1998 Ruling 9806533 - PROTECTIVE TRUST

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 Department.

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

Principal Issues:

Whether paragraph (e) of the definition of "disposition" in section 54 of the Act applies on a transfer of property to a trust.

Position:

Yes

Reasons:

The deed of settlement of trust contains the terms specified in the Technical News No. 7 that are required for the trust to be considered a protective trust.

XXXXXXXXXX
XXXXXXXXXX 3-980653
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs\Madams:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

We are writing in reply to your letters dated XXXXXXXXXX requesting an advance income tax ruling on behalf of XXXXXXXXXX, of the proposed trust to be settled by XXXXXXXXXX.

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request:

(i) is in an earlier return of the taxpayers or a related person;

(ii) is being considered by a Tax Services Office or Tax Centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) is under objection by the taxpayers or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and

(v) is the subject of a ruling previously issued by this Directorate to the taxpayers or a related person.

In this letter, unless otherwise stated, all references to a statute are to the Income Tax Act (R.S.C. 1985, 5th Supplement, c. 1, as amended) (the "Act"), and the following terms have the meanings specified:

- "disposition" has the meaning assigned by section 54 of the Act;

- "Deed" means the deed of settlement of trust, a draft copy of which was attached to your ruling request;

- "Lifting of the Triggering Event" means the ceasing of any and all of the events or circumstances which gave rise to a Triggering Event;

- "Property" means the assets of XXXXXXXXXX located in XXXXXXXXXX consisting of XXXXXXXXXX;

- "Revocation" means the first exercise, if any, by the Settlor of the power described in subsection 8.(a) of the Deed whereby the Settlor notifies the Trustee to return the Property received by the Trustee and any accumulations or increments from any such property;

- "Revocation Date" means the moment in time, if any, on which a Revocation shall have become effective;

- "Settlor" means XXXXXXXXXX;

- "Triggering Date" means the moment in time on which a Triggering Event shall have occurred;

- "Triggering Event" means the happening of any of the following events or circumstances, namely:

(i) XXXXXXXXXX

(ii) XXXXXXXXXX

(iii) XXXXXXXXXX

(iv) XXXXXXXXXX

(A) XXXXXXXXXX

(B) XXXXXXXXXX

(C) XXXXXXXXXX

(D) XXXXXXXXXX

(v) XXXXXXXXXX

(vi) XXXXXXXXXX

(vii) XXXXXXXXXX

- "Trust" means the proposed trust to be settled by XXXXXXXXXX;

- "Trustee" means XXXXXXXXXX;

- "Trust Capital" means, at any relevant time, the Property and all of the other property of the Trust including any accumulated income which has been added by the Trustees to the Trust Capital but not including any portion thereof that is Trust Income that has not been accumulated and added by the Trustee to the Trust Capital;

- "Trust Fund" means, without limitation, the Trust Income and the Trust Capital;

- "Trust Income" means the annual income from the Trust Capital which has not been accumulated and added by the Trustee to Trust Capital and all income earned on the income set aside for but not yet distributed to the beneficiary.

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

FACTS AND PROPOSED TRANSACTIONS

1. XXXXXXXXXX is a Canadian individual resident in XXXXXXXXXX. His address is XXXXXXXXXX social insurance number is XXXXXXXXXX files his annual income tax return at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.

2. The Trustee is a company incorporated under the XXXXXXXXXX and has its registered office at XXXXXXXXXX. Its business number is XXXXXXXXXX. The Trustee files its annual income tax return at the XXXXXXXXXX Tax Centre at XXXXXXXXXX.

3. The Settlor will cause the settlement of a protective trust (the Trust) in accordance with the Deed and will transfer the Property to the Trustee.

4. The trustee to the Trust will be the Trustee, a corporate body with the capacity and power under its constating documents to undertake trust business.

