2019-0795761R3 Variation of a trust

Principal Issues: A. Will the proposed amendments to the Trust result in a resettlement of the Trust or a disposition by the Trust of its property for purposes of the Act? B. Will the proposed amendments to the Trust result in a disposition by any Beneficiary of all or part of his, her or its beneficial interest in the Trust for purposes of the Act? C. Will subsection 107(2) apply to the distribution of the assets of the Trust to Daughters A, B, and C as contemplated herein in paragraph 18?

Position: A. No resettlement. B. No disposition. C. Yes.

Reasons: See below.

Author: XXXXXXXXXX
Section: 107(2) and 248(1) disposition

XXXXXXXXXX                                                                                                                                         2019-079576

XXXXXXXXXX, 2019

Dear XXXXXXXXXX:

Re:    XXXXXXXXXX (Trust account number XXXXXXXXXX)
          Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayer.  We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.

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 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, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v)    the subject of a Ruling previously issued by this Directorate.

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 definition unless otherwise indicated.

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

DEFINITIONS

In this letter, unless otherwise specified, all references to monetary amounts are in Canadian dollars and the following terms have the meanings specified:

“XXXXXXXXXX Trusts” means the Trust, any Hereditary Trust and any trust established pursuant to the First Trustee’s Wills;

“Beneficiaries” has the meaning ascribed to that term in the Trust Agreement;

“Daughter A” is XXXXXXXXXX;

“Daughter B” is XXXXXXXXXX;

“Daughter C” is XXXXXXXXXX;

“Dependent Beneficiaries” are Daughter A, Daughter B, and Daughter C, who are the adult daughters of Father;

“Division Date” has the meaning ascribed to that term in the Trust Agreement;

“Father” is XXXXXXXXXX;

“First Trustee” is XXXXXXXXXX;

“Hereditary Trust” has the meaning ascribed to that term in the Trust Agreement;

“Holdco” is XXXXXXXXXX, a taxable Canadian corporation;

“Mother” is XXXXXXXXXX;

“Perpetual Beneficiaries” are any one or more of the issue of the Dependent Beneficiaries, whether born before or after the establishment of the Trust;

“Trust” means the XXXXXXXXXX;

“Trust Agreement” means the Trust Agreement of the Trust established on XXXXXXXXXX as amended to date; and

“Trustees” means the trustees of the Trust and “Trustee” means any one of the Trustees of the Trust.

FACTS

1.    The Trust was established on XXXXXXXXXX.  The Trust is resident in Canada and is a personal trust as defined in subsection 248(1) of the Act.  The tax account number for the Trust is XXXXXXXXXX.  The Trust files its returns at XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.  Its mailing address is XXXXXXXXXX.

2.    Father and Mother are spouses and are both residents of Canada.

3.    The Trust was settled by XXXXXXXXXX, an arm’s length party, with a $XXXXXXXXXX.

4.    The Trustees of the Trust are Father, XXXXXXXXXX.

5.    The Beneficiaries of the Trust are as follows:

i)    Dependent Beneficiaries;

ii)    Perpetual Beneficiaries; and

iii)    In the event there are no Dependent Beneficiaries or Perpetual Beneficiaries, then a charity or charities as specified in Father’s Will (if none are specified, then as selected by the Trustees in their discretion).

6.    Daughter A, Daughter B, and Daughter C are siblings, daughters of Father, and are all residents of Canada.

7.    The Division Date of the Trust is the earliest of the following:

i)    The XXXXXXXXXX anniversary of the date of the Trust Agreement;

ii)    XXXXXXXXXX years after the death of the last survivor of the Dependent Beneficiaries and Perpetual Beneficiaries living on the date of the Trust Agreement; and

iii)    The day after the first date on which there is no Dependent Beneficiary and no Perpetual Beneficiary then living.

8.    Paragraph XXXXXXXXXX of the Trust Agreement provides that:

i)    The Trustees shall hold the Trust’s property and keep it invested; and

ii)    Subject to paragraph XXXXXXXXXX of the Trust Agreement, the Trustees shall pay to or apply for the benefit of the Beneficiaries the whole or part of the annual net income derived from the Trust property, in the following proportions and manner:

a)    The Trustees shall pay or transfer annually to Daughter A, during her lifetime, $XXXXXXXXXX for her own use absolutely;

b)    The Trustees shall pay or transfer annually to Daughter B, during her lifetime, $XXXXXXXXXX for her own use absolutely;

c)    The Trustees shall pay or transfer annually to Daughter C, during her lifetime, $XXXXXXXXXX for her own use absolutely;

d)    If any Perpetual Beneficiary has attained the age of XXXXXXXXXX, the Trustees may pay or transfer annually to or for the benefit of such Beneficiary, up to the amounts set out in Father’s Will, as the Trustees may determine in their discretion; and

e)    The Trustees may, in their sole discretion, pay or apply to or for the benefit of any Beneficiary from time to time an additional amount required for XXXXXXXXXX.

