Principal Issues: 1) Whether a particular trust to trust transfer will meet the requirements of paragraph (f) of the definition of "disposition" in subsection 248(1)? 2) Whether the requirements of paragraph (g) of the definition of "trust" in subsection 108(1) will be met in a particular situation?
Position: 1) Yes. 2) Yes.
Reasons: 1) The new trust is identical to the original trust, except that the new trust permits indefeasible vesting. In this particular situation, the beneficiaries' respective rights are not affected by the trust to trust transfer and hence, the trust to trust transfer does not result in a change in beneficial ownership. 2) Prior positions.
XXXXXXXXXX 2020-085845
Dear XXXXXXXXXX
Subject: Request for Advance Tax Rulings
XXXXXXXXXX Trust
Dear Madam,
This is in response to your letter dated XXXXXXXXXX requesting advance tax rulings and opinions on behalf of the above-named taxpayer. We have also taken into account the information you have provided to us by email, including that of XXXXXXXXXX as well as additional information provided in telephone conversations (XXXXXXXXXX).
Unless otherwise indicated, all statutory references below are to the provisions of the Income Tax Act, R.S.C. 1985, c. 1, (5th Supp.), as amended (the "Act") and any reference to an amount expressed in dollars is a reference to such amount in Canadian dollars.
To the best of your knowledge and that of the taxpayer involved, none of the issues raised herein:
(i) relates to a tax return previously filed by the taxpayer or a person related to the taxpayer;
(ii) is being considered by a Tax Services Office or Tax Centre in connection with a tax return previously filed by the taxpayer or a person related to the taxpayer;
(iii) is the subject of a notice of objection by the taxpayer or a person related to the taxpayer;
(iv) is the subject of a pending or completed court proceeding involving the taxpayer or a related person; or
(v) is the subject of an advance ruling request previously considered by the Income Tax Rulings Directorate.
DESIGNATION OF PARTIES
In this letter, the names of the taxpayers are replaced by the following names:
"Aco" means XXXXXXXXXX Corporation, a corporation incorporated under the XXXXXXXXXX, now governed by the XXXXXXXXXX and resident in Canada;
"Bco" means XXXXXXXXXX Corporation, a corporation incorporated under the XXXXXXXXXX, now governed by the XXXXXXXXXX and resident in Canada.
"Child 1" means Mr. XXXXXXXXXX;
"Child 2" means Ms. XXXXXXXXXX;
"Child 3" means Ms. XXXXXXXXXX;
"Child 4" means Ms. XXXXXXXXXX;
"Children" means jointly the children of Mr. X and Ms. X, who are currently Child 1, Child 2, Child 3 and Child 4;
"Mr. A" means Mr. XXXXXXXXXX, who is not a related person and deals at arm's length with Mr. X, Ms. X and the Children;
"Mr. X" refers to Mr. XXXXXXXXXX;
"Mr. B." means Mr. XXXXXXXXXX, the deceased father of Mr. X;
"Ms. X" means Ms. XXXXXXXXXX, the spouse of Mr. X;
"Trust 1" means XXXXXXXXXX Trust, an inter vivos trust and personal trust, created by the Trust Deed 1 of Trust under XXXXXXXXXX, governed by the laws in force in the Province of XXXXXXXXXX and resident in Canada;
"Trust 2" means the new Family Trust, an inter vivos trust and personal trust to be created by the Trust Deed 2 under XXXXXXXXXX, to be governed by the laws in force in the Province of XXXXXXXXXX and to be resident in Canada;
DEFINITIONS OF TERMS AND ABBREVIATIONS
In this letter, the following terms and abbreviations have the meanings specified below:
"CRA" means the Canada Revenue Agency;
"designated person" means a person who is a designated person in respect of Mr. X, as defined in subsection 74.5(5);
"disposition" has the meaning assigned by subsection 248(1);
First Trustee" means Mr.X as described in Paragraph 2(b) hereof;
"inter vivos trust" has the meaning assigned by subsection 108(1);
"Non-arm's length" means not dealing at arm’s length as specified by subsection 251(1);
"Paragraph" refers to a numbered paragraph herein;
"personal trust" has the meaning assigned by subsection 248(1);
"Proposed Transactions" means the transactions described in Paragraphs 5 to 6 below;
"related persons" has the meaning set out in subsection 251(2);
"resident in Canada" means an individual, corporation or trust resident in Canada for the purposes of the Act;
"SBC" means "small business corporation" as defined in subsection 248(1).
