that the ACB of these units is not reduced by the $890 capital gains distribution. As these units’ ACB thus is $950, Bidco realizes a capital loss of $890, which would be available to offset the $890 of capital gain which was so allocated to it under ITA s. 104(21).

This above analysis accords with a CRA published ruling (2009-0330901R3.)

Administrative Policy

19 January 2017 External T.I. 2015-0576751E5 F - Trust, Disposition of depreciable property, Assumption

s. 13(7)(e) applicable to depreciable property distribution

The correspondent also suggested that s. 13(7)(e) does not apply on a s. 107(2.1) distribution of property: although s. 107(2.1)(a) and (b) respectively deem the trust to have disposed of the property and the beneficiary to have acquired it, s. 107(2.1) does not deem the beneficiary to have acquired the property from the trust. CRA rejected this argument given inter alia that the preamble to s. 107(2.1) stipulates as a precondition to its application that there be a disposition of property by the trust to the beneficiary - and also noted that s. 251(1)(b) provides that a beneficiary and a trust of which he or she is a beneficiary are deemed not to deal with each other at arm's length.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) s. 13(7)(e) applicable to s. 107(2.1) distribution but not s. 104(5) deemed disposition 257
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2) s. 107(2) generally available where beneficiary assumes trust debt 158
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Personal Trust non-commital as to whether assumption of debt could constitute tainting consideration 175
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) trust cannot have a NAL relationship with itself 39

13 April 2015 External T.I. 2012-0449141E5 F - Usufruct

107(2.1) application to termination of usufruct created for valuable consideration

A corporation sold the usufruct respecting a property to an arm’s length third party for use as a secondary residence, while retaining the bare ownership, and with the usufruct ending when the bare owner redeemed the rights belonging to the usufructuary. CRA provides a general discussion of the application of the Act to the deemed contribution of property to a trust of which the bare owner and usufructuary are the beneficiaries, and of the application of s. 107(2.1) to the winding up of the trust in connection with the termination of the usufruct. “By reasons of the consideration that the usufructuary was required to pay to the Grantor of the usufruct, the trust is not a personal trust,” so that s. 107(2) did not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) 75(2) applies to termination of usufruct 168
Tax Topics - Income Tax Act - Section 248 - Subsection 248(3) application of trust provisions to creation of usufruct 93

2010 Ruling 2009-0330901R3 - Reorganization of XXXXXXXXXX

recognition of capital loss on distribution of capital gain through redemption of most of trust units by corporate unitholder

A unit trust (Trust 1), after selling units of a subsidiary LP to its parent (Subco) in consideration for a note, purchases for cancellation most of its units held by Subco in consideration for the transfer to Subco of debt owing by Subco. Rulings that s. 107(2.1) applies to this transaction – but that ss. 53(2)(h)(i.1)(A) and 53(2)(h)(i.1)(B)(I) will apply such that the ACB of the Trust I Units to Subco will not be reduced by the amount of the capital gain which was thereby distributed to Subco, and that Subco will realize a capital loss.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1) no ACB reduction for capital gain distributed to Trust parent on repurchase of most Trust units notwithstanding parent amalgamation before Trust year end 408
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount no forgiven amount on transfer by unit trust to its parent of debt owing by parent 34

1 April 1993 T.I. (Tax Window, No. 29, p. 20, ¶2461)

Where a member of an agency co-operative receives her proportionate share of machinery of the co-op on withdrawal therefrom, the rules in s. 107(2.1) rather than s. 107(2) will apply.

4 February 1992 T.I. (Tax Window, No. 16, p. 5, ¶1728)

S.107(2.1) acts in concert with s. 52(6) to ensure that distributions of income and taxable capital gains retain their identity as income for tax purposes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 52 - Subsection 52(6) 69

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Exclusions for capital and income distributions and application of FX gains thereto (p. 306, 308)

[A]lthough these amounts are excluded from the definition of disposition in subsection 248(1), they otherwise affect the tax cost of the beneficiary's interest in the trust or are included in computing income from the trust, and they are therefore taken into account in determining whether there has been a disposition of all or part of the beneficiary's capital interest in the trust for the purposes of subsection 107(2.1). This result occurs because only part of a distribution by a trust may consist of these amounts….

