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.
Principal Issues: In the situation where property is transferred from a spousal trust to another trust, will there be a change in beneficial ownership such that paragraph (f) of the definition of disposition will apply and the spousal trust will not realize a disposition as a result of the transfer?
Position: While it is a question of fact as to whether a particular set of transactions results in a change of beneficial ownership, if paragraph (f) of the definition of disposition applies to the transfer of assets from a spousal trust to another trust, the other trust will be deemed to be a continuation of the initial spousal trust such that any distribution out of the new trust to a person other than the spouse who is the beneficiary of the initial trust while that spouse is still alive will result in deemed proceeds of disposition equal to FMV in respect of the disposition that arises by reason of that distribution.
Reasons: 248(25.1)
XXXXXXXXXX 2008-028854
Annemarie Humenuk
Attention: XXXXXXXXXX
October 14, 2008
Dear XXXXXXXXXX :
Re: Concept of Beneficial Ownership
This is in reply to your letter of July 30, 2008 in which you ask for our comments on the concept of beneficial ownership as it relates to the situation you described in a July 9, 2008 meeting between yourself and Ms Murphy and Mr. Biscaro of this Directorate.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
In the July 9th meeting, you described a series of proposed transactions under which a settlor would establish a second trust (Trust2) in addition to the post-71 spousal or common-law partner trust (Trust1) that had previously been established as part of an estate freeze. Next, all or part of the property of Trust1 would be transferred to Trust2 of which Trust1 was the sole beneficiary. Following that action, the settlor would acquire Trust1's beneficial interest in Trust2 and then Trust2 would distribute the property acquired from Trust1 to the settlor.
You asked us to comment on whether the transfer of property from Trust1 to Trust2 would result in a change of beneficial ownership such that paragraph (f) of the definition of disposition in subsection 248(1) of the Act would not apply. In addition, assuming that the transfer of property from Trust1 to Trust2 does not result in a disposition for the purposes of the Act, you ask whether Trust2 would be a personal trust at the time of the distribution of the property to the settlor such that subsection 107(2) would apply to that distribution.
It would appear that the purpose of the transactions is to transfer property from Trust1 to the settlor on a rollover basis contrary to intent of subsection 107(4) of the Act. If the transfer of property from Trust1 to Trust2 is established to be a transfer to which paragraph (f) of the definition of disposition in subsection 248(1) of the Act applies, subsection 248(25.1) would deem Trust2 to be a continuation of Trust1 such that the rules applicable to the distribution of property from Trust1 would also apply to the distribution of property from Trust2. As a result, it is our view that any subsequent distribution of property from Trust2 to the settlor would be subject to subsection 107(2.1) of the Act by reason of the application of subsection 107(4) and Trust2 would realize any accrued gain or loss at the time of that distribution. In view of this conclusion, we are not prepared to comment on your questions at this time other than to note that it a question of fact in any particular situation as to whether a change of beneficial ownership has occurred.
Please note that if you wish us to consider these or other proposed transactions further, you should request an advance income tax ruling according to the procedures set out in Information Circular 70-6R5, Advance Income Tax Rulings. This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.
We trust our comments will be of assistance.
R. Maley
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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