"Subsequent Transactions" means the transactions described in Paragraphs 7 to 8 below;
"Trust Deed 1" means the trust deed that governs Trust 1, dated XXXXXXXXXX;
"Trust Deed 2" means the trust deed that will govern Trust 2;
XXXXXXXXXX;
XXXXXXXXXX;
FACTS
1. Mr. X and Ms. X are residents of Canada. Mr. X and Ms. X have four adult children, Child 1, Child 2, Child 3 and Child 4. The Children are residents of Canada. No one plans to cease to be a resident of Canada.
2. Trust 1 was established by deed on XXXXXXXXXX by the delivery by the Settlor, a person who is neither a trustee nor a beneficiary, of a note in the amount of XXXXXXXXXX dollars. The main terms of Trust Deed 1 can be summarized as follows:
(a) The trustees are Mr. X and Mr. A. According to XXXXXXXXXX of Trust Deed 1, the decisions of the trustees are to be taken unanimously when there are XXXXXXXXXX trustees;
(b) According to the XXXXXXXXXX of Trust Deed 1, Mr. X holds the position of First Trustee. According to XXXXXXXXXX of Trust Deed 1, First Trustee may appoint, by notarial act or in writing before a witness, the successor trustee in the event of the refusal, renunciation, death, incapacity or removal of any trustee other than First Trustee;
(c) The purpose of Trust 1 is set out in XXXXXXXXXX of Trust Deed 1. This trust was established, inter alia, to promote a smooth transfer of the trust capital to the beneficiaries, to protect the trust capital in the general interest of the beneficiaries and to ensure the financial security of those beneficiaries. Trust 1 also was established to provide financial support for the carrying on of a business by any of the beneficiaries. However, in no case shall this support be used to limit the powers of the trustees under XXXXXXXXXX of Trust Deed 1;
(d) XXXXXXXXXX of the Trust Deed 1 provides a definition of "beneficiary". According to this definition, the term "beneficiary" means, inter alia, all persons specifically referred to in XXXXXXXXXX;
(e) XXXXXXXXXX of the Trust Deed 1 states that the beneficiaries are:
(i) Ms. X;
(ii) the Children;
(iii) Mr. B (footnote 1); and
(iv) Aco.
(f) Trust 1 is a discretionary trust. XXXXXXXXXX of Trust Deed 1 provides that, subject to XXXXXXXXXX and XXXXXXXXXX, the trustees have a specific power to designate beneficiaries from among the persons named in XXXXXXXXXX and to determine the beneficiaries' share of the income and capital of Trust 1 in their absolute discretion. XXXXXXXXXX of Trust Deed 1 specifies the rules for the distribution of the income and capital of Trust 1 by the trustees, who may pay the capital and income, in whole or in part, to the beneficiaries or to any of them in their sole discretion, except in the event of a beneficiary becoming bankrupt or insolvent (footnote 2);
(g) XXXXXXXXXX of the Trust Deed 1 provides for the termination of the exercise of the trustees' discretionary powers from the time when the First Trustee is no longer one of the trustees in office by reason of his death. The division of the income and capital interest in Trust 1 shall then be determined in the manner specified in the First Trustee's will and the beneficiaries specified shall be among the beneficiaries specified in XXXXXXXXXX. If First Trustee has left instructions in First Trustee’s will as to the allocation of the income and capital of Trust 1 and one of the beneficiaries dies before receiving or renouncing the beneficiary’s full share, the share not yet received by the beneficiary will be allocated to the other beneficiaries named in the First Trustee's will. In the absence of instructions in the will, or in the case of incomplete instructions, Trust 1 will remain a discretionary trust regarding that which has not been provided for in the will;
(h) The discretionary powers of the trustees are subject to XXXXXXXXXX of the Trust Deed 1 which provides for restrictions on the rights of a beneficiary who is a designated beneficiary XXXXXXXXXX of the Trust Deed 1 specifies that once Bco ceases to be a SBC, while Trust 1 is a shareholder, the interest of Ms. X in the income or capital of Trust 1 will become fixed and limited to a percentage of XXXXXXXXXX%. The XXXXXXXXXX of the Deed of Trust 1 will again apply to Ms. X as of the beginning of the taxation year immediately following the taxation year in which Bco became a SBC again. Also, the XXXXXXXXXX provides that Mr. B would cease to be a beneficiary of the trust as a result of the death of First Trustee;
(i) XXXXXXXXXX of the Trust Deed 1 provides for the situation where a beneficiary renounces the beneficiary’s interest in the trust, either during the lifetime of First Trustee or following First Trustee’s death but in the absence of a direction in First Trustee’s will as to that beneficiary's interest. In such an event, that interest would then be allocated by the trustees, in their discretion, to the other beneficiaries or to some of them;
