Principal Issues: (1) Whether a particular variation of a trust deed by a Court judgment will (a) result in a disposition of all the assets of the trust and/or (b) cause a partial disposition of any part of the existing beneficiaries’ interest in the trust? (2) Whether the exercise by the trustees of their power to add new beneficiaries will (a) result in a disposition of all the assets of the trust and/or (b) cause a partial disposition of any part of the existing beneficiaries’ interest in the trust?
Position: (1)(a) No, provided that the variation does not terminate the trust for private law purposes. (1)(b) No. (2)(a) No. (2)(b) Yes, disposition by the existing beneficiaries but no deemed proceeds of disposition under paragraph 69(1)(b).
Reasons: (1)(a). Prior position. No disposition of the trust’s assets as long as the changes do not result in a fundamental change to the beneficiaries’ rights or to the terms of the trust. (1)(b) In this particular situation, the variation does not add any beneficiary nor otherwise reduce the existing beneficiary’s rights. (2)(a) Prior position. No disposition of the trust’s assets where the trustees exercise a power granted to them in the trust deed. (2)(b) Prior position. The addition of a new beneficiary to a discretionary trust by the exercise of a power to add such beneficiary in the trust deed results in a disposition, by the existing beneficiaries, of a portion of their interest in the trust. However, provided the existing beneficiaries do not direct to whom the interest is transferred, they would not be deemed to have received proceeds of disposition under paragraph 69(1)(b). This is also true for the trustee/beneficiary who, in this particular situation, is not considered to have control over the decision to add a new beneficiary.
XXXXXXXXXX 2020-086243
XXXXXXXXXX
Subject: Request for advance tax rulings
XXXXXXXXXX
Dear Madam,
This is in response to your letters dated XXXXXXXXXX requesting advance tax rulings on behalf of the above-named taxpayers. 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 taxpayers involved, none of the issues raised in this request:
(i) relates to a tax return previously filed by the taxpayers or a person related to them
(ii) is under examination by a Tax Services Office or Tax Centre in connection with a tax return previously filed by the taxpayers or a person related to them;
(iii) is the subject of a notice of objection by the taxpayers or a person related to them;
(iv) is the subject of any pending or completed legal proceeding involving the taxpayers or a person related to them, other than an application for judicial review of the provisions of a trust instrument described in Paragraph 5 hereof;
(v) was the subject of an application for an advance ruling previously considered by the Income Tax Rulings Directorate.
DESIGNATION OF PARTIES
In this letter, the names and corporation names of the taxpayers are replaced by the following names and corporation names:
"Aco" means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX, now governed by the XXXXXXXXXX and resident in Canada;
"Bco" means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX, now governed by the XXXXXXXXXX and resident in Canada;
"Brother C" means XXXXXXXXXX, the brother of Ms. X;
"Brother D" means XXXXXXXXXX, the brother of Ms. X;
"CC1" means XXXXXXXXXX, an adult child of Brother C;
"CC2" means XXXXXXXXXX, an adult child of Brother C;
"Cco” means XXXXXXXXXX, a new corporation described in Paragraph 8 to be incorporated pursuant to the XXXXXXXXXX and resident in Canada;
"CD1" means XXXXXXXXXX, an adult child of Brother D;
"CD2" means XXXXXXXXXX, an adult child of Brother D;
"Dco" means XXXXXXXXXX, a new corporation described in Paragraph 8 to be incorporated pursuant to the XXXXXXXXXX and resident in Canada;
"Eco" means XXXXXXXXXX, a new corporation described in Paragraph 8 to be incorporated pursuant to the XXXXXXXXXX and resident in Canada;
"Fco" means XXXXXXXXXX, a new corporation described in Paragraph 8 to be incorporated pursuant to the XXXXXXXXXX and resident in Canada.
