Principal Issues: 1) Does paragraph 13(7)(e) apply when a trust is deemed to have disposed of depreciable property pursuant to subsection 104(5)?
2) Does paragraph 13(7)(e) apply when a taxpayer acquires a depreciable property subject to subsection 107(2.1)?
3) Does subsection 107(2) apply to a distribution of property when the distribution is conditional on the assumption of a trust's debt by the beneficiary?
Position: 1) No 2) Possibly yes. 3) Question of facts.
Reasons: 1) A trust is not related to itself and is not deemed not to deal at arm’s length with itself. Therefore, the trust didn’t acquire the property from a non-arm's length person as required by paragraph 13(7)(e). 2) The beneficiary has acquired the property from the trust. Pursuant to paragraph 251(1)(b), the beneficiary and the trust are deemed not to deal with each other at arm's length. Therefore, paragraph 13(7)(e) can apply if all the other conditions are meet. 3) Likely yes if the assumption of debt by the beneficiary does not have an impact on the status of the personal trust.
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2015-057675 Catherine Ayotte, Notary, M. Fisc |
January 19, 2017
Dear Madam,
Subject: Disposition of property by a trust
This letter is in response to your e-mail of March 13, 2015, where you asked for our interpretation of paragraph 13(7)(e) and subsection 107(2) of the Income Tax Act (the “Act”).
Unless otherwise indicated, all legislative references herein are references to provisions of the Act.
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Your first question relates to the deemed disposition of depreciable property under subsection 104(5). In very summary terms, where a trust is in a situation where that subsection applies, it is deemed, at the end of each day determined in respect of the trust in accordance with subsection 104(4), to have disposed of each depreciable property that was a property of a prescribed class for proceeds equal to its fair market value. In addition, it is deemed to have reacquired the property at a capital cost equal to that fair market value. In such a situation, you wished to know if the trust is not dealing at arm's length with itself, resulting in the application of paragraph 13(7)(e).
A person is related to itself only where the Act so expressly provides. The Act does not contain a provision that would cause a trust to be related to itself for the purposes of paragraph 13(7)(e). On the deemed disposition and acquisition of property by a trust by virtue of subsection 104(5), the trust is not related to itself so that it is not deemed to not deal at arm’s length with itself. Consequently, paragraph 13(7)(e) is not applicable in these circumstances.
Second, you asked whether paragraph 13(7)(e) applies to determine the capital cost of property acquired by a beneficiary in circumstances described in subsection 107(2.1). You are of the view that paragraph 13(7)(e) is not applicable in the context of a distribution of property under subsection 107(2.1) because paragraph (b) of that subsection provides that the beneficiary of the trust is deemed to have acquired the property but does not provide that the beneficiary is deemed to have acquired the property from the trust. You infer that the beneficiary did not acquire the property of the trust and, consequently, did not acquire the property of a person with whom the beneficiary was not dealing at arm's length, as required by paragraph 13(7)(e).
The preamble to subsection 107(2.1) provides that this subsection applies "where at any time a property of a trust is distributed by the trust to a beneficiary under the trust, there would …be a resulting disposition of all or any part of the beneficiary’s capital interest in the trust…”. In other words, the trust must dispose of property in favour of one of its beneficiaries. Paragraph (c) of the definition of disposition in subsection 248(1) provides, inter alia, that any transfer from a trust to a beneficiary, except as provided by paragraph (f) or (k), constitutes a disposition.
We are of the view that the context and wording of the preamble to subsection 107(2.1) and paragraph (c) of the definition of disposition in subsection 248(1) provide a basis for concluding that the trust is deemed to have disposed of the property in favour of the beneficiary by virtue of paragraph (a) and that, under paragraph (b), the beneficiary is deemed to have acquired the property of the trust.
Paragraph 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. Where a trust makes a disposition to a beneficiary in the context of subsection 107(2.1), we are of the view that paragraph 13(7)(e) can apply if the other requirements of paragraph 13(7)(e) are met.
Finally, you wished to know whether subsection 107(2) applies where a trust distributes property to a beneficiary on condition that the beneficiary assume a debt of the trust to a financial institution.
Subsection 107(2) applies inter alia where a personal trust makes a distribution of property to a beneficiary that results in the disposition of all or part of the beneficiary's capital interest in the trust. Furthermore, subsection 107(2) applies only if subsections 107(2.001), 107(2.002) and 107(4) to 107(5) do not apply.
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 which cannot be determined until after a review of all the facts and of the relevant documentation.
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.
We hope that our comments will be of assistance.
Louise J. Roy, CPA-CGA
Manager
for the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch