5 April 2002 External T.I. 2002-0127075 - Trusts & loans to person related to spouse

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Where the terms of a trust permit the property of a trust to be loaned to a person other than the income beneficiary described in 73(1.01)(c) or 70(6), would such a loan taint the trust such that 73(1) or 70(6) did not apply to the property transferred to the trust?

Position: lending or investment of trust property to a non-spouse on "commercial" terms does not taint a spousal trust (or any other trust described in 104(4)(a)) but if the terms of the trust permit the lending of trust property to a person other than the spouse on terms more favourable than that which would otherwise be available to that person commercially, the trust would not be a spousal trust.

Reasons: Whether trust property is invested in a financial institution, used in a business, or loaned to a third party, someone other than the spouse "uses" the property, but for a fee. Such use does not result in encroachment of the trust's income or capital nor does the user obtain a benefit - thus, it is our view, as supported by the case of Peardon v MNR, 86 DTC 1045, that use of trust property acquired thru a commercially-based transaction (with regard to terms and conditions under which property was lent, invested or rented) does not taint a spousal trust.

XXXXXXXXXX 2002-012707
Annemarie Humenuk
April 5, 2002

Dear XXXXXXXXXX:

Re: Loans Made by a Post-1971 Spousal or Common-law Partner Trust

This is in reply to your letter of December 21, 2001, in which you ask whether a loan to any of the family members of the income beneficiary of a post-1971 spousal or common-law partner trust at a rate equal to that charged by a chartered bank to its best customers (the "prime rate") would taint the trust as a post-1971 spousal or common-law partner trust for the purposes of subsections 70(6) and 73(1) of the Income Tax Act.

As explained in paragraph 16 of IT-305R4, Testamentary Spouse Trusts, the lending of money on commercial terms (including market rates of interest, appropriate securities and a reasonable repayment schedule), does not generally mean that the person borrowing the money has received or has the use of that property such that the trust would not qualify as a post-1971 spousal or common-law partner trust as defined in subsection 248(1). The comments in paragraph 16 of IT-305R4 apply equally to a transfer of property to an inter vivos or a testamentary trust under subsection 73(1) or subsection 70(6).

Generally, a loan is considered to be have been made on commercial terms when the terms and conditions are consistent with normal commercial practices that would prevail in a similar situation. Thus, the determination of whether a loan at prime rate is a loan made on commercial terms depends, in part, on whether the borrower meets the criteria which would typically be used by commercial lenders in determining whether borrower is entitled to the prime rate. When the terms of a trust are such that a loan can be made on non-commercial terms to anyone other than the spouse or common-law partner, the trust will not qualify as a post-1971 spousal or common-law partner trust, even though no actual loan is made.

We trust our comments will be of assistance.

T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate