2022-0929321C6 STEP 2022 – Q12 – Sale to Alter Ego Trust

Principal Issues: 1) In a situation where the settlor of an alter ego trust transfers property to the Trust for consideration, without electing out of the subsection 73(1) rollover, does CRA agree that the Transferred Property will be deemed to have been disposed of by the settlor for proceeds equal to their adjusted cost base to the settlor (absent an election to the contrary) even though the settlor received payment? 2) If the settlor later gifts the cash, say to an adult child, does this alter the answer?

Position: 1)Yes. 2) likely no.

Reasons: See below.

Author: Robinson, Katie
Section: 73(1), 73(1.01), 73(1.02)

2022 STEP CRA Roundtable – June 15, 2022

QUESTION 12. Sale to Alter Ego Trust

A transfer of capital property to an alter ego trust by the settlor occurs at cost absent an election for the transfer to occur at fair market value.

Given such, consider the following short fact pattern. A settlor settled an alter ego trust (the “Trust”) a few years ago. The trust agreement provides that the settlor is not entitled to receive or otherwise obtain the use of any of the capital of the Trust during their lifetime. The Trust has cash. The settlor later transfers appreciated non-depreciable capital property (the “Transferred Property”) to the Trust in exchange for cash. The acquisition of property by the Trust is consistent with the terms of the Trust. Does CRA agree that the Transferred Property will be deemed to have been disposed of by the settlor for proceeds equal to their adjusted cost base to the settlor (absent an election to the contrary) even though the settlor received payment?

If the settlor later gifts the cash, say to an adult child, does this alter the answer?

CRA Response

Unless otherwise stated, all statutory references herein are to the Income Tax Act (Canada).

Pursuant to subsection 73(1), an individual (other than a trust) can transfer capital property on a tax-deferred basis, where certain conditions are met. In order for subsection 73(1) to apply, the following conditions must be met:

1. at the time of the transfer of property, both the transferor of the property and the transferee must be resident in Canada;

2. the transferor must not elect out of the rollover rule; and

3. subsection 73(1.01) must apply in respect of the transfer (a “qualifying transfer”).

Subsection 73(1.01) provides that, subject to the requirements of subsection 73(1.02), qualifying transfers include, inter alia, transfers to a trust, created by the individual transferring the property, that meet the requirements of subparagraph 73(1.01)(c)(ii), such that the individual is entitled to receive all the income of the trust arising before the individual’s death and no person except that individual may receive or otherwise obtain the use of any of the income or capital of the trust before that individual’s death.

Subsection 73(1.02) imposes additional conditions that must be met in order for a trust to meet the requirements of subparagraph 73(1.01)(c)(ii). Generally:

* the trust must be created after 1999;

* the individual must be at least 65 years of age at the time the trust is created, or, the transfer of property by the individual must involve no change in beneficial ownership of the property and no person (other than the individual) or partnership has any absolute or contingent right as a beneficiary under the trust (determined with reference to subsection 104(1.1)); and

* the trust does not make an election under subparagraph 104(4)(a)(ii.1).

A trust described in subparagraph 73(1.01)(c)(ii) that meets all of the relevant conditions outlined above will generally be an “alter ego trust” as defined in subsection 248(1).

The term “transfer” has a broad meaning that encompasses virtually any means by which ownership or title to property is conveyed from one person to another, or to a trust. It therefore includes a sale of property, whether or not it was made at fair market value.

Further to the above, subsection 73(1) sets out the rules for determining a taxpayer’s proceeds of disposition and the transferee’s cost of acquisition when capital property is transferred from a taxpayer to an alter ego trust. Thus, assuming that the requirements of subsection 73(1) are otherwise met, and that the trust agreement allows for such a sale, the proceeds of disposition of the Transferred Property would be deemed to be equal to the adjusted cost base of the capital property to the taxpayer immediately before the transfer. Further, the Trust would be deemed to have acquired the Transferred Property at that time for an amount equal to such proceeds of disposition.

Provided that the sale of the Transferred Property is complete, our response would not differ if the settlor subsequently gifts the cash to an adult child.

Katie Robinson
2022-092932

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