5. Under the terms of the Deed, the Trustee will have no significant powers or responsibilities and will be able to undertake no action without instructions from the Settlor prior to a Triggering Date (the "Initial Period"). Specifically, during the Initial Period, the Trustee shall in all respects administer the whole or any part of the Trust Fund as the Settlor in his sole, absolute and uncontrolled discretion may direct either verbally or otherwise, failing which direction the Trustee, until otherwise directed by the Settlor, shall retain the properties constituting the Trust Fund, or any other money or property which may become part of the Trust Fund, in whatever form they may be in and the Trustee shall have no power or discretion to convert such properties into any other form or to reinvest them.

6. During the Initial Period, the Trustee will pay to, apply for the benefit of, or set aside for, the Settlor the whole of the Trust Income unless the Settlor, in his sole, absolute and uncontrolled discretion, directs in writing to accumulate and add to the Trust Capital all the Trust Income.

7. During the Initial Period, the Trustee's only function will be to hold legal title to the Property.

8. During the Initial Period, the Settlor will be the sole beneficiary of the Trust and will have the power to cause the Property to revert to him at any time.

9. Upon the Triggering Date, the Initial Period will cease. The period of time during which the Triggering Event will be in effect (from the Triggering Date until either the Revocation Date or the lifting of the Triggering Event) will be hereinafter referred to as the "Subsequent Period."

10. During the Subsequent Period, the Trustee will pay to, apply for the benefit of, or set aside for, the Settlor the whole or any part of the Trust Fund as the Settlor, or his legal representative in the case of the occurrence of the Triggering Event listed in subparagraph (i) of the definition of Triggering Event, in his sole, absolute and uncontrolled discretion may direct either verbally or otherwise, failing which direction the Trustee will, until otherwise directed by the Settlor, pay to, apply for the benefit of, or set aside for, the Settlor the whole or any part of the Trust Fund as the Trustee will in its absolute discretion determine and, any Trust Income not so paid to, applied for the benefit of, or set aside for, the Settlor, will be accumulated and added by the Trustee to the Trust Capital.

11. During the Subsequent Period, the Trust Fund will revert to the Settlor if the Trust is terminated prior to the Settlor's death.

12. The Trust will terminate upon the death of the Settlor unless it is terminated at an earlier date.

13. Upon a lifting of the Triggering Event, the functions of the Trustee will revert to those applicable during the Initial Period, unless otherwise specifically directed by the Settlor.

14. The Settlor will have the power to cause the Revocation of the trust at any time and to elect to either keep the property for himself or to have the property distributed to him by the Trustee and immediately, on his behalf, transfer such property to a regular trust governed by the provisions of Schedule II of the Deed (a draft copy of which was attached to your ruling request).

PURPOSE OF THE PROPOSED TRANSACTIONS

XXXXXXXXXX intends to undertake the proposed transactions for the purposes of protecting his assets in case of incapacitation XXXXXXXXXX.

RULINGS GIVEN

Provided that the above statements of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure thereof and that the proposed transactions are carried out as set forth herein, the following rulings are given:

A. Provided that there will be no variation of the Trust to add another beneficiary or to modify in any manner or form whatsoever the interest of the Settlor as the beneficiary of the Trust, the transfer of the Property by the Settlor to the Trust as described in paragraph 3 above will not be a disposition of property for the purposes of Subdivision C of the Act by virtue of paragraph (e) of the definition of disposition in section 54 of the Act.

B. Until the Trust is terminated, any income or loss from the Property or property substituted therefor and any taxable capital gain or allowable capital loss arising from dispositions of the Property or property substituted therefor shall, during the Settlor's lifetime while he is resident in Canada, be deemed to be income or loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of the Settlor pursuant to subsection 75(2) of the Act.

C. Any distribution of the Trust Fund by the Trust to the Settlor, in satisfaction of all or any part of his capital interest in the Trust, will be subject to the provisions of subsection 107(2) of the Act.

D. As a result of the proposed transactions described herein, in and by themselves, subsection 245(2) of the Act will not apply to redetermine the tax consequences described in the rulings given.

The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding on the Department provided the proposed transactions are completed on or before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effects of any proposed amendments thereto.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

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