Principal Issues: May the payment of professionals fees by a trustee or a beneficiary of a trust result in the application of subsection 75(2)?
Position: Question of fact.
Reasons: Subject to the review of the trust deed and the circumstances specific to each situation, the conditions for the application of subsection 75(2) could be met.
APFF FEDERAL TAX ROUNDTABLE 10 OCTOBER 2024
2024 APFF CONFERENCE
15. Section 75(2) and payment of fees by trustee or beneficiary
In Technical Interpretation 2009-0306591E5 ) footnote 1), the CRA was asked to determine whether the payment of professional fees by the trustee of a trust was a contribution to the trust and, if so, whether this triggered the application of the attribution rules. However, the CRA was unable to answer this question because it lacked information, including a copy of the trust deed.
In July 2012, however, CRA issued a technical interpretation (footnote 2) finding that such a payment does not engage subsection 75(2).
Subsequently, in February 2013, CRA issued another technical interpretation in which it concluded that subsection 75(2) does not apply in such a situation (footnote 3). Furthermore, at the 2013 APFF Conference Roundtable on Provincial Taxation, Revenu Québec stated: [TaxInterpretations translation]
"Attribution rules
Where the professional fees and bank charges of a trust are paid by one of its beneficiaries, the attribution rules may, depending on the circumstances, apply to the beneficiary. If the relevant facts lead to the conclusion that the beneficiary who paid those fees made an indirect transfer either to the other beneficiaries or to the trust, and the other conditions for the application of the attribution rules are met, income from an amount equivalent to the amount of the professional fees and bank charges paid by the beneficiary could be attributed to the beneficiary.
On the other hand, where the income of the discretionary family trust is not paid or payable to the income beneficiaries, it would be necessary to examine all the facts to determine whether the attribution rules apply and how they may apply." (footnote 5)
Questions to the CRA
(a) Can the payment of professional fees by a trustee or beneficiary of a trust trigger the application of subsection 75(2)?
(b) If so:
i) Are there specific factors to be considered in order to make this determination (for example, in the trust deed)?
ii) What are the relevant circumstances for concluding whether or not the trustee or beneficiary who paid these fees made an indirect transfer to the other beneficiaries or to the trust?
iii) What is the “property” held by the trust that could allow income to flow to the beneficiary or trustee from an amount equal to the amount of the professional fees and bank charges paid by the beneficiary or trustee?
CRA Response
Generally, subsection 75(2) deals with situations where a person transfers, directly or indirectly, property to a trust and, under that trust, that property or property substituted for it may revert to the person, may pass to persons to be designated by the person after the trust is created, or may, during the person's lifetime, be disposed of only with the person's consent or in accordance with the person's direction.
Whether the payment of professional fees by a trustee, beneficiary, or other person is considered to be a contribution of property indirectly made by that person to the trust for the purposes of subsection 75(2) is a question of fact requiring an analysis of all the facts and circumstances relating to a particular situation. Since each situation must be analyzed in light of its own circumstances, the CRA is not in a position to set out a list of specific factors to be considered in this analysis. However, the CRA is generally of the view that the fact that a person pays fees for the creation of a trust should not, in and of itself, trigger the application of subsection 75(2), since those fees were incurred before the trust was created and do not result in an indirect contribution to the trust's patrimony.
This would obviously not be the case if the fees were reimbursement of the costs of acquiring the property initially contributed by the settlor to the trust. Similarly, the fees incurred for the creation of a trust are distinct from the professional fees of a trust that would be incurred after its creation. Where applicable, the payment of such fees by another person, such as a trustee or beneficiary, could be considered a contribution or transfer made indirectly to the trust by that other person and could, depending on the circumstances, result in the application of subsection 75(2).
In this sense, the comments made by the CRA in response to Question 7 in the 2012 Trusts Seminar (footnote 6), which are also consistent with the position taken by the CRA in Technical Interpretations 2010-0388551I7 (footnote 7) and 2011-0424341I7 (footnote 8), mentioned above, still represent the CRA's position.
Isabelle Brulotte, CPA
October 10, 2024
2024-102845
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Technical Interpretation 2009-0306591E5, January 6, 2011.
2 CANADA REVENUE AGENCY, Technical Interpretation 2010-0388551I7, July 5, 2012.
3 R.S.C. 1985, c. 1 (5th Supp.) (the "Act").
4 CANADA REVENUE AGENCY, Technical Interpretation 2011-0424341I7, June 7, 2013.
5 Provincial Taxation Roundtable, 2013 Conference, Montreal, Association de planification fiscale et financière, 2014, question 5.
6 Round table - CRA and ARQ administrative positions on trusts, in Colloquium 206 - Trusts, Montreal, Association de planification fiscale et financière, 2012.
7 Supra, note 2.
8 Supra, note 4.