2015-0610391R3 Whether 75(2) will apply to new trusts

Principal Issues: 1.Determination of whether subsection 75(2) would apply in a proposed reorganization involving the set-up of new family trusts. 2. If the 108(1)(g) exclusion is applicable so that 21 year rule will not apply.

Position: 1. 75(2) does not apply. 2. No ruling given since no definite time period proposed.

Reasons: 1. Conditions not met per trust terms. 2. Opinion given.

Author: XXXXXXXXXX
Section: 75(2); 108(1)(g)

XXXXXXXXXX                                                                                                                               2015-061039

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
         XXXXXXXXXX (the “Taxpayer”)

This is in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the Taxpayer. 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 return of the Taxpayer or a related person,

(ii)  being considered by a tax services office or taxation centre in connection with a previously filed tax return of 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 considered by the Directorate in respect of 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 except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

In this document, unless otherwise indicated, all statutory references are to the Income Tax Act, (R.S.C. 1985, 5th Supplement, c.1. as amended, the “Act”).

DEFINITIONS

In this letter, expressions that are assigned a meaning under the Act or the Regulations thereunder have the same meaning herein and the following terms have the meanings specified:

a) “Beneficiaries” shall mean:

(i)   XXXXXXXXXX

(ii)  XXXXXXXXXX

(iii) XXXXXXXXXX

(iv)  XXXXXXXXXX

(v)   XXXXXXXXXX

(vi)  XXXXXXXXXX

(vii) the issue of any of the foregoing persons;

(viii)      any corporation or company of which all of the shares are owned directly or indirectly by one or more of the foregoing individuals, and/or a trust contemplated in the sub-item (ix) hereof save and except that such corporation shall be excluded as a Beneficiary in respect of: 1) its own issued share capital held by the trust; 2) any debt obligations or other liabilities owed by it to the trust; 3) any income or capital paid or distributed by such corporation to the trust; and 4) any property substituted, directly or indirectly, for any of the forgoing, including any substituted property within the meaning of subsection 248(5) of the Income Tax Act. For greater certainty, any reference herein to a person referred to in (i) to (vii) above shall be read as including a reference to a corporation described in this paragraph (viii) controlled by such a person;

(ix)  a trust of which one or more of the foregoing constitute all of the beneficiaries.

In the event that there are no living First Rank Beneficiaries or Second Rank Beneficiaries at any time prior to the Trust Liquidation Date, XXXXXXXXXX, the brother of the Settlor, and his issue shall be added as Beneficiaries;

b) "Cancol" means XXXXXXXXXX;

c) "Canco2" means XXXXXXXXXX;

d) “Deeds” shall have the meaning assigned in 6 below;

e) “Family Trustees” shall mean XXXXXXXXXX and their successors appointed by or further to the Deeds to act as a Family Trustee thereunder;

f) “First Rank Beneficiaries” shall mean Mr. A and Mrs. A;

g) "Holdco" means XXXXXXXXXX, a corporation formed under the laws of Canada, a Canadian-controlled private corporation and a taxable Canadian corporation;

h) “Independent Trustees” shall mean XXXXXXXXXX and their successors appointed by or further to the Deeds to act as an Independent Trustee thereunder;

i) "Mr. A" means XXXXXXXXXX, an individual resident in Canada who files his tax returns at the XXXXXXXXXX Tax Centre;

j) "Mrs. A" means XXXXXXXXXX, an individual resident in Canada and Mr. A's spouse;

k) “Net Annual Income” in respect of a New Trust shall mean:

(i)   all dividends (other than stock dividends and winding-up dividends), interest, royalties, as well as all other income computed in accordance with generally accepted accounting principles derived from the New Trust;
      less the aggregate of:

(ii)  all expenses incurred or payable in connection with the protection, management, and administration of the New Trust as the Trustees determine are chargeable to income;

(iii) such further or other sums in each year as the Trustees in their discretion consider to be proper allowances, deductions, disbursements and/or outgoings in accordance with generally accepted accounting principles; and

(iv)  without limiting the generality of the foregoing, such sums in each year as the Trustees in their discretion determine to set aside in accordance with the powers contained in Article XXXXXXXXXX of the Deeds.

