2014-0552341E5 Subsection 107(4.1)

Principal Issues: Is subsection 107(4.1) applicable to a distribution of certain property to beneficiaries, when a beneficiary who contributed the property to the trust to which subsection 75(2) applied, ceases to exist?

Position: In this case, no.

Reasons: On the death of the contributor and provided there is no other person who has contributed property to the trust to which subsection 75(2) applied, subsection 107(4.1) will not apply and a tax deferred roll out under subsection 107(2) may be available.

Author: Srikanth, Vyjayanthi
Section: 75(2), 107(2), 107(2.1), 107(4.1), 248(5)

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                                                                                                                                                  2014-055234
                                                                                                                                                  V. Srikanth
May 12, 2016                                         

Dear XXXXXXXXXX:

Re:  Application of subsection 107(4.1) of the Income Tax Act (the “Act”)

This is in response to your e-mail correspondence dated October 30 and November 11, 2014. We apologise for the delay in responding to you. You wanted our views in respect of the application of subsection 107(4.1) of the Act to a hypothetical scenario. Our response is based on the following hypothetical facts:

*     A personal trust (the “Trust”) resident in Canada is settled with a gold coin.
*     The capital beneficiaries of the Trust include the settlor (the “Settlor”) and his children.
*     The Trust obtained an arm’s length loan (the “Loan”) and used the proceeds of the Loan to purchase securities from a vendor (the “Vendor”) in an arm’s length transaction.
*     The Vendor is not a beneficiary of the Trust.
*     Subsection 75(2) of the Act applied with respect to the gold coin but never applied to the securities acquired with the Loan proceeds.
*     The Settlor is no longer alive, however, the Vendor is.

You would like us to comment on the following:

1. Whether subsection 107(4.1) would apply to distributions of the securities to the children such that the distributions would be at fair market value pursuant to subsection 107(2.1) of the Act.
2. Whether the fact that the Trust received property from the Vendor in the given instance is relevant for purposes of applying paragraph 107(4.1)(d) to the hypothetical fact scenario.

Our Comments

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations, dated April 22, 2016.

Subsection 107(2) of the Act generally allows certain trusts to distribute property to a capital beneficiary under the trust on a tax deferred basis. However, where subsection 107(4.1) applies to a distribution of trust property to a beneficiary, subsection 107(2.1) rather than subsection 107(2), will apply.

Subsection 107(4.1) will apply when all of the conditions in paragraphs (a) through (d) are met. It is a question of fact whether property is held by a trust under the conditions described in subsection 75(2) of the Act. In the given instance, as noted, the only property of the Trust that is subject to subsection 75(2) is the gold coin. Accordingly, during the existence of the Settlor, any distribution of property to a capital beneficiary (other than the gold coin to the Settlor), will trigger the application of subsection 107(4.1).

Since it is indicated that at the time the Trust will distribute the securities, the Settlor was not alive, subsection 107(4.1) will not apply given that the condition in paragraph 107(4.1)(d) will not be met. Hence the distributions may be made pursuant to subsection 107(2) of the Act, if all of the requirements therein are met. The fact that property was received from the Vendor in a fair market value purchase will not be relevant, given the hypothetical facts as presented.

We trust our comments will be of assistance to you.

Yours truly,

Phil Kohnen
Manager, Trusts Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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