(j) XXXXXXXXXX of Trust Deed 1 sets out the various powers of the trustees, which include, inter alia, the XXXXXXXXXX to make or not make any election, determination or designation under the Act and the XXXXXXXXXX to pay to any of the beneficiaries all or part of any taxable capital gain or deemed income. The trustees may, in the XXXXXXXXXX, decide on the eve of the XXXXXXXXXX anniversary of Trust 1 to terminate it in their absolute discretion and, in the XXXXXXXXXX, terminate Trust 1 and distribute its assets to any of the beneficiaries, subject to the rights of any other beneficiary under the provisions of Trust Deed 1;
(k) XXXXXXXXXX of Trust Deed 1 grants the trustees the power to transfer, at their discretion, all or part of the assets of the trust to another trust provided that the beneficiaries of such other trust shall be selected from among the beneficiaries of Trust 1 and that First Trustee shall be in office. As of the time when First Trustee is no longer in office, the XXXXXXXXXX of Trust Deed provides that it will be possible for the trustees then in office to transfer all or part of the income or capital of Trust 1 to another trust provided that the beneficiaries will be the beneficiaries chosen from among those listed in the XXXXXXXXXX in the instructions left by First Trustee in First Trustee’s will. In the absence of such written instructions, the trustees may transfer the property to another trust only to the extent that the beneficiaries of that trust are the same as Trust 1 and in the same proportions;
(l) XXXXXXXXXX of Trust Deed 1 specifies the right of the trustees to mortgage the trust property; and
m) XXXXXXXXXX of the Trust Deed 1 provides that the trustees may from time to time amend certain terms of Trust Deed 1 in the manner provided by applicable law and the trustees or any interested person may apply to the court to amend the provisions of Trust Deed 1.
3. In addition to the $XXXXXXXXXX note referred to in Paragraph 2, Trust 1 holds XXXXXXXXXX Class F shares (footnote 3) of the capital stock of Aco and XXXXXXXXXX Class E shares (footnote 4) of the capital stock of Bco.
4. Neither the Children nor MRS. X are currently in bankruptcy or insolvency and will not be at the time of the implementation of the Proposed Transactions.
PROPOSED TRANSACTIONS
5. Trust 2 will be created by the delivery by the settlor, a person who is neither a trustee nor a beneficiary, of a bar of silver. The trustees of Trust 2 will be Mr. X and Mr. A. The beneficiaries will be the same as the current beneficiaries of Trust 1 (footnote 5). The terms of Trust Deed 2 will be for all intents and purposes the same as those of Trust1, except that the Trust Deed 2 will grant the trustees the power to effect an irrevocable vesting of the interests in favour of the beneficiaries at their discretion. The additions to Trust Deed 2 can be summarized as follows:
a) The XXXXXXXXXX of the Trust Deed 2 will read as follows:
XXXXXXXXXX Winding up of the Trust
To terminate the Trust and distribute its assets to any of the Beneficiaries, subject to the rights of any other Beneficiary as provided herein.
At any other time during the administration of the Trust, if the Trustees believe that there is a tax or financial benefit to be derived from doing so, the Trustees may, by deed recorded in a notarial instrument or in writing before XXXXXXXXXX witnesses, irrevocably vest in one or more Beneficiaries all of the interests (both capital and income) in all present and future benefit resulting from this Agreement.
Such irrevocable vesting shall be effected by the Trustees by determining in their sole discretion, but in a definitive manner, for each beneficiary subject to such irrevocable vesting, the nature, extent, terms and conditions of payment of the right vested in such beneficiary; such vesting in favour of a beneficiary having the effect of granting the beneficiary a transmissible right in respect of any benefit arising therefrom, so that all the interests are "indefeasibly vested" within the meaning of Paragraph 108(1)(g) of the definition of "trust" in the Income Tax Act and so that the application of subsection 104(4) of the Income Tax Act, which provides for a deemed disposition of the property of the Trust on the twenty-first (21st) anniversary of its incorporation, is avoided.
Once such indefeasible vesting has occurred, the beneficiary or beneficiaries will have rights in the Trust unconditionally and without any subsequent event nullifying or altering such rights. In addition, the interest of each beneficiary for whom an irrevocable vesting has been effected, once established, may not be modified in any way or vary over time.
