2015-0596841E5 Definition of personal trust

Principal Issues: Would CRA confirm the submitter's view that in the given fact scenario, the proportionate capital contributions by beneficiaries will not result in the trust failing to meet the "personal trust" definition?

Position: No.

Reasons: We do not agree with the submitter's view and have not been provided with persuasive arguments to support their position.

Author: Kohnen, Phil
Section: 108(7) and 248(1) definition of "personal trust"

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                                                      2015-059684
                                                      Phillip Kohnen
                                                      (613) 670-8916

July 30, 2015

Dear XXXXXXXXXX:

Re:   Interpretation of the definition of “personal trust”

This is in response to your submission dated June 22, 2015 wherein you presented a scenario involving the following hypothetical facts:

1.    a particular inter vivos trust (“Trust”) is not a unit trust, as that term is defined in subsections 248(1) and 108(2) of the Income Tax Act (the “Act”);
2.    there is no agreement between the beneficiaries of Trust, nor is there a requirement under the trust deed of Trust, in respect of the contribution of additional capital to the trust; and
3.    each of the beneficiaries of Trust will make an additional contribution of capital to Trust in proportion to their respective fixed entitlements to a percentage of trust capital and income.

You have suggested that in this scenario, the additional contributions of capital by the beneficiaries should not disqualify Trust as a personal trust on the basis that the contribution would not constitute consideration payable for a beneficial interest in the trust, and have asked that the Canada Revenue Agency (“CRA”) confirm your view.

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 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

As you know, paragraph (b) of the definition of “personal trust” in subsection 248(1) of the Act, which sets out the requirements in respect of a trust that is not a testamentary trust, reads as follows:

“an inter vivos trust no beneficial interest in which was acquired for consideration payable directly or indirectly to
(i) the trust, or
(ii) any person or partnership that has made a contribution to the trust by way of transfer, assignment or other disposition of property”.

In support of your view, you have referred to three interpretations published by our Directorate; documents 9716725, 9432135 and 9512566, as well as commentary in a Canadian Tax Foundation (“CTF”) article from the 1990 Conference Report.

It should be noted that when technical interpretation 9716725 was written in 1998, the definition of “personal trust”, as it then read, provided, inter alia, that where all the beneficial interests in a particular inter vivos trust acquired by way of transfer, assignment or other disposition of property to the particular trust were acquired by one person, the interests of that person was deemed to have been acquired for no consideration.

In response to the question addressed in that document, which included the assumption that all of the beneficial interests in a self-directed registered retirement savings plan (“RRSP”) are acquired by one person, the interpretation stated our view that, generally, a self-directed RRSP trust could qualify as a personal trust by reason of subparagraph (b)(iii) of the personal trust definition, as it then read.

In technical interpretation 9432135, which addressed beneficial interests in an employee profit sharing plan (“EPSP”), CRA stated its position that “the sole fact that an employee is a beneficiary under an EPSP due to his employment does not constitute consideration payable to the employer to acquire a beneficial interest in the said EPSP”. It was further noted that it is a question of fact whether a particular EPSP would be a personal trust.

Internal technical interpretation 9512566 stated our view that it was possible for a communal organization, deemed by subsection 143(1) of the Act to be an inter vivos trust, to qualify as a personal trust. This view considered previous document 9432135 when considering the issue. Our response also further noted that “whether a beneficial interest was acquired for consideration payable to the trust or to any person who has made a contribution to the trust is a question of fact”.

In regard to the CTF article you have referenced, we have reviewed its content and do not find that any of the comments therein provide persuasive support for your views.

In conclusion, we are unable to confirm our agreement with the view you provided in your submission that the additional contributions of capital by the beneficiaries in the scenario provided should not disqualify the trust as a personal trust.

We trust our comments will be of assistance.

Yours truly,

Phillip Kohnen
Trust Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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