"Mr. A" means XXXXXXXXXX;
"Ms. X" means XXXXXXXXXX;
"Ms. Y" means XXXXXXXXXX, the spouse of Ms. X;
"Trust" means XXXXXXXXXX, an inter vivos trust and a personal trust, created by the Trust Deed pursuant to XXXXXXXXXX, governed by the laws in force in the Province of XXXXXXXXXX and resident in Canada;
DEFINITIONS OF TERMS AND ABBREVIATIONS
In this letter, the following terms and abbreviations have the meanings ascribed below:
"Court" means the XXXXXXXXXX Court;
"CRA" means the Canada Revenue Agency;
XXXXXXXXXX;
"Designated Person" means a person who is designated in respect of Ms. X, as defined in section 74.5(5);
"disposition" has the meaning assigned by subsection 248(1);
"Existing Beneficiaries" means the individuals referred to in paragraph 2(d) hereof;
"fair market value" means the highest price, in dollars, that two knowledgeable and prudent arm's length parties would agree on in the open market, neither party being under any compulsion to act;
"First Trustee" means Ms. X, as described in Section 2(b) hereof;
"inter vivos trust" has the meaning assigned by subsection 108(1);
"personal trust" has the meaning assigned by subsection 248(1);
XXXXXXXXXX;
"Paragraph" refers to a numbered paragraph herein;
"proceeds of disposition" has the same meaning as in section 54;
"Proposed Transactions" means the transactions described in Paragraphs 5 to 13 below;
"resident of Canada" means an individual, corporation or trust resident in Canada for the purposes of the Act.
"Trust Deed" means the trust deed governing the Trust, dated XXXXXXXXXX;
FACTS
1. CC1, CC2, CD1, CD2, Brother C, Brother D, Ms. X and Ms. Y are residents of Canada. None of them plans to cease to be a resident of Canada.
2. The Trust was formed pursuant to a notarial act on XXXXXXXXXX by the delivery by the settlor, a person who is neither trustee nor beneficiary, of a silver ingot. The main terms of the Trust Deed can be summarized as follows:
(a) The trustees are Ms. X and Mr. A (footnote 1). According to the XXXXXXXXXX of the Trust Deed, decisions of the trustees are taken by majority vote if there are more than two trustees in office and, if required by law, at least one trustee who is neither the settlor nor one of the beneficiaries of the trust shall be part of that majority;
(b) Under XXXXXXXXXX of the Trust Deed, Ms. X holds the position of First Trustee. Under XXXXXXXXXX of the Trust Deed, the First Trustee has the power to reduce or increase the number of trustees and, if necessary, to appoint persons to fill the positions of trustees following an increase in the number of trustees. According to XXXXXXXXXX of the Trust Deed, the First Trustee may also designate, by notarial act or in writing before a witness, the replacement trustee in the event that a trustee dies, resigns, refuses or is unable to act for any reason. However, the First Trustee may not remove a trustee from office, this power being reserved for the court on application by an interested party in certain specific circumstances provided for in the deed (footnote 2);
(c) XXXXXXXXXX of the Trust Deed provides a definition of "beneficiary". According to this definition, this term means, inter alia, the persons referred to in XXXXXXXXXX, as well as any legal person, organization or trust referred to in XXXXXXXXXX added as a beneficiary by written designation of the trustees only as from the signature for such decision;
(d) The XXXXXXXXXX of the Trust Deed states that the beneficiaries are:
(i) Brother C;
(ii) Brother D;
(iii) the first-degree children born and unborn of Brother C, including in particular CC1 and CC2 (footnote 3);
(iv) the first-degree children born and unborn of Brother D, including in particular CD1 and CD2 (footnote 4);
(v) the spouse of the First Trustee (Ms. Y); and
(vi) the First Trustee (Ms. X).
(e) XXXXXXXXXX of the Trust Deed, which allows the trustees to add one or more beneficiaries to the list referred to in XXXXXXXXXX by written decision, reads as follows:
XXXXXXXXXX
The trustees may add to the list of persons eligible for election as a beneficiary provided for above, by means of a written designation to that effect, any legal person, organization or trust estate meeting any of the following criteria:
-
any organization whose main objective is the XXXXXXXXXX;
-
any legal person whose only holders of all the shares are the natural persons referred to in XXXXXXXXXX;
-
any trust patrimony constituted for the benefit of one or more of the natural persons named in XXXXXXXXXX and, in particular, any trust estate in which all of the interests vest indefeasibly in them within the meaning of the Income Tax Act.