[E]ven if a cash distribution is solely in respect of an amount referred to in paragraphs (h) or (i), the distribution may be denominated in foreign currency, in which case the trust may recognize a foreign currency gain or loss on the distribution. Accordingly, subsection 107(2.1) nevertheless applies in respect of the distribution.

Limited application of s. 107(2.1)(d) to a non-resident trust/potential preferability of sale and distribution (p. 310)

[I]t does not appear that the reference to subsection 75(2) in paragraph 107(2.1)(d) will continue to have application because non-resident trusts are no longer subject to subsection 75(2).

Therefore, in limited circumstances a non-resident trust that makes a capital distribution to a Canadian-resident beneficiary may be subject to tax in Canada by virtue of paragraph 107(2.1)(d). This is the case when the trust is revocable, the settlor (or another contributor to the trust) is a capital beneficiary under the trust, or subsection 107(4.1) otherwise applies as discussed in greater detail below. If subsection 107(4.1) applies, the rollover provision in subsection 107(2) is inapplicable. Under paragraph I67(2.1)(d), the beneficiary is deemed to have disposed of a portion of die capital interest in die trust at the time of the distribution, and generally realizes a capital gain equal to the difference between the fair market value of the property received from the trust on the distribution and the tax cost of the property to the trust immediately before the distribution. The beneficiary generally acquires any capital property so distributed at a cost that is equal to its fair market value. However, this rule should not apply to distributions of cash and property, other than appreciated property, and therefore these assets should continue to be received by the beneficiary on a non-taxable basis. To avoid adverse tax consequences, the trustee may wish to avoid making a distribution in land to Canadian-resident beneficiaries. Rather, it may be more efficient from a tax perspective for the trust to sell the property and distribute the proceeds arising from the sale to the Canadian-resident beneficiaries in the following calendar year. This is not necessary if the trust is not revocable, the settlor or other contributors of property to the trust are not capital beneficiaries, and subsection 107(4.1) is otherwise inapplicable…

Example of operation of s. 107(2.1) (pp. 314-5)

[A] commercial trust distributes non-depreciable capital property (shares) to its beneficiary resident in Canada in satisfaction of the beneficiary's capital interest in the trust. The adjusted cost base of the shares is $40. The adjusted cost base of the beneficiary's I capital interest is $20. The fair market value of the property is $100.

Results:

1. Subsection 107(2.1) applies to the distribution.

2. The trust is deemed by paragraph 107(2.1) (a) to have disposed of the property for proceeds of $100, so there is a capital .gain of $60 on the resulting disposition and a taxable gain of $30.

3. The beneficiary is deemed by paragraph 107(2.1) to have acquired the property at a cost of $100.

4. Because the distribution gives rise to a capital gain at the trust level, die amount of the capital gain ($60) reduces the proceeds of disposition of the beneficiary's capital interest under subparagraph 107(2.1)(c)(ii). The beneficiary is deemed to have disposed of the capital interest for proceeds of $40 ($100 — $60). A1ternatively, in the event that the payment of the gain were considered to be payment of the capital gains of the trust to which paragraph (i) of the definition "disposition" in subsection 248(1) applied, $40 would be determined under j subparagraph 107(2.1)(c)(i) and no amount would be determined under sub paragraph 107(2.1)(c)(ii). Consequently under both of the alternative analyses, the beneficiary's proceeds of disposition of the beneficiary's capital interest in the trust are $40.

