Principal Issues: [TaxInterpretations translation] What are the tax consequences when a fully discretionary trust, resident in Canada for the purposes of the Act, obtains court consent for the addition of a beneficiary?
Position: Various scenarios are presented. Our responses are shown below.
Reasons: Income Tax Act.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 29
Trust and adding a beneficiary
The trustees of a fully discretionary trust that is resident in Canada for the purposes of the Act, applied, with the consent of all the beneficiaries of the trust, to the courts to have the trust deed amended to add a new beneficiary.
The courts have allowed the addition of that new beneficiary.
Questions to the CRA
(a) If the new beneficiary is a corporation all of whose shareholders are the original beneficiaries of the trust, does this amendment to the trust indenture result in the original beneficiaries disposing of their interest in the trust?
(b) If the new beneficiary is a corporation in which a majority of the voting and participating shares are held by persons other than the original beneficiaries of the trust, is there a disposition by the original beneficiaries of their interest in the trust?
(c) In the event that some of the original beneficiaries are non-residents and the CRA has concluded in (a) and/or (b) that the change of beneficiary results in a disposition, will these non-resident beneficiaries be required to comply with the procedure set out in section 116 if the fair market value of the trust's property is considered to be derived principally from real property situated in Canada?
(d) In the event that the change of beneficiary in (a) and/or (b) constitutes a disposition, how will the value of the beneficiaries' interest in the trust being disposed of be determined?
CRA Response
(a) We are of the view that this amendment to the trust indenture results in a partial disposition of the capital and income interests in the trust held by the original beneficiaries.
Since we believe that paragraph 69(1)(b) is applicable in this case, the original beneficiaries will be deemed to have received, as a result of the partial disposition of their interests, consideration equal to the fair market value of those interests. Of course, the determination of the fair market value of the interests disposed of by the beneficiaries remains a question of fact.
(b) In the event that the courts approve the addition of a beneficiary that is a corporation in which a majority of the voting and participating shares are held by persons other than the original beneficiaries of the trust, it would first have to be determined whether the change is significant enough to give rise to a new trust and, consequently, to a disposition of all the property of the old trust to the new trust.
In the event that the addition of a beneficiary does not result in a new trust, it is our view that the answer to Question (a) would also apply to Question (b).
(c) In the event that some of the initial beneficiaries are non-residents, we are of the opinion that they should comply with their obligations under section 116.
(d) See answers to previous questions.
François Bordeleau
(613) 957-8972
October 8, 2010
2010-037340.