Principal Issues: Whether our position in document 2004-008689 concerning subparagraph 256(1.2)(f)(ii), is still valid?
Position: Yes
XXXXXXXXXX 2006-017680 R. Gagnon August 16, 2006
Dear Madam,
Subject: Paragraph 256(1.2)(f) of the Income Tax Act
This is in response to your letter of August 24, 2005, which was forwarded to our Administrative Division on March 17, 2006, in which you asked us about the Canada Revenue Agency ("CRA") response to Question 1.2 of the 2004 Association de Planification Fiscale et Financière ("APFF") Conference Federal Tax Roundtable (pages 50:14 and 50:15 of Volume 2 of the Conference Volumes).
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act ("Act").
Your Questions
1. Is the CRA's position still as stated in the response to Question 1.2 of the 2004 APFF Conference Federal Tax Roundtable and what are the reasons behind the comments in the last two paragraphs of the response to Question 1.2 of the Roundtable?
2. Would subparagraph 256(1.2)(f)(ii) be applicable in a situation as presented in question 1.2 of the APFF 2004 Federal Tax Roundtable, except that the trust deed provides for the naming of a substituted beneficiary on the death of Mr. X, but without naming a specific person?
Our Comments
Question 1
The CRA stated in the last two paragraphs of the response to Q. 1.2 of the 2004 APFF Conference Federal Tax Roundtable:
With respect to the situation described above, based on the limited information provided, it appears that Mr. Y would be deemed to own Xco shares pursuant to subparagraph 256(1.2)(f)(ii) I.T.A., if Mr. Y's share in the trust's capital depends on the trustee's (or trustees') exercise or failure to exercise any discretionary power in relation to Mr. X.
The response would be the same if the trust deed had provided that the trustee would no longer have any discretionary power after Mr. X's death.
The CRA's position stated in the response to Q. 1.2 of the 2004 Conference Federal Tax Roundtable is still valid.
Our understanding of the situation presented is that Mr. Y is specifically named as a beneficiary in the trust deed, but cannot receive income or capital from the trust until Mr. X dies.
In such a situation, we believe that Mr. Y can be considered a beneficiary under civil law.
In our view, subparagraph 256(1.2)(f)(ii) is broad enough to apply to a person designated as a beneficiary even if the person's entitlement to the income and capital of the trust is triggered by the death of the individual’s father.
Furthermore, in our view, it is clear from the wording of subparagraph 256(1.2)(f)(ii) that Parliament intended this provision to apply where a person is named as a beneficiary in the trust indenture, and the person's share of the trust's income or accumulated capital is conditional on the exercise or non-exercise of discretion in that regard. Indeed, in its response to Question 1.2 of the 2004 Federal Tax Roundtable, the Department of Finance stated that it considered it appropriate from a tax policy perspective that the Xco shares be deemed to be owned by Mr. Y pursuant to subparagraph 256(1)(f)(ii).
Question 2
It appears that in the second question, the trust deed could include a power to appoint a beneficiary as provided in Article 1282 of the Civil Code of Québec.
Given the limited information we have, we are unable to determine whether subparagraph 256(1.2)(f)(ii) would be applicable in this case. The provisions of the trust document and all other relevant facts would have to be examined before we could make a determination.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, is not binding on the CRA with respect to any particular factual situation.
We apologize for the delay in responding to your request.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch