1998 Ruling 9824953 - 21-YEAR RULE

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: 1. Will 107(2) of the Act apply to the distribution of shares to the Grandchildren? 2. Will 106(3) apply to the Trust as a result of the proposed transactions? 3. Will GAAR apply to the proposed transactions?

Position: 1. Yes. 2. Yes. 3. No.

Reasons: 1. Consistent with previous rulings in the context of the 21-year rule and Finance's technical notes. 2. The "Constructive receipt" argument applied to the situation. Consistent with our position re 104(6) and 104(24) of the Act w.r.t. trusts for minors set out in Technical News #11. Payment made by the Trust to an insurance company to purchase an annuity with the Daughter's attorney's written consent and direction.

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Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted trust and beneficiaries under the trust in respect of the income tax consequences arising out of the proposed transactions described below. We also acknowledge your correspondence of XXXXXXXXXX.

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

(a) in an earlier return of the taxpayers or related persons;

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;

(c) under objection by the taxpayers or related persons;

(d) before the courts; or

(e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons.

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

a) "Adjusted cost base" has the meaning assigned by section 54 of the Act.

b) "Capital property" has the meaning assigned by section 54 of the Act.

c) "Daughter" currently means XXXXXXXXXX.

d) "Grandchild" currently means XXXXXXXXXX, individually.

e) "Grandchildren" currently means XXXXXXXXXX, collectively.

f) "Great grandchildren" currently means XXXXXXXXXX, collectively.

g) "Great-great grandchildren" currently means XXXXXXXXXX.

h) "ITAR" means the Income Tax Application Rules.

i) "ITR" means the Income Tax Regulations.

j) "Mr. A" means XXXXXXXXXX.

k) "Opco1" and "Opco2" means XXXXXXXXXX.

l) "XXXXXXXXXX case" means XXXXXXXXXX.

m) "Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

n) "Trust" means the trust created by the terms of the XXXXXXXXXX last will and testament.

o) "Trustees" means XXXXXXXXXX.

p) XXXXXXXXXX.

The names and addresses of the taxpayers who are parties to this ruling request, as well as the tax services office or tax centre where their returns are filed, are listed in Schedule A.

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

1. Mr. A died in XXXXXXXXXX.

2. Mr. A left a will which made provision for his wife who is now deceased, and for his two daughters; one daughter (the "Daughter") is currently alive and in her XXXXXXXXXX, and the other one is now deceased.

3. The Trust is resident in Canada and is a "personal trust" as defined in subsection 248(1) of the Act.

4. In accordance with the terms of the will, the Trustees are currently holding the remainder of Mr. A's estate in the Trust, the main provisions of which are as follows:

a) One-half of the Trust fund is to be set aside at the death of one of the daughters and distributed to the Grandchildren in equal shares per stirpes. In accordance with the decision of the XXXXXXXXXX case pertaining to the division of assets, one of the Grandchildren is entitled to one-half of the value of the Trust fund and the other one-half is to be divided equally among the other three Grandchildren. Their shares in the one-half of the Trust fund set aside on the death of one of the daughters are immediately distributable in accordance with the decision of the XXXXXXXXXX case but at the present time are still held by the Trust;

b) The remainder of the Trust fund is to be held until the death of the Daughter, at which time the Trustees shall pay, divide and distribute the remainder of the Trust fund to among and between the Grandchildren in equal shares per stirpes;

c) The Trustees shall pay the net profits on the remainder of the Trust fund to the Daughter until her death; and

d) The Trustees shall pay all such amounts, if any, as shall be required by the Daughter or by any of the Grandchildren by reason of illness, for medical, surgical, dental, hospital and nursing services, and for supplies in connection therewith, and for transportation or other expenses caused by or resulting from such illness.

5. The Daughter and the four Grandchildren are all resident in Canada. The Grandchildren are all adults. The Daughter is in her XXXXXXXXXX and is incapable of managing her property. One of the Grandchildren (the "attorney") has a power of attorney over the Daughter's affairs.

6. There are currently XXXXXXXXXX Great grandchildren and one Great-great grandchild who have contingent interests in the Trust, XXXXXXXXXX of whom are minors.

7. The assets of the Trust consist of XXXXXXXXXX% of the shares of Opco1 and Opco2 and some miscellaneous assets. The shares are capital property to the Trust.