For the purposes of the New Trusts and for greater certainty, Net Annual Income shall not include income or earnings of corporations, partnerships or other entities in which a New Trust shall have an interest;

l) “New Trusts” shall have the meaning assigned in 5 below;

m) “Second Rank Beneficiaries” shall mean the Beneficiaries other than the First Rank Beneficiaries;

n) “Settlor” shall mean Mr. A or Mrs. A (as described in 5 below);

o) "Trust1" means XXXXXXXXXX, a trust formed under the laws of the Province of XXXXXXXXXX and resident in Canada, the principal beneficiaries of which are Mr. A and members of Mr. A's family;

p) "Trust2" means XXXXXXXXXX, a trust formed under the laws of the Province of XXXXXXXXXX and resident in Canada, the principal beneficiaries of which are Mr. A and members or Mr. A's family;

q) “Trust Capital” of a New Trust means the Trust Fund other than the undistributed Net Annual Income for the current year or the immediately preceding fiscal year of the New Trust;

r) “Trustees” of a New Trust shall mean the initial trustees as described in 6(b) below and other additional, surviving, continuing or substituted trustees appointed under the Deed of the New Trust;

s) “Trust Expiration Date” in respect of a New Trust shall mean the latest possible date permitted by XXXXXXXXXX or, as the case may be, the latest possible date permitted under the proper law then applicable to the New Trust;

t) “Trust Fund” or “Trust Patrimony” of a New Trust shall mean:

(i)   the initial sum transferred to the Trust Patrimony, and the accumulated income thereon (if any);

(ii)  any further, substituted or additional property and accumulated income thereon (if any) which the Settlor may transfer or cause to be transferred to the Trust Patrimony, or vest or cause to be vested in, or otherwise acquired by, the Trustees to be held upon the trusts and with and subject to the powers and provisions hereof and any property substituted therefor;

(iii) any other property acquired by the Trustees pursuant to, and in accordance with, the provisions of the Deed of the New Trust; and

(iv)  the property and accumulated income thereon (if any) for the time being and from time to time into which the sum transferred to the Trust Patrimony and the further, substituted or additional or other property (if any) aforesaid and accumulated income thereon (if any) may be converted;

u) “Trust Liquidation Date” shall mean the date that the Trustees may, at any time in their discretion, determine by decision evidenced by an instrument to be the date as of which all of the property constituting the Trust Patrimony, is to be distributed, which date shall not be later than the Trust Expiration Date; and

v) “Vesting Date” has the meaning assigned in 6(e) below.

The relevant facts, proposed transactions and the purpose of the proposed transactions are as follows:

FACTS

1.    Cancol is a corporation formed under the laws of Canada. It is a Canadian-controlled private corporation and a taxable Canadian corporation. Its business number is XXXXXXXXXX. Canco1's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. Cancol is an investment holding corporation.

2.    Cancol's principal asset is XXXXXXXXXX Class XXXXXXXXXX preferred shares in the capital of Holdco. XXXXXXXXXX. Cancol has two classes of issued and outstanding shares in its capital:

a) Trust 1 owns all the issued and outstanding XXXXXXXXXX class XXXXXXXXXX common shares in the capital of Cancol and thereby controls Cancol; and

b) Canco2 owns all the issued and outstanding XXXXXXXXXX non-voting, fixed redemption value, redeemable, retractable preferred shares in the capital of Cancol, which have adjusted cost base ("ACB") and paid-up capital ("PUC") equal to their redemption value.

3. Canco2 is a corporation formed under the laws of Canada. It is a Canadian-controlled private corporation and a taxable Canadian corporation. Its business number is XXXXXXXXXX. Canco2's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. Canco2 is an investment holding corporation. Canco2's principal asset is XXXXXXXXXX class XXXXXXXXXX common shares in the capital of Holdco.

4. Canco2 has one class of issued and outstanding shares in its capital. Trust2 owns all the issued and outstanding XXXXXXXXXX common shares in the capital of Canco2 and thereby controls Canco2.

PROPOSED TRANSACTIONS

Formation of New Trusts

5. Two sets of XXXXXXXXXX substantially identical irrevocable new trusts (collectively, the "New Trusts") will be formed under the laws of a province of Canada and will be resident in Canada. One set will be settled by Mr. A and the other by Mrs. A (each trust to be settled by the transfer of Cdn $XXXXXXXXXX to the trust by the Settlor). The New Trusts will be "grantor trusts" for US tax purposes.

6. The principal terms of the deeds of trust for the New Trusts (the “Deeds”) are summarized as follows:

a) Settlor: Shall mean Mr. A or Mrs. A (as applicable). Pursuant to Article XXXXXXXXXX of the Deeds, the Trustees of the New Trusts may accept any other property transferred by the Settlor but may not accept property from any other person.

b) Trustees: The New Trusts will be administrated by XXXXXXXXXX Trustees, XXXXXXXXXX of whom will be Family Trustees and XXXXXXXXXX of whom will be Independent Trustees. Family Trustees must be members of Mr. A's immediate family.  Independent Trustees must be persons who are not members of the Mr. A's extended family.  The initial Trustees will be Mr. A, Mrs. A, XXXXXXXXXX of their children, and XXXXXXXXXX arm's length persons. A majority of the Trustees will be Canadian resident individuals.

      c) Beneficiaries:

      (i) First Rank Beneficiaries: Shall mean Mr. A and Mrs. A.

