Re: Alter Ego Trusts- Adjusted Cost Base of Property
We have been asked to respond to your fax memorandum dated August 15, 1991 to Audit Applications Division.
You have requested our views on the method of determining the adjusted cost base of property transferred to an "Alter Ego Trust". Such a trust acquires the legal but not the beneficial ownership of the transferred property.
21(1)(b)
If we assume for the moment that the trust you refer to is a "bare trust" we note that in 1989, C.C. B. Darlingng of this Department presented a paper for the Canadian Tax Foundation at the Corporate Management Tax Conference on the issue of bare trusts (copy attached). This paper indicated that these matters were under review by the Department but pending the completion of this review the Department would continue to treat bare trusts in the manner described in ATR-l, IT-216 and IT-437. In substance this would be to consider such a trust as an agent with respect to the property and to treat the property transferred to the trust, for tax purposes, as if it were owned directly by the settlor. In such a case, the adjusted cost base of the property would be determined as if the property had never been transferred to the trust. This continues to be our position on these issues.
If a trust is used to achieve a beneficial result for tax purposes not otherwise available to the settlor, it is usually an indication that the trust should be regarded as a valid trust, under the Act, and not as an agent or bare trust. In other words, in the absence of any direct evidence to the contrary, it must be assumed that the arrangements and/or documents establish a trust for the purposes of section 104. Such a trust will then be subject to the rules of the Act regarding trusts and trust property. Obviously, there is a significant difference in the tax treatment of the two types of trusts described above. It is important, therefore, to carefully consider all the facts, documents and agreements involved in a specific case to establish the nature of the trust and the proper tax consequences. In some instance it may be necessary to consider whether or not the general anti-avoidance provisions of subsection 245(2) of the Act are applicable if there appears to be an abuse of the provisions of theAct
Your memorandum refers to a specific case under review. We cannot comment directly on this case without complete details including copies of all the relevant documents. We do note, however, that it seems inconsistent to maintain that the trust and not the settlor was a member of the partnership for determining that all the partnership members were residents of Canada but was not the owner of the partnership unit for the purpose of determining the adjusted cost base of the interest in the partnership. However, we are not sure that this is the case. We could not determine from the information submitted the exact nature of the taxpayer's dispute with the Department. It appears from some of the documents that the dispute is not about the technical application of the law to the transaction (i.e. subsection 107(2.1)) but about the proper method of valuing the partnership interest; specifically, whether the restriction on sales and the formulae for buying and selling units was relevant in valuing the units. Should this be the case, this is a matter for the Department's evaluators and does not require a technical interpretation.
We would, of course, be pleased to provide our opinion on any technical issues based on the specific facts of this case should you wish to provide a detailed submission and include the relevant documents.
for DirectorManufacturing Industries, Partnerships and Trusts Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch
cc Walter Szyc Chief, Applications Opinion Section