| 5-920243 | |
| 24(1) | Franklyn S. Gillman |
| (613) 957-8953 |
Attention: 19(1)
June 25, 1992
Dear Sirs:
Re: Subsections 73(4), 75(2) and 107(2) of the Income Tax Act (the "Act")
This is in reply to your letter dated January 20, 1992 wherein you requested a technical interpretation with respect to a transaction whereby a taxpayer would transfer a farm corporation to a trust, in which both the taxpayer and his children would be beneficiaries. You specifically requested the Department's opinion as to the application of subsections 73(4) and 75(2) of the Act.
A review of the transactions you have enunciated in your above mentioned letter should be the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R dated September 28, 1990. As expressed at paragraph 6 in the Circular, the Department will not express opinions on definite transactions that are being proposed other than by way of an advance income tax ruling, nor will the Department provide rulings on completed transactions.
While we are unable to provide confirmation of the tax effect with regards to situations such as the ones you described, we offer the following general comments for your assistance.
Where an interest in a family farm corporation, depreciable farm property or in farm land is transferred to a child of a taxpayer, subsections 73(4) and 73(3) of the Act, respectively apply permitting (in most situations) the proceeds of disposition (as agreed) to be any amount between the fair market value and the adjusted cost base of the property. Details of the provisions governing such transactions are discussed in Interpretation Bulletin IT-268R3 entitled "Inter Vivos Transfer of Farm Property to Child" including two Special Releases to the said Bulletin dated May 30, 1988 and September 6, 1991 and Interpretation Bulletin IT-486R entitled "Intergenerational Transfers of Shares of a Small Business Corporation".
With regards to the use of a trust in a transfer of farm property or a family farm corporation to a minor child and the related application of the special treatment of farm property transfers under subsections 73(4) and 73(3) of the Act, paragraph 21 in Interpretation Bulletin IT-268R3 discusses this possibility and states the additional requirements necessary in order for the applicable subsection to apply. These additional requirements are:
1. The trust must be irrevocable;
2. The terms of the trust must provide for the property to be held for the exclusive benefit of the child and there must not be any trust provision which could have the effect of depriving the child of any rights as the beneficial owner of the property; and
3. The terms of the trust must provide for the distribution of the property to the child absolutely upon reaching a certain age and for the distribution of that property to the child's estate upon the child's death before that age.
If an arrangement is in fact a trust, any income earned within the trust that is not payable to the beneficiaries is generally taxable in the trust pursuant to section 122 of the Act. If however the trust deed provides that the property in the trust reverts to the settlor or is controlled by the settlor in such a way that the property cannot be disposed of without his consent, or the property in the trust passes to persons to be determined by the settlor subsequent to the creation of the trust, subsection 75(2) of the Act will apply to deem any income earned in the trust to be income of the settlor. A situation where subparagraph 75(2)(a)(ii) of the Act applies is one where the settlor is able to select additional beneficiaries (or to delete beneficiaries) after the creation of the trust.
Where a beneficiary/taxpayer has a capital interest with or without an income interest in a personal or prescribed trust, and the trustee distributes property to the beneficiary/taxpayer in satisfaction of all or part of the capital interest, subsection 107(2) of the Act will apply to the distribution and subsection 107(1) of the Act will apply to determine the adjusted cost base of the capital interest in the trust which has been disposed of by the taxpayer. If part of the distribution is in satisfaction of all or any part of the beneficiary's income interest in the trust, then subsection 106(3) of the Act will apply in respect thereof.
The above comments are an expression of opinion and are not binding on the Department, as explained in paragraph 21 of Information Circular 70-6R2. We trust, however, that they are of assistance to you.
Yours truly,
for DirectorManufacturing Industries,Partnerships and Trusts DivisionRulings Directorate