Principal Issues: [TaxInterpretations translation] 1. Would the Canada Revenue Agency ("CRA") recognize that a settlor and sole beneficiary of an asset protection trust may, in the deed for the asset protection trust, provide that capital property (shares), previously held by him, will be returned to him immediately before his death?
2. Would the transfer of property distributed from a protective trust, in accordance with the will as a bequest, to trusts created in accordance with the will of the settlor-beneficiary of an asset protection trust, compromise the testamentary trust status of the trusts thus created?
Position: 1. No, the CRA does not recognize for taxation purposes that parties can contractually establish a presumption giving retroactive effect to a disposition of the property of a trust to a settlor-beneficiary.
2. Depends on, among other things, whether the property is part of the estate of the settlor-beneficiary.
Reasons: 1. In fact, the transfer or distribution of property by the trustee of the trust to the settlor did not occur immediately prior to the death of the settlor-beneficiary. In addition, that contractual presumption would make it possible to escape the disposition of the property upon the death of the beneficiary. Furthermore, the decision of the Federal Court of Appeal in Nussey rejected the effect on the CRA of a contractual presumption that would recognize a redemption of shares by a corporation taking effect prior to their disposition on death of a shareholder, while during the shareholder’s lifetime, the shareholder had not benefited from any redemption. Finally, the jurisprudence casts doubt on this proposition.
2. Depends on the facts and wording of the provisions of the asset protection trust Indenture.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 13
Asset Protection trust
For asset protection purposes, Mr. X transferred the preferred shares he held in Opco to an asset protection trust of which he was the sole beneficiary.
The indenture provides inter alia that immediately before death, the shares held by the trust will be distributed to Mr. X.
Mr. X's will provides that the preferred shares thus distributed will be bequeathed to several testamentary trusts for the benefit of each of his children.
Questions to the CRA
Would the CRA consider that the bequest of preferred shares under Mr. X's will does not contaminate the testamentary trusts for the purposes of subsection 108(1)?
In other words, would the distribution of preferred shares to Mr. X immediately before his death, followed by the bequest of such shares to testamentary trusts, be an acceptable course of action to the CRA?
CRA Response
By virtue of paragraph 104(4)(a), a trust is deemed, at the end of certain days, to have disposed of each property of the trust (other than exempt property) that was capital property (other than excluded property or depreciable property) for proceeds equal to its fair market value at the end of that day and to have reacquired the property immediately after that day for an amount equal to that fair market value.
With respect to a trust described in subparagraph 104(4)(a)(iv), unless it has elected thereunder to not have clause 104(4)(a)(iv)(A) apply, the deemed disposition day of that trust is the day on which the taxpayer dies.
By virtue of paragraph 104(4)(a.4), that day is also the day on which the death of the taxpayer occurs, where the trust is a trust to which property was transferred by a taxpayer who is an individual in circumstances in which inter alia section 73 applied, the transfer did not result in a change in beneficial ownership of that property and no person (other than the taxpayer) or partnership has any absolute or contingent right as a beneficiary under the trust, determined with reference to subsection 104(1.1).
We are of the opinion that it is only at the time of the death of a taxpayer that an obligation to distribute or transfer the property of an asset protection trust to the taxpayer may arise, notwithstanding any term or condition intending that obligation to have retroactive effect. For the purposes of the Act, if the facts so demonstrate, the trustees may then be considered to hold the property in trust for the benefit of Mr. X. However, until the property of the trust has actually been distributed to the executor of the estate or other legal representative of Mr. X, and the necessary steps to liquidate the trust have been taken, the asset protection trust is generally considered to continue to exist for tax purposes.
Furthermore, a testamentary trust, as defined in subsection 108(1), is a trust that arose on and as a consequence of the death of an individual, subject to the exceptions set out in paragraphs (a) to (c) and (d) of the legislation proposed in former Bill C-10.
Under paragraph 108(1)(a), a testamentary trust does not include a trust created by a person other than a deceased individual. In addition, paragraph 108(1)(b), applicable to a trust created after November 12, 1981, excludes a trust if property has been contributed to it otherwise than by an individual on or after the individual’s death and as a consequence thereof.
The answer to the question as to the status of the trusts created for each of the children under Mr. X's will can only be resolved after a review of the terms and conditions of the asset protection trust agreement, relevant legislation governing that trust, as well as all other relevant documents and facts.
To the extent that the legal effect of all of the terms and conditions of the asset protection trust is such that, as a consequence of the death of Mr. X, the property of that trust is distributed directly to a trust created under the will of Mr. X, the distribution of the preferred shares to that trust would preclude the trust from qualifying as a "testamentary trust" as defined in subsection 108(1) because of the exclusion in paragraph (b) of that definition.
However, it is possible that, as a result of the death of Mr. X, the property previously held by the asset protection trust is part of Mr. X's estate. In that case, the distribution of the preferred shares to a trust created in Mr. X's will does not preclude it from being a "testamentary trust" within the meaning of subsection 108(1).
Lucie Allaire
(613) 957-2046
2011-041185