2015-0606771R3 Disclaimer of trust interest

Principal Issues: Would a disclaimer of a grandchild beneficiary's contingent interest in a testamentary trust (1) result in any proceeds of disposition being received on the disposition of the grandchild’s interest in the trust, (2) allow the application of subsection 107(2) on the distribution to the parent beneficiaries

Position: (1) no (2) yes

Reasons: Previous rulings on this similar issue. Technical provisions of the Act are satisfied.

Author: XXXXXXXXXX
Section: 106 (1) 107(2), 69

XXXXXXXXXX                                                                                                                                      2015-060677

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re:  Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-named taxpayer.  We also acknowledge the additional information provided in your correspondence dated XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

(i)   in an earlier tax return of the taxpayer or a related person;

(ii)  being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv)  before the courts; or

(v)   the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

This document is based solely on the facts and proposed transactions described below.  The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated. The following terms and taxpayers referred to throughout this document will have the following meaning:

“Beneficiaries” means Ms. A, Mr. B and the Grandchildren;

“CRA” means the Canada Revenue Agency;

“Estate” means the estate of the late Mr. X;

“FMV” means fair market value, being that amount at which property would be transferred by a willing seller to a willing buyer in an open and unrestricted market, between informed parties under no compulsion to act;

“Grandchild 1” means XXXXXXXXXX;

“Grandchild 2” means XXXXXXXXXX;

“Grandchild 3” means XXXXXXXXXX;

“Grandchild 4” means XXXXXXXXXX;

“Grandchild 5” means XXXXXXXXXX;

“Grandchildren” means collectively Grandchildren 1 through 5, inclusive;

“Holdco” means XXXXXXXXXX;

“Investco” means XXXXXXXXXX;

“Land” means land held by Holdco in XXXXXXXXXX;

“Ms. A” means XXXXXXXXXX;

“Mr. B” means XXXXXXXXXX;

“Mr. X” means the late XXXXXXXXXX;

“Mrs. X” means the late XXXXXXXXXX, who was the spouse of Mr. X;

“Province 1” means the province of XXXXXXXXXX; and

“Will” means the Last Will and Testament of Mr. X signed on XXXXXXXXXX.

The names and addresses of the Beneficiaries who are parties to this ruling request, as well as the tax centre where their returns are filed, are listed in Schedule A. The Estate returns are filed at the XXXXXXXXXX Tax Centre.

Our understanding of the facts, the proposed transactions, and the purpose of the proposed transactions is as follows:

FACTS

1.    The Estate was created pursuant to the terms of the Will and as a consequence of the death of Mr. X.  The Estate is a testamentary trust as defined in subsection 108(1) of the Act and is a personal trust as defined in subsection 248(1).  No property has been received by the Estate from anyone else but Mr. X.

2.    Mr. X’s date of death was XXXXXXXXXX.

3.    Mrs. X predeceased Mr. X on XXXXXXXXXX.

4.    The 21-year deemed disposition rule in subsection 104(4) will apply in respect of the Estate on XXXXXXXXXX.

5.    Mr. X’s children, Ms. A and Mr. B are the executors of the Will and trustees of the Estate.

6.    Ms. A and Mr. B are income and capital beneficiaries under the Estate.  In the event that Ms. A or Mr. B dies before the Estate assets are exhausted, the contingent residual beneficiaries of the Estate are the five Grandchildren.

7.    The Estate assets are:

(a)   an investment portfolio of securities managed by Investco, the FMV of which was $XXXXXXXXXX at XXXXXXXXXX with a cost of $XXXXXXXXXX;

(b)   shares of Holdco, the FMV of which is currently estimated to be approximately $XXXXXXXXXX.  It was valued at $XXXXXXXXXX on XXXXXXXXXX.  Currently its main assets are:

      i) land with an estimated FMV in XXXXXXXXXX of $XXXXXXXXXX; the FMV of this land was estimated to be $XXXXXXXXXX on XXXXXXXXXX and the cost of this land is $XXXXXXXXXX;

      ii) an investment portfolio of Holdco managed by Investco; at XXXXXXXXXX the securities in this portfolio had a FMV of $XXXXXXXXXX and a cost of $XXXXXXXXXX; and

(c)   XXXXXXXXXX located in XXXXXXXXXX which have a nominal value.

8.    Pursuant to the terms of the Will:

      a)    Ms. A and Mr. B are each to receive $XXXXXXXXXX per year from the capital of the Estate, plus XXXXXXXXXX of the net annual income earned from the capital of the Estate.

      For this purpose the assets and income of the Estate exclude the value and the income resulting from the shares of Holdco. These distributions commenced XXXXXXXXXX after Mr. X’s date of death.  The Will contemplates that should the general capital and income of the Estate (excluding the Holdco Shares) be exhausted by way of these annual payments during the lifetime of Ms. A and Mr. B, commencing XXXXXXXXXX thereafter an annual payment of $XXXXXXXXXX is to be paid from the retained earnings and capital of Holdco until the retained earnings and capital of Holdco are depleted;

      b)    Each of the Grandchildren received $XXXXXXXXXX plus accrued interest on their XXXXXXXXXX birthday.  Each of the five Grandchildren have received this distribution and there is no further obligation of the Estate with respect to this specific bequest;

      c)    Each of the Grandchildren received $XXXXXXXXXX plus accrued interest on their XXXXXXXXXX birthday.  Each of the five Grandchildren received this distribution and there is no further obligation of the Estate with respect to this specific bequest;

      d)    Each of the XXXXXXXXXX and the XXXXXXXXXX received a $XXXXXXXXXX distribution from the Estate.  There is no further obligation of the Estate with respect to these specific bequests;

      e)    Ms. A and Mr. B each received a $XXXXXXXXXX distribution from the Estate upon Mr. X’s death.  There is no further obligation of the Estate with respect to these specific bequests;

      f)    All of the liabilities of the Estate have been paid;

      g)    Should Ms. A predecease her XXXXXXXXXX children, they will each receive XXXXXXXXXX of her remaining interest in the Estate; and

      h)    Should Mr. B predecease his XXXXXXXXXX children, they will each receive XXXXXXXXXX of his remaining interest in the Estate.

