2021-0879021C6 STEP 2021 - Q7 - Subsection 107(2)

Principal Issues: Whether subsection 107(2) applies on the transfer of property from an original trust to a newly created trust with the same beneficiaries as the original trust. The transfer is made in accordance with the terms of the trust. However, the new trust is not an identifiable beneficiary of the original trust and the creation of a new trust as a beneficiary of the original trust is not contemplated by the trust agreement of the original trust.

Position: Subsection 107(2) will not apply as the new trust is not a beneficiary for the purposes of applying subsection 107(2). The application of paragraph (f) of the definition of disposition in subsection 248(1) or subsection 107.4(3) can be considered.

Reasons: See analysis below.

Author: Campbell, Katie
Section: 107(2); 248(25); 248(1); 107.4(3)

2021 STEP CRA Roundtable – June 15, 2021

QUESTION 7. Subsection 107(2) and trust to trust transfers

A discretionary family trust, a personal trust resident in Canada, (the “Trust”) is settled by Mr. X.  The beneficiaries of Trust are the children of Mr. X (the “Beneficiaries”).   The trust agreement (the “Trust Agreement”) gives the trustees the power to distribute income or capital of the Trust to or for the benefit of the Beneficiaries.  The Trust Agreement does not contemplate that a trust created for the benefit of the Beneficiaries could be added as a beneficiary nor does it provide that a trust for the benefit of the Beneficiaries is a beneficiary of Trust.

The trustees of Trust intend to distribute the property of Trust to a newly created trust (the “NewTrust”) which has been settled for the benefit of the Beneficiaries, on a tax deferred basis pursuant to subsection 107(2) of the Act (footnote 1) .  None of subsections 107(2.001), and (4) to (5) are applicable to deny the application of subsection 107(2) to any distributions from Trust.   

Can the CRA confirm that subsection 107(2) will apply to the transfer of the property from Trust to NewTrust?

CRA Response

Where property is distributed by a personal trust to a beneficiary in satisfaction of all or part of their capital interest in that trust, subsection 107(2) should apply provided that none of subsections 107(2.001), (2.002), and (4) to (5) apply.  Under subsection 107(2), the trust is deemed to dispose of the distributed property for its cost amount and the beneficiary is generally deemed to have acquired the property at the same cost amount. 

As defined in subsection 108(1), for the purposes of subdivision k of the Act, a beneficiary under a trust includes a person beneficially interested in the trust.  Therefore, for the purposes of applying subsection 107(2), a beneficiary includes a person beneficially interested in the trust.

Paragraph 248(25)(a) describes a person or partnership beneficially interested in a particular trust as “any person or partnership that has any right … as a beneficiary under the trust to receive any of the income or capital of the particular trust either directly from the particular trust or indirectly through one or more trusts or partnerships.” (footnote 2) 

Based on the wording of paragraph 248(25)(a), the person having any right as a beneficiary under a trust to receive any income or capital of the trust, either directly or indirectly, must have that right as a beneficiary under a trust.   The Act does not define the term beneficiary for the purposes of paragraph 248(25)(a).  It is our view that the definition of beneficiary for the purposes of paragraph 248(25)(a) will be based on its ordinary meaning.  Whether a person is a beneficiary of a trust in its ordinary sense is determined based on the relevant facts and circumstances (in particular, the terms of the trust agreement) and the relevant trust law.

In this case, the Trust Agreement does not include a trust for the benefit of the children of Mr. X as a beneficiary nor does it contemplate the creation of such a trust to be a future beneficiary. Therefore, it is our view that subsection 107(2) will not apply on the transfer of property from Trust to NewTrust since NewTrust is not a beneficiary of Trust for the purposes of subsection 107(2).

Even though subsection 107(2) will not apply to the transfer, paragraph (f) of the definition of disposition in subsection 248(1) and subsection 107.4(3) may apply to allow the transfer to be completed on a tax deferred basis.  The determination of whether these provisions could apply on the transfer of property from Trust to NewTrust would require consideration of all the relevant facts and circumstances, including the terms and conditions that apply in respect of Trust and NewTrust.

Katie Campbell
2021-087902

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  The Act means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.
2  Based on the information provided, we have assumed that paragraphs 248(25)(b) and (c) do not apply.

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