(ii) Second Rank Beneficiaries: Shall mean children, grandchildren and remoter issue of Mr. A and Mrs. A, as well as corporations, all of the shares of which are owned, directly or indirectly, by one or more members of the individual Beneficiaries, and trusts for the benefit of one or more of the individual Beneficiaries.

      d) Distributions:

(i) Net Annual Income, will include all dividends (excluding stock dividends and winding-up dividends, but including capital dividends), interest, rental and other income determined in accordance with generally accepted accounting principles.

(ii) First Rank Beneficiaries may receive discretionary distributions of Net Annual Income during the lifetime of the Settlor.

(iii) No distribution of Net Annual Income, nor any distribution of Trust Capital may be made to other Beneficiaries during the lifetime of the Settlor. Pursuant to Article XXXXXXXXXX of the Deeds, no payment, transfer or distribution of Trust Capital may be made during the lifetime of the Settlor.

(iv) Trustees may either distribute Net Annual Income to the First Rank Beneficiaries, or accumulate the same and add to Trust Capital.

(v) Following the death of the Settlor, Trustees may make distributions of Net Annual Income and Trust Capital to any one or more of the Beneficiaries (save and except that with respect to the New Trusts to be settled by Mr. A, Net Annual Income but not Trust Capital may be paid to Mrs. A). 

(vi) Provision will be made to retain in the trust Net Annual Income or Trust Capital allocated to a Beneficiary in the event that the Trustees consider that such Beneficiary may not be able to deal with his or her affairs properly.

      e) Vesting of Interests:

(i) Provision will be made for the right to vest all trust interests prior to the twenty-first anniversary of the trust ("Vesting Date") per Article XXXXXXXXXX of the Deeds.

(ii) In the event that the Settlor is alive on the Vesting Date, the Net Annual Income will be vested in the Settlor and the Trust Capital in one or more of the Beneficiaries excluding the Settlor, prior to the Vesting Date. In the event that the Settlor has passed away, the Net Annual Income and Trust Capital will be vested in one or more of the Beneficiaries (save and except that with respect to the New Trusts to be established by Mr. A, Net Annual Income but not Trust Capital may be paid to Mrs. A).

(iii) Upon the death of one or both First Rank Beneficiaries, in whom the Net Annual Income may have vested, the Trustees shall pay or transfer to the estate of such vested First Rank Beneficiary an amount equal to the fair market value of such First Rank Beneficiary’s interest in the Net Annual Income computed immediately prior to his or her death.  The same will apply mutatis mutandis with respect to the allocation and distribution of any vested interests of a Second Rank Beneficiary applicable subsequent to the death of the Settlor.

      f) Term:

(i) The New Trusts will be of indefinite duration and may be maintained for three ranks of beneficiaries. The Deeds provide for allocation of any previously non-vested trust property on the Trust Expiration Date.

(ii) Following the death of the Settlor, Trust Capital may be distributed to Beneficiaries and if fully distributed, the New Trusts will terminate.

      g) Replacement of Trustees and Decision-making:

(i) Each of Mr. A and the child who will be one of the initial Trustees will have the right to appoint his successor Family Trustee.

(ii) Other Family Trustees will be appointed by unanimous resolution of Family Trustees, failing which, by majority vote of all Trustees.

(iii) Family Trustees may unanimously dismiss an Independent Trustee.

(iv) There will be standard provisions for termination of Trustee office (i.e. death, resignation, insolvency, etc.).

(v) There will be provisions relating to US tax residence or US citizenship constituting an event of termination of office that will apply only to Independent Trustees, not Family Trustees.

(vi) Trustees will generally adopt resolutions by majority vote (subject to the foregoing). In the event of a tie vote in which two Family Trustees vote together, the resolution will be carried or defeated in accordance with the vote of such two Family Trustees. 

      h) Powers of Trustees:

(i) Trustees will have very broad power to administer the trust property.

(ii) Trustees will be able to change the locus of administration of the trust from one jurisdiction to another.

(iii) Trustees will have the power to change the trust governing law.

(iv) Trustees will be able to make amendments to administrative provisions of the Deeds.

      i) Other:

(i) Trust property vested or distributed to a Beneficiary will remain the sole and exclusive property of such Beneficiary and will not form part of any community of property, family property or any other marital property regime per Article XXXXXXXXXX of the Deeds.

(ii) The Deeds will provide for exemption from the seizure of trust property (or property substituted therefor) in the patrimony of Beneficiaries per Article XXXXXXXXXX of the Deeds.

(iii) The Deeds will distinguish between amendment for administrative and substantive provisions per Article XXXXXXXXXX of the Deeds. Pursuant to Article XXXXXXXXXX of the Deeds, the New Trusts may be amended, varied or altered by unanimous agreement of the Trustees, however, no such amendment, variation or alteration may revoke the New Trusts nor change their Beneficiaries or diminish their potential entitlements.

7. The only substantive difference between the two series of New Trusts is that whereas Mrs. A will only be an income beneficiary under the New Trusts settled by Mr. A, under the New Trusts settled by Mrs. A, Mr. A will also be a capital beneficiary after the death of Mrs. A per Article XXXXXXXXXX of the Deeds.

Freeze of Cancol and Canco2

8. Cancol and Canco2 will amalgamate under their governing corporate law to form one single corporation ("Amalco") that will be a Canadian-controlled private corporation and a taxable Canadian corporation.

9. As a result of the amalgamation:

      a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Cancol and Canco2 immediately before the amalgamation will become property of Amalco by virtue of the amalgamation;

      b) all of the liabilities (except amounts payable to any predecessor corporation) of Cancol and Canco2 immediately before the amalgamation will become liabilities of Amalco by virtue of the amalgamation; and

        c) all of the shareholders (except any predecessor corporation), who owned shares of the capital stock of Cancol and Canco2 immediately before the amalgamation, will receive shares of the capital stock of the new corporation because of the merger.

10. The authorized capital of Amalco will consist of an unlimited number of XXXXXXXXXX.

11. As a result of the amalgamation of Cancol and Canco2 to form Amalco:

      a) Trust1 will exchange its XXXXXXXXXX class XXXXXXXXXX common shares in the capital of Canco1 for class XXXXXXXXXX fixed-value redeemable-retractable preferred shares in the capital of Amalco having ACB and PUC equal to the ACB and PUC of the XXXXXXXXXX class XXXXXXXXXX common shares in the capital of Cancol, respectively; and

      b) Trust2 will exchange its XXXXXXXXXX common shares in the capital of Canco2 for class XXXXXXXXXX fixed redemption value redeemable, retractable preferred shares in the capital of Amalco having ACB and PUC equal to the ACB and PUC of the XXXXXXXXXX common shares in the capital of Canco2, respectively.

12. Upon the amalgamation of Canco1 and Canco2 to form Amalco, each of the New Trusts will subscribe for XXXXXXXXXX class XXXXXXXXXX common shares in the capital of Amalco in consideration for $XXXXXXXXXX.

ADDITIONAL INFORMATION

13. Also upon the amalgamation of Cancol and Canco2 to form Amalco, a series of XXXXXXXXXX newly settled trusts for the benefit of Mr. A and his family will subscribe for new special participating shares in the capital of Amalco that will track the value of the life insurance policies owned by Amalco.

PURPOSE OF THE PROPOSED TRANSACTIONS

The principal purpose of the proposed transactions is to effect a standard "freeze reorganisation" in respect of Cancol and Canco2 in favour of the New Trusts, which will be "grantor trusts" for US tax purposes. Another purpose of the proposed transactions is to simplify Mr. A's holding company structure.

RULING GIVEN

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

A.    Subsection 75(2) will not apply as a result of the proposed transactions, in and of themselves, to the property transferred to the New Trusts by the Settlors, or to any property substituted therefor.

The above advance income tax ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R6, dated August 29, 2014, and is binding on the Canada Revenue Agency (“CRA”) provided that the proposed transactions are completed within six months of the date of this letter.

OPINION

In our view, provided that:

i) there are no changes to the facts and proposed transactions;

ii)   there are no relevant changes to paragraph (g) of the definition of “trust” in subsection 108(1) of the Act;

iii)  subparagraphs (g)(iii), (iv) and (vi) of the definition of “trust” in subsection 108(1) are not applicable to the New Trusts; and

iv)   the Trustees exercise their power to vest indefeasibly all the property of the New Trusts in the Beneficiaries (as described in subparagraph 6(e) above) prior to the 21st anniversary of the establishment of the trusts, subsection 104(4) as currently enacted, will not apply to the New Trusts by reason of the exclusion found in paragraph (g) of the definition of “trust” in subsection 108(1).

The preceding commentary under the heading “OPINION” is only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor binding on the CRA.

CAVEATS

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above. In particular we express no opinion with respect to:

1.    whether the New Trusts will be “grantor trusts” under the taxation laws of the United States;

2.    any tax implications relating to the proposed freeze reorganisation transactions described in paragraphs 8 through 11 above;

3.    any tax implications relating to the proposed subscription for new shares in Amalco described in paragraph 13 above;

4.    any tax implications in respect of Trust1 or Trust2; or

5.    the adjusted cost base or paid-up capital for purposes of the Act of any shares referred to herein.

Yours truly,

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

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