9.    Pursuant to paragraph 249(1)(c), the Estate has a taxation year-end of XXXXXXXXXX.

10.   The Estate is resident in Province 1 and all Beneficiaries are resident in Canada.

PROPOSED TRANSACTIONS

11.   The Grandchildren will disclaim any capital and income residual interest that they would ultimately receive in the Estate (if they survive Ms. A and Mr. B and there are residual assets) for no consideration. They will make no direction regarding who is entitled to receive the benefit from disclaiming their interest.

12.   As a result of the disclaimer by the Grandchildren, the residue of the Estate will be subject to an intestacy because at that time there will be no beneficiaries other than Ms. A and Mr. B. Pursuant to the laws of Province 1, immediately after the disclaimer by the Grandchildren, the residual interests will vest in Ms. A and Mr. B as follows:

a) XXXXXXXXXX of the securities held in the investment portfolio will be distributed to Ms. A and XXXXXXXXXX of the said securities held in the portfolio will be distributed to Mr. B.

b) XXXXXXXXXX of the shares of Holdco held by the Estate will be distributed to each of Ms. A and Mr. B.

c) XXXXXXXXXX interest in the XXXXXXXXXX held by the Estate will be distributed to each of Ms. A and Mr. B.

Prior to making the distributions in (a), (b) and (c) above, the trustees of the Estate shall pass a resolution that the distributions of all of the residual assets will be in satisfaction solely of the capital interests of Ms. A and Mr. B in the Estate.

PURPOSE OF THE PROPOSED TRANSACTIONS

13.   The main purpose of the proposed transactions is the simplification of estate planning. Currently, the Estate assets are managed for the benefit of the XXXXXXXXXX families. Distribution of the assets to Ms. A and Mr. B will facilitate the separation of the assets and thus each family will be able to manage their investments in a manner consistent with their particular needs.

14.   If the Estate continues in its current form and its assets are not exhausted by XXXXXXXXXX, the Estate will have a deemed disposition of its assets on that date, the XXXXXXXXXX anniversary of Mr. X’s death. As the Estate indirectly holds an interest in the Land, this could cause a liquidity issue for the Estate. By distributing the shares of Holdco before that date, this deemed disposition will be deferred until the date of the actual disposition of the Land.  In the case of the shares of Holdco XXXXXXXXXX of such shares will be deemed to be disposed of on:

i)    the date of the death of Ms. A, or her spouse, in the case that Ms. A predeceases her spouse and the assets are transferred to her spouse or to a spousal trust;

ii)   the date of the death of Mr. B, or his spouse, in the case that Mr. B predeceases his spouse and the assets are transferred to his spouse or to a spousal trust.

15.   Each of Ms. A and Mr. B will have the benefit of their respective portions of the Estate assets during their respective lifetimes and have the potential to be able to make gifts to their children as they determine appropriate. On their deaths these assets and the balance of any assets they have accumulated in their own personal estates are to be distributed to their families and any other beneficiaries in accordance with their respective wills. This is acceptable to the five Grandchildren.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, the proposed transactions are completed in a legally effective manner as described above and there are no other transactions that may be relevant to the rulings given, our rulings are as follows:

A.    The execution of the disclaimers by the Grandchildren, described in 11 above, will not result in any of the Grandchildren being considered to have received any proceeds of disposition for purposes of subsections 40(1), 106(2) and 107(1).

B.    Subject to subsection 107(2.001), subsection 107(2) will apply to the distribution of the Estate assets to Ms. A and Mr. B as described in 12 above.

C.    The distribution of the Estate assets, as described in 12 above, will not result in the Estate, Ms. A or Mr. B being considered to have received any proceeds of disposition for purposes of section 106.

D.    Subsections 56(2), 105(1) and 246(1) will not apply in respect of the disclaimers described in 11 above.

E.    Subsection 245(2) will not apply as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein.  For greater certainty, the CRA has not confirmed or made any determination in respect of:

(a)   the FMV of any property referred to herein;

(b)   the legal validity of the proposed disclaimers under the laws of Province 1;

(c)   any income tax consequences relating to the facts or proposed transactions described herein other than those specifically described in the rulings given above; and

(d)   whether the Estate is a testamentary trust or a personal trust.

The above advance income tax rulings, which are based on the Act and Income Tax Regulations to the Act in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R6, dated August 29, 2014, and are binding on the CRA provided that the proposed transactions are completed within six months of the date of this letter.

Yours truly,

XXXXXXXXXX
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

SCHEDULE A – Parties to the Ruling

XXXXXXXXXX

1.    XXXXXXXXXX

2.    XXXXXXXXXX

Grandchildren of Deceased XXXXXXXXXX

1.    XXXXXXXXXX

2.    XXXXXXXXXX

3.    XXXXXXXXXX

4.    XXXXXXXXXX

5.    XXXXXXXXXX

All individuals listed above file their tax returns at the XXXXXXXXXX Tax Centre

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