Words and Phrases - "distribute"


8 October 2010 Roundtable, 2010-0373611C6 F - Certificat avant distribution

repayment of note to unsecured creditor was a distribution

A trust, whose sole trustee is a corporation, acquired, as its only asset, a property valued at $50 million (the "Property") in consideration for the issuance of a note payable in the same amount, and then disposed of the Property and used the proceeds to repay the note. Should the trust obtain an advance certificate for distribution under s. 159(2) before the note is repaid and, if so, and in the event that the trustee has failed to obtain such a certificate? CRA responded:

It is generally not necessary to obtain a clearance certificate before a distribution where the legal representative retains sufficient property to pay any tax liability.

We are of the view that the term "distributing" used in subsection 159(2) has a broad enough meaning to include a transaction by the legal representative that has the effect of greatly diminishing the value of the property in the legal representative’s custody. Furthermore, we are of the view that a transaction whereby a legal representative transfers, to an unsecured creditor as payment, all of the taxpayer's property in its custody as legal representative, would be a transaction coming within these terms.

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Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 159 - Subsection 159(3) directors of corporate trustee generally are generally not liable under s. 159(3) 151

Tory Estate v. M.N.R., 73 DTC 5354, [1973] CTC 434 (FCA), briefly aff'd 76 DTC 6312, [1976] CTC 415 (SCC)

The word "distributed" was held not to include a sale of accounts receivable for valuable consideration.

Words and Phrases

McKenzie v. The Queen, 2011 DTC 1216 [at 1274], 2011 TCC 289

The testator of a testamentary trust holding shares of a company provided that an executive employee of the company had an entitlement to the income from one-fifth of those shares until the termination of her employment. When the executive (the taxpayer) was subsequently dismissed, the taxpayer sued the capital beneficiary and the trust for wrongful dismissal, oppression and wrongful depletion and termination of her income interest. A settlement agreement provided for the payment by the trust to her of $1.7 million in satisfaction of her interest in the trust. Through a numbered company, the capital beneficiary issued a promissory note to the trust for $1.7 million in exchange for the shares held for the taxpayer. The trust issued a promissory note to the taxpayer in the same amount. The trust's law firm then gave the taxpayer a certified cheque for $1.7 million to discharge the trust's promissory note.

Boyle J. found that s. 106(3) applied to the settlement payment, and therefore that s. 106(2) did not apply. The three elements of s. 106(3), that the $1.7 million was property of the trust when paid, that the alleged trust property was distributed to a beneficiary, and that the distribution was in satisfaction of the taxpayer's income interest, were all met. Boyle J. rejected the Minister's argument that the money was never the property of the trust, but rather was property of the beneficiary's numbered company. The transfer of promissory notes was a transfer of trust property. He stated (at para. 21):

Surely [the Minister] would not seriously have contested a bill of exchange involving a bank and I have been provided with no persuasive argument that enforceable promissory notes from solvent entities should be treated any differently.

Boyle J. also found that the property had been distributed to the taxpayer. He stated (at para. 22) that "[t]here is no apparent reason put forward to suggest that the term 'distributed' should not be given its ordinary meaning." Finally, he found that the distribution was in satisfaction of an income interest. He rejected (at paras. 26-27) the Minister's argument that the lump sum payment to the taxpayer, which was contrary to the existing terms of the trust, amounted to an impermissible amendment of the trust deed. The rule in Saunders v. Vautier permitted the beneficiaries and the trust to modify the operation of the trust by entering into a termination agreement.

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Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt payment through back-to-back promissory notes 218

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