(f) Trust is a discretionary trust. The XXXXXXXXXX of the Trust Deed provides that, subject to XXXXXXXXXX, the trustees shall have the power to designate specific beneficiaries and to determine the beneficiaries' share of the income and capital of the Trust, as well as the manner of distribution of such shares. XXXXXXXXXX of the Trust Deed sets out the rules for the distribution of the income and capital of the Trust by the trustees, who may pay out the capital and income, in whole or in part, to the beneficiaries or any of them in their discretion. Further details of the power to designate beneficiaries and determine their share from the time when the First Trustee is no longer one of the trustees in office are set out in XXXXXXXXXX of the Trust Deed. This power to designate is subject to XXXXXXXXXX of the Trust Deed which provides for restrictions on the rights of a beneficiary who is a designated person;
(g) XXXXXXXXXX of the Trust Deed provides that the trustees or any interested person may apply to the Court to amend the provisions of the Trust Deed.
3. As long as the Trust has only two trustees, as is the case as of the date hereof, decisions of the trustees shall be taken unanimously in accordance with XXXXXXXXXX of the Trust Deed described in Paragraph 2(a).
4. In addition to the silver ingot referred to in Paragraph 2, Trust holds XXXXXXXXXX Class A shares of the capital stock of Aco and XXXXXXXXXX Class D shares of the capital stock of Bco. Those shares are participating and voting shares.
PROPOSED TRANSACTIONS
5. An application for judicial modification of the provisions of a trust deed was filed with the Court on XXXXXXXXXX in order to modify according to XXXXXXXXXX the XXXXXXXXXX of the Trust Deed. The execution of the Proposed Transactions described in Paragraphs 8 to 13 is conditional upon the obtaining of a judgment whose findings will give effect to the trustees' requests, namely, that the current sub-XXXXXXXXX of the Trust Deed be replaced by the following:
XXXXXXXXXX
The trustees may add to the list of persons eligible for designation as a beneficiary provided for above, by means of a written decision to that effect, of any legal person, organization or trust estate meeting any of the following criteria:
- any organization whose main objective is the XXXXXXXXXX.
- any legal person whose sole holders of all its shares are one or more of the following: (a) the natural persons referred to in XXXXXXXXXX; and/or (b) legal persons previously added as beneficiaries under this XXXXXXXXXX; and/or (c) trust estates previously added as beneficiaries under this XXXXXXXXXX;
- any trust estate constituted for the benefit of one or more of the following persons: (a) the natural persons mentioned in XXXXXXXXXX; and/or (b) legal persons previously added as beneficiaries under this XXXXXXXXXX; (c) trust patrimonies previously added as beneficiaries under this XXXXXXXXXX and in particular any trust patrimony in which all interests vest indefeasibly in them within the meaning of the income tax law.
6. This judicial amendment of the Trust Deed shall not result in the termination of the Trust under the laws of the Province of XXXXXXXXXX.
7. Furthermore, by this judicial amendment of the Trust Deed, no new beneficiaries will be added to the list of existing beneficiaries and no existing beneficiaries will cease to be beneficiaries.
8. Once the judgment for judicial modification of the Trust Deed is granted by the Court in accordance with the Statement of Claim described in Paragraph 5, four new corporations will be incorporated under the XXXXXXXXXX: Cco, Dco, Eco and Fco. The share capital of each of these new corporations will be identical, consisting of the following shares:
(a) Class A: voting, participating, entitled to receive dividends when declared by the directors of the corporation and to the remainder in the event of dissolution or winding-up;
(b) Class B: non-voting, participating, entitled to receive dividends as and when declared by the directors of the corporation and to the remainder in the event of dissolution or winding up;
(c) Class C: voting, non-participating and non-dividend bearing;
(d) Class D, E and F: non-voting, non-participating, redeemable at the option of the holder and having a redemption value equal to the fair market value of the consideration received by the corporation for the issuance of such shares;
(e) Class G and H: non-voting, non-participating and entitled to a discretionary dividend.
9. Upon incorporation of Cco, the living children of Brother C, CC1 and CC2 will each subscribe for XXXXXXXXXX Class A shares in the capital stock of Cco for a monetary consideration of $XXXXXXXXXX each.
10. Upon incorporation of Dco, the children of Brother D, CD1 and CD2 will each subscribe to XXXXXXXXXX Class A shares of the capital stock of Dco for a monetary consideration of $XXXXXXXXXX each.
11. Upon incorporation of Eco, each of Cco and Dco will subscribe to XXXXXXXXXX Class A shares of the capital stock of Eco for a monetary consideration of $XXXXXXXXXX each.
12. Upon incorporation of Fco, Ms. Y will subscribe to XXXXXXXXXX Class A shares of the capital stock of Fco for a monetary consideration of $XXXXXXXXXX.
13. Thereafter, Cco, Dco, Eco and Fco shall be added by written designation of the trustees as beneficiaries of the Trust, in accordance with the rules set out in XXXXXXXXXX of the Trust Deed, as amended by the judgment of the Court, the findings of which will give effect to the Statement of Claim described in Paragraph 5.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the Proposed Transactions described above is to broaden the criteria for determining the persons who may be added as beneficiaries of the Trust in order to better respect the will of the settlor, which is to benefit, directly or indirectly, the natural persons designated in the XXXXXXXXXX of the Trust Deed. Obtaining the Court's judgment amending the XXXXXXXXXX of the Trust Deed will make it possible to clarify the will of the settlor, who wishes to give the trustees the greatest possible latitude to carry out any reorganization within the family with a view to transmitting the family business when necessary. This amendment will give the trustees the possibility to designate as beneficiary of the Trust a legal person and/or a trust patrimony held or constituted by legal persons and/or trust estates to the extent that the only holders or beneficiaries of such legal persons and/or trust estates are natural persons referred to in the XXXXXXXXXX of the Trust Deed.
ADDITIONAL INFORMATION
The main contact details for the taxpayers covered by the advance rulings are:
- XXXXXXXXXX
All material transactions that have been undertaken prior to the submission of the request for advance rulings or that may be undertaken after the conclusion of the Proposed Transactions are described herein.
ADVANCE RULINGS ISSUED
Provided that the statement of facts, the Proposed Transactions and the Additional Information constitute full disclosure of all relevant facts and of all the proposed transactions and that the Proposed Transactions are carried out as described above, our decisions are as follows:
A. The obtaining of a Court judgment amending the XXXXXXXXXX of the Trust Deed pursuant to the originating application described in Paragraph 5 and the addition by the trustees, as described in Paragraph 13, of Cco, Dco, Eco and Fco as beneficiaries of the Trust, in accordance with the rules set out in the XXXXXXXXXX as amended, will not, in and of itself, result in a disposition of all the property of the Trust for the purposes of the Act.
B. The obtaining of a Court judgment amending the XXXXXXXXXX of the Trust Deed, pursuant to the originating application described in Paragraph 5, will not, in and of itself, result in a disposition for the purposes of the Act, by the existing beneficiaries, of all or any part of their respective interests in Trust. In particular, the obtaining of this judgment will not result in a disposition of their respective interests in Trust for the purposes of subsections 106(2) and 107(1).
C. The existing beneficiaries of Trust will not be considered to have received proceeds of disposition for the purposes of the Act as a result of the addition by the trustees, as described in Paragraph 13, of Cco, Dco, Eco and Fco as beneficiaries of Trust, pursuant to XXXXXXXXXX of the Trust Deed as it will be amended. For greater certainty, section 69(1)(b) will not apply as a result of this addition.
These rulings are subject to the limitations and general conditions set out in Information Circular 70-6R11 dated April 1, 2021, issued by the CRA and are binding on the CRA provided that the Proposed Transactions are completed within XXXXXXXXXX of this letter. These rulings are based on the current Act and do not take into account any proposed amendments to the Act.
SCOPE OF THE RULINGS RENDERED AND OTHER COMMENTS
For the purposes of this letter, only the Facts and Proposed Transactions described above have been considered. The documentation provided in support of your request does not form part of the Facts and Proposed Transactions.
Furthermore, the rulings rendered should in no way be construed as an acquiescence on the part of the CRA that:
a) we have considered the consequences of the amendment to the Trust Deed as described in Paragraph 5 under the laws of the Province of XXXXXXXXXX;
(b) we have considered the tax consequences that might result from a distribution of the property by the Trust; and
(c) we have considered the other tax consequences that may result from the Facts or Proposed Transactions set out herein, including the application of subsection 74.4(2).
A statement of our fees for the time spent on your case will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
For the 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 the Statement of Claim for judicial modification of the provisions of a trust deed, Mr. A has been acting as trustee of the Trust since XXXXXXXXXX, replacing XXXXXXXXXX.
2 See XXXXXXXXXX of the Trust Deed.
3 According to the XXXXXXXXXX of XXXXXXXXXX dated XXXXXXXXXX was a child of Brother C and died in XXXXXXXXXX. As of the date hereof, CC1 and CC2 are the only children of Brother C.
4 As of the date hereof, CD1 and CD2 are the only children of Brother D.