Principal Issues: Deemed disposition day of transferee trust on a trust-to-trust transfer where the trust's deemed disposition day was deferred to January 1, 1999.
Position: In this scenario, the earliest day determined under subparagraph 104(5.8)(a)(i) is the day determined under clause 104(5.8)(a)(i)(A).
Reasons: See below.
2013 STEP CANADA ROUNDTABLE, June 10 & 11, 2013
QUESTION 11. Deemed Disposition Day on a Trust-to-Trust Transfer
Paragraph 104(4)(b) of the Act generally provides for a deemed disposition at fair market value of certain property owned by a trust 21 years after the later of January 1, 1972, the day on which the trust was created, and the day on which certain deemed dispositions occurred. Paragraph 104(4)(c) provides for a deemed disposition every 21 years thereafter.
Consider a hypothetical scenario in which a non-spousal testamentary trust with multiple beneficiaries was created upon a testator's death prior to 1972. The first deemed disposition day of the trust under paragraph 104(4)(b) of the Act would have been January 1, 1993. However, the trust had an exempt beneficiary between 1993 and 1999 and made an exempt beneficiary election under subsection 104(5.3). As a result, the trust's deemed disposition day was deferred until January 1, 1999. Assume that on January 1, 2000, one of the beneficiaries died and a successor trust was established. The testamentary ("transferor") trust's assets were transferred to the successor ("transferee") trust in circumstances such that subsection 104(5.8) applies to the transfer. What is the "disposition day" of the transferee trust under subsection 104(5.8) where the trust-to-trust transfer takes place after the trust's January 1, 1999 deemed disposition day?
CRA Response
Subsection 104(5.8) prevents the avoidance of the 21-year deemed realization rule by the use of trust-to-trust transfers that do not involve dispositions of certain property at fair market value. The first deemed disposition day in respect of the transferee trust is generally advanced to such day in respect of the transferor trust. We assume that paragraphs 104(5.8)(b) through (b.3) are not applicable to this scenario.
Subparagraph 104(5.8)(a)(i) deems the "disposition day" of the transferee trust to be the earliest of five days determined in that subparagraph. Only two of these dates are relevant to this scenario:
- Clause 104(5.8)(a)(i)(A) determines the first day on or after the transfer date on which the transferor trust would have been deemed under subsection 104(4) to dispose of its property, without regard to the transfer or any transaction or event occurring after the transfer.
- Clause 104(5.8)(a)(i)(B) determines the first day on or after the transfer date on which the transferee trust would have been deemed under subsection 104(4) to dispose of its property, without regard to any transaction or event occurring after the transfer.
If the trust-to-trust transfer is disregarded, the first day ending at or after the January 1, 2000 transfer would be determined under paragraph 104(4)(c) in respect of the transferor trust to be 21 years after the January 1, 1999 deferred deemed disposition day. Therefore the day determined under clause 104(5.8)(a)(i)(A) is January 1, 2020.
The first day ending at or after the January 1, 2000 trust-to-trust transfer determined under paragraph 104(4)(b) in respect of the transferee trust would be 21 years after the latest of January 1, 1972 and the day on which the transferee trust was created, January 1, 2000. In this case the day determined under clause 104(5.8)(a)(i)(B) is January 1, 2021.
In this example, the earliest day determined under subparagraph 104(5.8)(a)(i) is the day determined under clause 104(5.8)(a)(i)(A). Therefore, the transferee trust's first deemed disposition day is January 1, 2020.
Under subparagraph 104(5.8)(a)(ii), the transferee trust in this situation would not also have a deemed disposition on January 1, 2021 for purposes of subsections 104(4) to (5.2).
2013-048600
Saskia deLang-Lenters