5. Consequently, the capital gain from the disposition of the capital interest is $20 ($40 — $20).

6. If the trust is a mutual fund trust, the distribution occurs in a taxation year of the trust before its 2003 taxation year, the trust has elected under subsection 107(2.11) in respect of the year and the trust so elects under paragraph 107(2.1)(e), the beneficiary's proceeds of disposition of its capital interest are deemed to be equal to the fair market value of the property distributed (i.e., the amount determined under paragraph 107(2.1)(a)). Consequently, the capital gain from the disposition of the capital interest is $80 ($100 — $20). In these circumstances, the capital gains refund mechanism in section 132 would apply to offset the capital gains realized on the distribution at the trust level.

Goodman, "The Tax Treatment of Commercial Trusts", 1989 Canadian Tax Journal, July-August issue, p. 1053

Hayhurst, "Transactions in Income and Capital Interests in Trusts", 1988 Conference Report, c. 38

An example is given showing that a commercial trust and a beneficiary are subject to double taxation in a similar way to a corporation and its shareholders.

Subsection 107(2.11) - Gains not distributed to beneficiaries

Administrative Policy

16 June 2014 STEP Roundtable, 2014-0526581C6 - STEP CRA Roundtable - June 2014 - Q18

election procedure

As there is no prescribed form, how is the election made? CRA indicated that the trust should include in a letter attached to the T3 Return: a declaration that it is electing under s 107(2.11); its name and trust account number; the name and residence status of the beneficiary receiving the distribution; and the distributed property's description, ACB and FMV.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.001) property-by-property, election procedure 121
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.002) election procedure, gain if election 218

11 July 2013 External T.I. 2012-0471061E5 - Subsection 107(2.001) election

CRA sets out, inter alia, the information that CRA requires for a s. 107(2.11) election. A letter containing this information should be included with the taxpayer's T3 form.

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Effect of s. 107(2.11) election (p. 314)

[A]ccordingly, in the absence of an election under subsection 107(2.11), the portion of the trust's income representing the taxable portion of the capital gain that is distributed to the non-resident beneficiary is subject to withholding tax under part XIII as a distribution of trust income.

Subsection 107(3) - Application of subsection (3.1)

Articles

Mitchell, Sherman, "SIFT Update - Conversions and Normal Growth", Corporate Finance, 2009, p. 1678.

Subsection 107(4.1) - Where subsection 75(2) applicable to trust

Administrative Policy

12 May 2016 External T.I. 2014-0552341E5 - Subsection 107(4.1)

application of s. 75(2) to only one property in a trust can taint all the other trust property

S. 75(2) applied to a personal trust respecting a gold coin that had been settled on it by one of the capital beneficiaries. The Trust also used proceeds of an arm’s length loan to acquire securities from an arm’s length vendor (the “Vendor”) to which s. 75(2) did not apply. Would s. 107(4.1) apply (after the settlor’s death) to distributions of the securities to the settlor’s children while the Vendor was still alive? CRA responded:

[D]uring the existence of the Settlor, any distribution of property to a capital beneficiary (other than the gold coin to the Settlor), will trigger the application of subsection 107(4.1).

Since it is indicated that at the time the Trust will distribute the securities, the Settlor was not alive, subsection 107(4.1) will not apply given that the condition in paragraph 107(4.1)(d) will not be met. … The fact that property was received from the Vendor in a fair market value purchase will not be relevant.. .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2) tainting effect of one 75(2) property 82

3 June 2011 STEPs Roundtable Q. 2, 2011-0401831C6 - 2011 STEP Conference-Q2-Trusts & Principal Res.

where a cottage is contributed to an inter vivos trust by a Canadian-resident individual (B) who is one of the beneficiaries, then the s. 107(2) rollover will be available if the cottage is distributed to B out of the trust (e.g., in advance of the 21-year deemed disposition date under s. 104(4), given that B will be "the person...from whom the particular trust...received the property); however, the rollover will be available if the cottage is distributed out to another capital beneficiary (D) at a time that the contributor (B) is still living as the quoted condition will be satisfied. CRA stated:

It should be noted that the fact that D has never contributed any property to the trust is not relevant in this case, as the property referred to in subparagraph 107(4.1)(c)(i) is the property referred to in pargraph 107(4.1)(b), which is the cottage that was contributed to the trust by B: Ref 1999-0013085 ...and 2002-0118255.