For greater certainty, the provisions of this Paragraph shall prevail over any other provision hereof, including, but not limited to, the provisions of the XXXXXXXXXX and the XXXXXXXXXX, in the event of such indefeasible vesting, and in no event shall the interest of any particular Beneficiary terminate with respect to any period (including that determined with respect to the death of the Person), other than by the effect of the terms of the Agreement that an interest in the Trust shall terminate as a result of the distribution to the Person (or the Person's estate) of any property of the Trust. Notwithstanding anything to the contrary in this Agreement, if any of the Beneficiaries dies and an interest in the Trust has been irrevocably acquired by that Beneficiary prior to that Beneficiary’s death, all property of the Trust relating to that interest shall revert to the Beneficiary’s estate. For this purpose, estate has the same meaning as in the Income Tax Act.
b) Trust Deed 2 will provide in XXXXXXXXXX (which will be otherwise identical to XXXXXXXXXX of the Trust Deed 1, described in Paragraphs 2(f) and (g)), and in XXXXXXXXXX (which will be otherwise identical to XXXXXXXXXX of the Trust Deed 1, described in Paragraph 2(f)), that these provisions will cease to apply when an irrevocable vesting in accordance with XXXXXXXXXX is effected by the trustees;
c) A proviso to the effect that "unless irrevocable vesting has previously been effected in accordance with the provisions of XXXXXXXXXX" will be added to the XXXXXXXXXX of the Trust Deed 2, which will otherwise be identical to the XXXXXXXXXX of the Trust Deed 1, described in Paragraphs 2(c),( i), (j), (k) and (l);
d) The XXXXXXXXXX of Trust Deed 1 described in Paragraph 2(m) will be included in Trust Deed 2, but it will provide that in no case may an amendment be made if it would have the effect of modifying the share, rights or privileges of a beneficiary in favour of whom an irrevocable vesting will have been effected in accordance with XXXXXXXXXX; and
e) The XXXXXXXXXX of Trust Deed 1 described in Paragraph 2(h) will not be repeated in the Trust Deed 2 since Mr. B is deceased.
6. The trustees of Trust 1 will transfer all of the property of Trust 1 to Trust 2 in accordance with the XXXXXXXXXX of the Trust Deed 1 described in Paragraph 2(k). The beneficiaries of Trust 2 and their respective rights under Trust Deed 2 will be the same as under Trust Deed 1. Immediately prior to the transfer of property from Trust 1 to Trust 2, Trust 2 will hold only bullion as described in Paragraph 5. Trust 2 will not be a beneficiary of Trust 1 within the meaning of the XXXXXXXXXX or the Act, will not have any of the rights or privileges that would arise therefrom and will not receive the transferred property in satisfaction of any right as a beneficiary of Trust 1. Trust 1 will terminate, both for the purposes of XXXXXXXXXX and for the purposes of the Act, after the transfer of its property to Trust 2. Trust 2 will not elect to avoid the application of paragraph (f) of the definition "disposition" in subsection 248(1). The property to be transferred from Trust 1 to Trust 2 will be the XXXXXXXXXX Class F shares of the capital stock of Aco and the XXXXXXXXXX Class E shares of the capital stock of Bco or any property substituted therefor, as well as the $XXXXXXXXXX note contributed to the capital of Trust 1 by the Settlor on XXXXXXXXXX as described in Paragraph 2.
SUBSEQUENT TRANSACTIONS
7. After the transfer described in Paragraph 6 but before the 21st anniversary following the date of creation of Trust 1 (before XXXXXXXXXX), the trustees will distribute XXXXXXXXXX of the property of Trust 2 to the beneficiary Ms. X, as a distribution in satisfaction of her entire capital interest in Trust 2.
8. After the distribution described in Paragraph 7 but before the 21st anniversary following the date of creation of Trust 1 (before XXXXXXXXXX), the trustees of Trust 2 will exercise their discretion under XXXXXXXXXX of the Trust Deed 2 described in Paragraph 5 to effect, by deed or in writing before XXXXXXXXXX witnesses, the irrevocable vesting of the entire income and capital interests of Trust 2 in favour of each of the Children who will be beneficiaries at that time, in equal shares (i.e. XXXXXXXXXX% each).
PURPOSE OF THE TRANSACTIONS
The purpose of the Proposed Transactions described above is to permit the deferral of the distribution of the property to be held by Trust 2 to the beneficiaries until after the 21st anniversary of the date of creation of Trust 1, when the Children will be older and more experienced in holding property of substantial value. Thus, the transfer of property from Trust 1 to Trust 2 is intended to allow, without changing the beneficial ownership of the property for the purposes of the Act, the property to be held by a Trust (Trust 2) governed by a deed (Trust Deed 2) the provisions of which will provide for the possibility of irrevocable vesting in a clear and precise manner. The clarifications and specifications in question are relevant in particular when determining whether the trustees may use their power of designation to grant property of the Trust irrevocably to the beneficiaries for subsequent distribution to them or, in the event of death, to the estate of the deceased beneficiary. The purpose of the Subsequent Transactions is to enable Trust 2 to rely on the exclusion in paragraph (g) of the definition of "trust" in subsection 108(1).
