| 19(1) | File No. 5-8839 |
| G. Thornley | |
| 957-2101 |
November 24, 1989
19(1)
Re: Blind Trusts
This is in reply to your letter of October 5, 1989, and further to your meeting of November 7, 1989 with Mr. Dath and Mr. Wheeler concerning the tax implications of placing in a blind trust certain assets of a private holding company to permit a public office holder (POH) to comply with the Conflict of Interest and Post- Employment Code for Public Office Holders (the "Code").
The following will confirm our understanding of the discussion held on November 7, 1989.
(1) In the first scenario the POH owns all the shares of a private holding company (Holdco) which in turn owns two basic types of securities; mutual funds and marketable securities of a public corporation (public securities). In accordance with the previous Code the POH placed all of his shares of Holdco into a blind trust. Under the law of trusts, any purported divesting of ownership under such terms and conditions is not a bona fide trust and the ownership does not in law or in fact pass from the donor. As there is no change of beneficial ownership, subparagraph 54(c)(v) of the Income Tax Act (the "Act") deems there to be no disposition of the shares and thus no tax consequences to the POH. Earnings from the securities are reported by Holdco in its annual return and tax, if any, is paid at Specified Investment Corporation rates (i.e. no small business deduction). If Holdco declares dividends they are paid to the Trustee of the blind trust but by virtue of subsection 75(2) of the Act such dividends are deemed to be those of the beneficial owner. Thus the POH would report them in his annual return.
(2) In the second scenario only the public securities are required to be in a blind trust. To move from the first scenario to the second it will be necessary to collapse the original blind trust and return the shares of Holdco to the POH. This can be done without attracting tax because, as before, there is no change in beneficial ownership pursuant to subparagraph 54(c)(v) of the Act. Holdco can then be directed to place the public securities into a blind trust which can also be done without tax consequences. Although the POH now has control over Holdco he has no direction over the public securities as they will now be in a blind trust. Investment income earned on the public securities would, because of subsection 75(2) of the Act (which deems the income of the trust to be that of the beneficial owner), flow through to Holdco where it would be taxed at Specified Investment Corporation rates. If Holdco declares dividends on its earnings, from either its mutual fund investments or from income received from the blind trust, the POH would include such income in his personal return for the year.
(3) With respect to self-directed R.R.S.P.'s, where a trust governed by an RRSP under which a POH is the annuitant holds both mutual funds and public securities, (and because of conflict of interest rules the POH must divest himself of the public securities), the POH may roll the public securities from the self-administered RRSP fund to a second RRSP without attracting tax. As Section 146 of the Act requires that only an individual can receive payments out of an RRSP, any payments out of the POH's Plan will be taxable in his hands.
In view of the foregoing the ownership of an RRSP may not be transferred by a POH to a Blind Trust. We feel, however, that a POH might be able to give written instructions to the administrator of his RRSP that only the trustee of his Blind Trust has authority to make decisions with respect to the public securities held in his RRSP.
With respect to the 3 foregoing situations, we note that in no case is the rate at which a trust is taxable relevant.
We are unable to provide our views regarding the execution of a blind trust as this is a legal matter to be determined by legal advisors based on the facts of the particular situation. 23.
23 Then the taxation aspects of executing a blind trust could be referred by them to our legal services.
We trust our comments will prove helpful.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch