29 March 1999 External T.I. 9826545 - STATUS OF PRE-72 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 a pre-1972 trust has or will receive property by way of gift if it receives property, or revokes its right to receive property, pursuant to certain assignments.

Position: No position taken; general comments provided.

Reasons: Insufficient information.

XXXXXXXXXX 		982654
T. Murphy
Attention:  XXXXXXXXXX 

March 29, 1999

Dear XXXXXXXXXX:

Re: Status of an Inter Vivos Trust

We are writing in response to your letter of October 2, 1998, concerning the status of an inter vivos trust (the “Pre-72 Trust”) which in your opinion currently meets the conditions in subsection 122(2) of the Income Tax Act (the “Act”). Specifically, you have requested confirmation that the Pre-72 Trust will not be considered to have received property by way of gift for purposes of paragraph 122(2)(d) of the Act in the following scenario:

Prior to 1972, the grandchild agreed to assign her right to any inheritances she might be entitled to receive under the wills of grandfather and grandmother (the “Estates”) to the trustees of the Pre-72 Trust in exchange for an immediate capital distribution from a second inter vivos trust (the “Second Trust”). The assignments are irrevocable without the consent of the trustees of the Pre-72 Trust. The grandchild’s interests in the Estates have recently vested. Grandchild is the sole income beneficiary of the Pre-72 Trust.

It is your opinion that the Pre-72 Trust will continue to meet the conditions in subsection 122(2) of the Act notwithstanding the receipt of property pursuant to the assignments. In particular, it is your opinion that the receipt of property is not “by way of gift” as the contractual agreement between the grandchild and the trustees of the Second Trust requires the distribution of property to the Pre-72 Trust. You also quote paragraph 8 of Interpretation Bulletin IT-406R2 as support for your position.

That paragraph states: “...the word ‘gift’ is not considered to include a property received as a bequest under the will of a deceased taxpayer or under the terms of a testamentary trust....”

Additionally, in the event that the trustees of the Pre-72 Trust give their consent to the assignments being revoked, such that the Pre-72 Trust no longer has a right to receive property pursuant to the assignments, you ask for confirmation that paragraph 122(2)(d) of the Act will not apply to the Pre-72 Trust. In your opinion the revocation of the right to receive under the assignments is not a gift to the Pre-72 Trust as the capital of the trust is not increased by the revocation.

Our Comments

The scenario described above appears to be an actual fact situation. We do not provide binding interpretations of the Act except by way of advance income tax rulings, as discussed in Information Circular 70-6R3. We offer the following general comments which may be of assistance to you.

With respect to gifts, it seems clear that subsection 122(2) of the Act is intended to prevent the favorable treatment of gifts made since June 18, 1971 as a result of their being put into a trust which otherwise meets the conditions in subsection 122(2) of the Act.

The development of the administrative position set out in the above noted bulletin did not contemplate this type of scenario; i.e., where a trust would receive property by virtue of an assignment and not specifically as a bequest by will or under the terms of a testamentary trust. The simple scenario contemplated was where a settlor had established an inter vivos trust prior to section 122 of the Act being enacted and the settlor’s will provided that his or her assets pour-over into the inter vivos trust. If we did not take the position that such testamentary gifts were excluded from paragraph 122(2)(d) of the Act, it was felt that the consequences would be onerous in situations where the settlor lacked the capacity to amend his or her will. Also, given that testamentary trusts and trusts which met the criteria in subsection 122(2) of the Act were both subject to the graduated rates of income tax there was no obvious policy concern with the position.

Generally, we would not regard a person as making a gift of property where the person is obligated by virtue of a bona fide contractual agreement to transfer the property. Thus, a review of all the facts may support the conclusion that the grandchild is not gifting property to the Pre-72 Trust.

However, it is not clear to us why the trustees of the Second Trust would direct, or otherwise agree to, the grandchild executing assignments in favor of the Pre-72 Trust as opposed to itself. This raises the question of whether the Second Trust is making a gift to the Pre-72 Trust. As is evident from the comments noted above, gifts between inter vivos trusts were not contemplated in the development of the administrative position, even if both trusts were established prior to June 18, 1971.

In summary, there are issues to be addressed before any determination could be made on the status of the Pre-72 Trust.

With respect to the possible revocation of the assignments, it is not clear to us why the trustees of the Pre-72 Trust would agree to do so, as such revocation could mean that other beneficiaries of the Pre-72 Trust would receive less than what they would otherwise be entitled to receive. The questions that would arise on a revocation of the assignments include whether the Pre-72 Trust is disposing of its right to receive the property that is the subject of the assignments, whether a benefit is being conferred on the grandchild or whether there has otherwise been a disposition of the capital interests in the Pre-72 Trust.

It would appear that if no property is received by the Pre-72 Trust by virtue of the revocation of the assignments, there could be no property received by gift. However, it is not clear whether the rights which have recently vested in the grandchild and in the Pre-72 Trust pursuant to the assignments should be viewed as “property received” by the Pre-72 Trust.

If you have a proposed transaction and you wish to submit an advance income tax ruling request we will consider the various issues further. Alternatively, you may wish to discuss the issues with the local tax services office as the local office is responsible for the review of completed transactions.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R3.

Yours truly,

R.S. Biscaro, CA
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch