2016-0669881I7 75(2) applicability to trust

Principal Issues: 1. Does 75(2)(b) apply where the trust indenture requires unanimous agreement of the trustees, including the settlor, where the settlor can remove and replace the co-trustee at any time? 2. Does 75(2)(b) apply where the trust indenture requires unanimous agreement of the trustees, including the settlor, where the co-trustee is the settlor’s spouse, and therefore does not deal at arm’s length with the settlor? 3. Where the co-trustee is the settlor’s spouse, is there a presumption that the co-trustee does not deal at arm’s length with the settlor?

Position: 1. 75(2) likely applicable 2. Question of fact. 3. Yes.

Reasons: 1. Based on the facts, including the terms of the trust as a whole, the settlor has retained effective control over the property of the trust; and the settlor while alive retains broad power to amend the trust indenture. Accordingly, 75(2)(a)(i) and (ii) , and 75(2)(b) apply. 2. The fact that the co-trustee is the settlor’s spouse would mean that the co-trustee does not deal at arm’s length with the settlor. 3. Yes by virtue of 251(1)(a), but this does not directly impact on 75(2).

Author: deLang-Lenters, Saskia
Section: 75(2)

XXXXXXXXXX Tax Services Office                                                                                2016-066988
                                                                                                                                        S. deLang-Lenters
Attention: XXXXXXXXXX

Audit case: XXXXXXXXXX

February 16, 2017

Dear XXXXXXXXXX,

We are writing in reply to your enquiry regarding the above referenced audit case in which you requested our views regarding the interpretation of subsection 75(2) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Suppl.) (the “Act”, to which all statutory references herein relate).

Specifically, in the context of a personal family trust, you have asked whether paragraph 75(2)(b) applies where the trust indenture requires unanimous agreement of the trustees, including the settlor/trustee, where the settlor can remove and replace the co-trustee at any time.

Our comments

Some of the terms of the trust indenture in the current case relevant to the incident enquiry provide for the following:

* the settlor is one of two original trustees of the trust
* in the event that there is more than one trustee of the trust, all decisions respecting the trust, and the exercise of any of the powers of the trustees, shall require unanimous trustee decision making
* the power to remove or replace, or to appoint additional trustees of the trust, vests solely with the settlor while alive
* the power to amend the terms of the trust indenture vests solely with the settlor while alive

Unanimous trustee decision making

The Directorate’s views regarding a trust for which the settlor is one of two or more trustees include those made in document E 2008-0292061E5 which states in part: “Recognizing that it is a question of fact as to whether the terms of a particular trust have been so conditioned as to enable the settlor to determine, after the creation of the trust, who will receive the trust property, the fact that the settlor is one of two or more trustees, acting in their fiduciary capacity to decide issues by majority will not normally, in and by itself, give rise to the application of subsection 75(2) of the Act. It could still apply however where the terms and conditions of a trust expressly require the contributor’s consent to any decision made by the trustees as a whole. This would include the situation where decisions are made by a majority of trustees provided that the trustee-contributor is one of that majority but would not include the situation where the terms of the trust require the decisions of the trustees to be unanimous. Thus a determination of whether this condition is met in respect of any particular property can only be made on a case-by-case basis following a review of all the facts and circumstances surrounding a particular situation, including a review of the complete trust indenture.”

In the current case the trust indenture provides for unanimous trustee decision making and specifies that the settlor is one of two original trustees of the trust. The terms of the trust indenture do not expressly require the contributor’s consent to any decision made by the trustees as a whole. We understand that the taxpayer’s representative has advised that as the trust indenture requires unanimous decision making by the trustees, the settlor/trustee cannot act independently of the co-trustee and that therefore subsection 75(2) does not apply.

In our opinion, where the terms of a trust indenture require unanimous trustee decision making and are otherwise silent regarding the decision making power of the settlor/trustee, this fact alone does not lead to a presumption that subsection 75(2) will not apply. Rather, a determination as to whether subsection 75(2) applies to the trust follows a review of all the facts and circumstances surrounding a particular situation, including the terms of the trust indenture as a whole.

Additional powers under the trust indenture

In the current case, the trust indenture provides that the power to remove or replace, or to appoint additional trustees of the trust, vests solely with the settlor while alive. The Directorate has stated that where a settlor/trustee has the power to appoint, remove, or replace any trustee, it is a question of fact whether the property held by the trust could only be disposed of with the consent or in accordance with the direction of the settlor/trustee (such that paragraph 75(2)(b) may apply).

Moreover, the Directorate has stated that subsection 75(2) may apply if a settlor retains a power of amendment with respect to the trust, pursuant to which the property may, following any such amendment to the trust terms, revert to the settlor or pass to beneficiaries to be determined by the settlor after that time. In the current case, the trust indenture provides the settlor with broad power to amend the terms of the trust indenture. Under the terms of the trust indenture, any such amendment may be retroactive and may be effected without court approval and without providing notice to any beneficiary or other interested party. Given the settlor’s power to amend the trust and to remove any trustee, in our opinion the settlor is empowered in this case to unilaterally amend any provision of the trust indenture at their sole discretion. Such powers, in conjunction with the unanimous decision making requirement under the trust, support the view that the settlor/trustee effectively controls the trust.

Accordingly, based on the facts in this case, including the terms of the trust as a whole, in our opinion the property of the trust is held on condition that it may revert to the settlor for purposes of subparagraph 75(2)(a)(i). In addition, the property of the trust is held on condition that the settlor may determine to whom it may pass after the creation of the trust for the purposes of subparagraph 75(2)(a)(ii), or during the existence of the settlor, shall not be disposed of except with the settlor’s consent or in accordance with the settlor’s direction for the purposes of paragraph 75(2)(b).

We trust these comments will be of assistance to you.

Yours truly,

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

c.c. Joanne Verkerk
       Jane Colton
       Domestic Compliance Programs Branch

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