However, the above is to be received by any given Beneficiary from the totality of all XXXXXXXXXX Trusts and, accordingly, each amount received from the Trust shall be reduced by any amounts that such particular Beneficiary receives in respect of the year from any other XXXXXXXXXX Trusts.

9.    Paragraph XXXXXXXXXX of the Trust Agreement provides that any net income not paid to or applied for the benefit of one or more Beneficiaries in a year shall be accumulated and added to the capital of the Trust property.

10.    Paragraph XXXXXXXXXX of the Trust Agreement provides that no Beneficiary has an interest of any kind in the net income of the Trust until such time as the Trustees have determined to pay a portion of the net income to that Beneficiary.

11.    Paragraph XXXXXXXXXX of the Trust Agreement provides that the Trustees shall not pay to or apply for the benefit of any of the Beneficiaries any part of the capital of the Trust property until the Division Date.

12.    Paragraph XXXXXXXXXX of the Trust Agreement provides that on the Division Date, the Trustees shall distribute the Trust property to one or more of the Beneficiaries, to the exclusion of the other(s), in the manner and extent that the Trustees determine.

13.    Paragraph XXXXXXXXXX of the Trust Agreement allows Father, as First Trustee, to amend, vary, alter, or restate at any time, in his sole discretion, the terms of the Trust.

14.    The Trust owns XXXXXXXXXX Class XXXXXXXXXX common shares of the capital stock of Holdco.

PRELIMINARY TRANSACTIONS

15.    Prior to the proposed transaction in 17 below, a freeze will be implemented such that the Trust will own XXXXXXXXXX Class XXXXXXXXXX shares and XXXXXXXXXX Class XXXXXXXXXX shares of the capital stock of Holdco.  Articles of Amendment for Holdco will be filed to create the Class XXXXXXXXXX and XXXXXXXXXX shares prior to the transaction.

16.    Prior to the proposed transaction in 17 below, a new discretionary trust will subscribe for a Class XXXXXXXXXX common share of the capital stock of Holdco.  The income and capital beneficiaries of the new trust will be Mother and Father’s issue.

PROPOSED TRANSACTIONS

17.    The First Trustee shall amend the definition of Division Date in paragraph XXXXXXXXXX of the Trust Agreement to include the following:

iv)    Prior to the XXXXXXXXXX anniversary of the Trust; and

v)    Such earlier date as the First Trustee or a majority of the Trustees, in his or their absolute discretion, shall determine and select as the Division Date.

18.    On XXXXXXXXXX, once the Trust Agreement has been amended, the Trustees will distribute to the Dependent Beneficiaries, in accordance with the provisions of the Trust Agreement, the XXXXXXXXXX Class XXXXXXXXXX shares and XXXXXXXXXX Class XXXXXXXXXX shares of the capital stock of Holdco in satisfaction of their capital interests in the Trust.  The Trust will not elect under subsection 107(2.001) in respect of any of the property that is distributed.  Subsection 107(4.1) will not apply to the distribution of any of the property.

19.    Following the distribution, the Trust will be wound up and cease to exist.

PURPOSE OF THE PROPOSED TRANSACTIONS

20.    The purpose of the proposed transactions is to ensure that there will be no deemed disposition of the properties held by the Trust on XXXXXXXXXX pursuant to subsection 104(4) of the Act.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. The proposed amendment to the Trust in 17 above will not, in and by itself, result in a resettlement of the Trust or a disposition by the Trust of its property for purposes of the Act.

B.    The proposed amendment to the Trust in 17 above will not, in and by itself, result in a disposition by any Beneficiary of all or part of his, her or its beneficial interest in the Trust for purposes of the Act.

C.    Subsection 107(2) of the Act will apply to the distributions to Daughter A, Daughter B, and Daughter C as proposed in 18 above.

CAVEATS

Except as expressly provided herein, the above rulings do not imply acceptance, approval or confirmation of any other income tax implications of the facts, preliminary transactions and proposed transactions.  In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly, the determination of:

a)    the tax consequences of any amendments made to the Trust Agreement before the date of this letter;

b)    any tax consequences relating to the freeze described in 15 above; and

c)    any tax consequences relating to the new trust described in 16 above.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R9, Advance Income Tax Rulings and Technical Interpretations, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed within 6 months of the date of this letter.

Yours truly,

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

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