8. Opco1 and Opco2 are taxable Canadian corporations. The adjusted cost base ("ACB") of the shares of Opco1 and Opco2 which is based on V-day value is $XXXXXXXXXX and $XXXXXXXXXX respectively. The estimated fair market value ("FMV") of the shares of Opco1 and Opco2 is $XXXXXXXXXX and $XXXXXXXXXX respectively.

9. On XXXXXXXXXX, the Trustees filed an election under subsection 104(5.3) of the Act in order to defer the deemed disposition of assets of the Trust that, pursuant to subsection 104(4) of the Act, would have otherwise taken place on XXXXXXXXXX. At the time the election was filed, the Daughter was the only remaining exempt beneficiary pursuant to the definition of "exempt beneficiary" in subsection 104(5.4) of the Act.

10. Pursuant to XXXXXXXXXX, an application was made to the XXXXXXXXXX Court (XXXXXXXXXX) to vary the terms of the Trust so as to permit the Trustees to distribute property to the Daughter and the Grandchildren in satisfaction of all of their interests in the Trust.

11. The application to the XXXXXXXXXX Court (XXXXXXXXXX) was made to obtain its consent on behalf of the minor beneficiaries, the incapable Daughter, all unborn persons and any other person who may become entitled to an interest at some future date in the Trust. The court order was obtained on XXXXXXXXXX with the approval of the Children's Lawyer and the Daughter's litigation guardian who was appointed by the court for the purpose of the court application.

PROPOSED TRANSACTIONS

12. Pursuant to the court order described in paragraph 11 above, the Trustees will purchase a life annuity payable to the Daughter and will divide the rest, residue and remainder of the Trust property in accordance with the division of assets set out in the XXXXXXXXXX case. More specifically, the following transactions are proposed in accordance with the court order:

13. The Trustees will redeem a portion of the Trust's shares.

14. Subsequent to the redemption of shares described in paragraph 13 above, a portion of the proceeds of disposition will be used by the Trustees, with the Daughter's attorney's direction and consent, to purchase the Daughter's income interest in the Trust by way of a cash payment to an insurance company for the purchase of a life annuity payable to the Daughter which will qualify as a "prescribed annuity contract" under section 304 of the ITR. The annuity purchased will be based upon factors such as the Daughter's life expectancy and the historical income she has received from the Trust. After the purchase, the Daughter will be the owner and the annuitant under the life annuity.

15. Subsequent to the redemption of shares described in paragraph 13 above, a portion of the proceeds of disposition will be used by the Trustees to purchase fully paid permanent contingent life insurance policies on the joint lives of the Daughter and each Grandchild insuring the life of each Grandchild providing the Daughter is still alive at the time of the death of the Grandchild. The costs of the insurance policies will be paid by the Trust and allocated and charged against the Grandchildren's interests. The Trustees will be the irrevocable beneficiaries of the insurance policies.

16. Subsequent to the redemption of shares described in paragraph 13 above, the reserve of funds needed to see to the obligation of the Trust including the purchase of the annuity described in paragraph 14 above and the purchase of the insurance policies described in paragraph 15 above, the Trustees will distribute the remainder of the shares of Opco1 and Opco2 in the Trust to the Grandchildren in accordance with the division of assets set out in the XXXXXXXXXX case in satisfaction of their respective capital interests in the Trust.

PURPOSE OF THE PROPOSED TRANSACTIONS

17. The purpose of the proposed transactions is to distribute a portion of the Trust property to the Daughter and the Grandchildren in order to mitigate the tax consequences which will arise as a result of the deemed disposition of the Trust property on the deemed disposition day of XXXXXXXXXX pursuant to subsection 104(4) of the Act.

RULINGS GIVEN

Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as described herein, our advance income tax rulings are as follows:

A. The provisions of subsection 106(2) of the Act will not apply to the Daughter as a result of the proposed transactions described in paragraph 14 above.

B. The provisions of subsection 106(3) of the Act will apply to the Trust as a result of the proposed transactions described in paragraph 14 above.

C. The distribution of the Shares held by the Trust to the Grandchildren as described in paragraph 16 above will be subject to the provisions of subsection 107(2) of the Act.

D. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of Rulings A to C above as a result of the proposed transactions described herein.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and are binding on Revenue Canada provided that the proposed transactions are completed and effective before XXXXXXXXXX.

COMMENTS

Nothing in this letter should be construed as implying that Revenue Canada has agreed to or accepted:

(a) the determination of the FMV, ACB or V-day value of any property referred to herein, or

(b) any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.

Yours truly,

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

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