ADDITIONAL INFORMATION
The main contact details for the taxpayer referred to in the advance rulings are:
- XXXXXXXXXX
All material transactions that have been undertaken prior to the submission of the advance ruling request or that may be undertaken after the conclusion of the Proposed Transactions and Subsequent Transactions are described herein.
ADVANCE RULINGS ISSUED
Provided that the statement of facts, the Proposed Transactions, the Subsequent Transactions, the Purposes of the Transactions and the Additional Information constitutes full disclosure of all relevant facts, all proposed transactions, all subsequent transactions and all purposes of the transactions affecting the determinations made in this letter and provided that the Proposed Transactions are carried out as described above, we confirm the following:
A. The transfer of property from Trust 1 to Trust 2 as described in Paragraph 6 will not result in a disposition of the property by Trust 1 by virtue of paragraph (f) of the definition of "disposition" in subsection 248(1).
B. Trust 2 will be deemed to be the same trust as and a continuation of Trust 1 pursuant to paragraph 248(25.1)(a) and the transfer of property from Trust 1 to Trust 2 will not result in a disposition of a beneficiary's interest in Trust 1 for the purposes of sections 106 and 107.
C. Subsection 104(5.8) will apply, so that pursuant to subsection 104(4), if applicable, Trust 2 will be deemed to have disposed of each of its assets referred to in that subsection on the day that is 21 years after the day Trust 1 was established.
These rulings are subject to the limitations and general conditions set out in Information Circular 70-6R12, dated April 1, 2022, issued by the CRA and are binding on the CRA provided that the Proposed Transactions are completed within XXXXXXXXXX months of this letter. These rulings are based on the current Act and do not take into account any proposed amendments to the Act.
OPINIONS
Provided that the statement of facts, the Proposed Transactions, the Subsequent Transactions, the Purposes of the Transactions and the Additional Information described in this letter constitutes full disclosure of all relevant facts, all proposed transactions, all subsequent transactions and all purposes of the transactions affecting the opinions rendered in this letter, and provided that the Proposed Transactions and the Subsequent Transactions are carried out as described above, the following general comments may be provided on the basis of the Act as it currently reads with respect to the Subsequent Transactions:
(a) to the extent that:
(i) subparagraphs (g)(iii), (iv) and (vi) of the definition of "trust" in subsection 108(1) do not apply to Trust 2; and
(ii) the trustees, as described in Paragraph 8, irrevocably vested all interests in the capital and income of Trust 2 so that the respective shares of each of the beneficiaries of Trust 2 would, at the end of the day that is 21 years after the day on which Trust 1 was established, be irrevocably vested,
subsection 104(4), as it currently reads, would not apply to Trust 2 because of the exclusion in paragraph (g) of the definition of "trust" in subsection 108(1).
The foregoing comments under the heading "Opinions" are opinions only and should not be construed as advance rulings or as binding on the CRA.
SCOPE OF THE DECISIONS RENDERED AND OTHER COMMENTS
For the purposes of this application, only the facts, the Proposed Transactions, the Subsequent Transactions and the Purpose of the Transactions described above have been considered. The documentation provided in support of your application does not form part of the facts, Proposed Transactions and Subsequent Transactions.
Furthermore, the decisions rendered should in no way be construed as an acquiescence on the part of the CRA that we have considered the other tax consequences that may result from the facts, the Proposed Transactions and the Subsequent Transactions set out herein, including the application of subsection 74.4(2).
The statement of our fees for the time spent on your case will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
Interim Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 According to the XXXXXXXXXX of your letter dated XXXXXXXXXX, Mr. B has died.
2 XXXXXXXXXX of the Trust Deed 1 provides that from the time a beneficiary becomes bankrupt or insolvent the trustees may not pay or allocate income, encroach on or remit capital of the Trust to that beneficiary while the state of bankruptcy or insolvency continues.
3 These shares are non-voting shares, are entitled to a monthly, preferential, non-cumulative dividend of XXXXXXXXXX% to XXXXXXXXXX% of the redemption value and are redeemable at the option of the holder or the corporation.
4 These shares are non-voting, non-participating and redeemable.
5 Those listed in Paragraph 2(e) hereof. Mr. B is not one of the beneficiaries named in XXXXXXXXXX of Trust Deed 2, as he is deceased.