7 August 1992 T.I. 921506 (May 1993 Access Letter, p. 197, ¶C56-227; Tax Window, No. 23, p. 18, ¶2126)

S.107(4.1) does not apply where a trust distributes property back to the settlor.

Where there are identical properties some of which were transferred to the trust by the settlor and some of which were not, it is RC's practice to allow the trust to identify which properties were distributed, except that s. 245 will be applied where the only purpose of the transactions is to shift the adjusted cost base of property from the settlor to another taxpayer or vice versa.

22 July 1992, T.I. 920736 (March 1993 Access Letter, p. 71, ¶C56-219)

S.75(2) can be considered to be applicable even if there has been no income attribution by the trust to the settlor under that provision.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) 58

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Broad scope accorded by CRA to s. 107(4.1) (pp. 324-6)

The CRA has consistently taken the position that the application of subsection 107(4.1) is not limited to the property in respect of which subsection 75(2) applied….

This interpretation of subsection 107(4.1) can give rise to extremely harsh results. Consider, for example, the case of a settlor who makes a nominal contribution to a trust on its settlement but retains a power that results in the application of subsection 75(2), or even inadvertently becomes subject to its application by, for instance, becoming the sole trustee of the trust for a brief period on the death of a co-trustee, pending the appointment of a replacement trustee. According to the CRA's interpretation, subsection 107(4.1) potentially applies to deny a rollover under subsection 107 (2) in respect of die distribution of every asset held by the trust, even when the remaining trust property is acquired by the trust with borrowed funds or the property is contributed to the trust by third parties. …

The CRA has long maintained that subsection 107(4.1), which as a precondition to its application, requires that "subsection 75(2) was applicable...at a particular time in respect of any property" of the trust or of a trust that received the property pursuant to a qualifying disposition before that time, does not require that income, gain,, or loss has actually been attributed to the settlor of the trust under subsection 75(2)….[fn 133: …9207365…See also 9714685….] …

[T]he basis for the CRA's position appears to be that the word "applicable in paragraph 107(4.1)(b) is broader than the word "applied,"…

[T]he CRA's interpretation of subsection 107(4.1) effectively reads down the postamble to subsection 75(2).…

Further extension of s. 107(4.1) (p. 330)

[A]mendments…extend subsection 107(4.1) to apply not only if subsection 75(2) was applicable at a particular time in respect of any property of the trust but also if subsection 75(2) "would have been applicable if it were read without reference to the phrase while the person is resident in Canada' and subsection 75(3) were read without reference to paragraph (c.2)." The effect of this amendment is that subsection 107(4.1) may apply to prevent a tax-deferred rollover of trust property under subsection 107(2), even when the contributor has always been a non-resident of Canada and therefore no attribution of income would have resulted under subsection 75 (2).

Subsection 107(5) - Distribution to non-resident

Administrative Policy

4 January 2013 External T.I. 2012-0442741E5 - Distribution from a NR trust to a NR beneficiary

After being referred to proposed amendments to s. 107(5) to be effective for distributions made after February 27, 2004, CRA stated:

we agree with your conclusion that where property distributed by a non-resident trust is either shares of the capital stock of a non-resident owned investment corporation or property described in subparagraphs 128.1(4)(b)(i) to (iii), under either the currently enacted version or the proposed amendments to subsection 107(5), subsection 107(2) of the Act would apply to the distribution (if the conditions therein are met and subsection 107(4.1) is not applicable).

ATR-70, 21 March 1996 "Distribution of Taxable Canadian Property by a Trust to a Non-Resident"

The distribution by a non-resident personal trust of shares of a public corporation was not subject to s. 107(5) because the shares were deemed, as a result of their having been acquired in exchange for the disposition of shares of a private corporation, to be taxable Canadian property.