Principal Issues: [TaxInterpretations translation] Whether a trust with one beneficiary meets the conditions of subparagraph 73(1.01)(c)(ii) and is entitled to the rollover under subsection 73(1) where the trust indenture temporary suspends the right of the sole beneficiary to receive payment from the trust in case of bankruptcy?
Position: No.
Reasons: The phrase "entitled to receive all of the income of the trust" in subparagraph 73(1.01)(c)(ii) means to have the legal right to enforce payment of that income. In order for a trust’s sole beneficiary to have the legal right to enforce payment of the income of the trust, any discretion in respect of the distribution of all or part of the income of the trust must be solely in the hands of the beneficiary. Where a trust indenture suspends the right to receive income from the trust during the bankruptcy of the sole beneficiary, the beneficiary does not have the legal right to enforce payment during that period of time. Therefore, the transfer from the individual to the trust would not qualify as a qualifying transfer and would not benefit from the rollover treatment set out in 73(1).
XXXXXXXXXX 2017-073718 Chantale Bouchard, Advocate, DESS Fisc.
March 30, 2022
Dear Mr. XXXXXXXXXX,
Subject: Conditional suspension of the right to receive income from a beneficiary of a self-benefiting trust
This letter is in response to your email dated December 11, 2017 requesting our opinion regarding the eligibility of an alter ego trust for the tax rollover provided for in subsection 73(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "Act"). We apologize for the delay in responding to your request.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
In your request, you briefly described a situation where the deed governing a trust (of which the settlor is the sole beneficiary) would provide for a suspension of the settlor's right to demand receipt of the income of the trust in the event of individual’s bankruptcy. You wish to know whether such a clause would be inconsistent with one of the conditions set out in subparagraph 73(1.01)(c)(ii), namely that the beneficiary must be entitled to receive, during the beneficiary’s lifetime, all of the income of the trust, and would thus have the effect of preventing the beneficiary from benefiting from the tax rollover provided for in subsection 73(1). For the purposes of your request, you asked us to assume that all other conditions in subparagraph 73(1.01)(c)(ii) and subsection 73(1.02) would otherwise be satisfied.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation, where applicable. 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 IC70-6R11, Advance Income Tax Rulings and Technical Interpretations.
In order for an individual to be entitled to a subsection 73(1) rollover in the context of a transfer to a trust of which the individual is the sole beneficiary, the trust must, inter alia, satisfy the conditions set out in subparagraph 73(1.01)(c)(ii).
One of the conditions in subparagraph 73(1.01)(c)(ii) requires that the individual be entitled to receive all of the income of the trust for life. As discussed in paragraph 1.20 of Income Tax Folio S6-F4-C1, Testamentary Spouse or Common-Law Partner Trusts, for this purpose, subsection 108(3) provides that the income of the trust is its income computed under the rules of trust law rather than under the provisions of the Act, minus certain dividend amounts. Furthermore, we are of the view that the phrase " is entitled to receive all of the income of the trust that arises before the individual’s death” means that the individual must be entitled to demand payment of all income of the trust in the year. Thus, a clause in the trust deed to the effect that the beneficiary's right to receive the income of the trust is suspended in the event of the latter's bankruptcy would not respect this condition since, during the entire period of bankruptcy, the beneficiary would not be entitled to demand payment of the income generated by the trust. The existence of such a clause in the trust deed would therefore cause the trust to fail to meet the income condition set out in subparagraph 73(1.01)(c)(ii), even if the beneficiary never became bankrupt. Indeed, the existence of that clause in the DOT would make it possible for the DOT to provide that the beneficiary may not be entitled to receive all of the income of the trust for life. Consequently, in such a situation, the individual would not be eligible for the subsection 73(1) rollover.
This situation differs from the situation discussed in Technical Interpretation Letter 2002-0143255, attached to your request, where a beneficiary elects annually not to receive the income so that it is capitalized in the trust. In such a context, the beneficiary's right to receive the income is not suspended, since the beneficiary can demand payment if the beneficiary wishes, but elects to have the income retained by the trust. Our opinion, to the effect that the annual exercise of such a written election by the beneficiary does not disqualify the trust as a testamentary spousal trust within the meaning of paragraph 70(6)(b), has no impact on our conclusion regarding the situation described in your request.
We hope that our comments are of assistance.
Best regards,
Mélanie Beaulieu
Manager
For the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch