CaseNotes For October, 2019

2019 Ruling-0795761R3-Variation of a Trust- by Jeanne Posey This CRA Ruling concerns a fairly straight forward 21-year trust deemed disposition plan which required an amendment to the trust deed. The CRA was asked to rule on whether the amendment results in a "resettlement" of the trust and whether subsection 107(2) applies to the trust property distribution.

Facts:

The existing trust (the "Existing Trust") was a Canadian resident trust settled by a non-arm's length party and met the definition of a "personal trust" pursuant to subsection 248(1) of the Act. The Existing Trust had dependent beneficiaries, perpetual beneficiaries, and charities as contingent beneficiary.

The dependent and perpetual beneficiaries were residents of Canada for income tax purposes.

The division date ("Division Date") of the Existing Trust was the earliest of the following:

the 21st anniversary of the date of the Existing Trust; a set number of years after the death of the last survivor of the dependent beneficiaries and perpetual beneficiaries living on the date of the Trust deed; and the day after the first date on which there are no dependent beneficiaries and no perpetual beneficiaries then living. The deed provided for the distribution of income and capital of the Existing Trust, but also stated that the Trustee shall not pay to or apply for the benefit of any of the beneficiaries any part of the capital of the Existing Trust property prior to the Division Date.

The Existing Trust allowed the Trustee, to amend, alter, or restate at any time in his sole discretion the terms of the trust.

Proposed transactions:

In contemplation of the 21-year anniversary of the Existing Trust, the trustee contemplated a series of transactions. They were as follows:

A freeze would be implemented such that the Existing Trust would own a particular class of shares in the capital stock of a Holdco. The Articles of Amendment for Holdco would be amended to provide a new class of shares that a new discretionary trust (the "New Trust") would subscribe for. The income and capital beneficiaries of the New Trust would be the same as the Existing Trust. The trustee would amend the Division Date of the Existing Trust to be: i. prior to the 21st Anniversary of the Existing Trust; or

ii. such earlier date as the Trustee in his absolute discretion shall determine.

Once the trust deed of the Existing Trust was amended, the trustee would distribute to the dependent beneficiaries, in accordance with the provisions of the trust agreement, a specified number of shares in the capital stock of Holdco in satisfaction of their capital interests in the Existing Trust. Following the distribution, the Existing Trust would cease to exist and be wound up. Analysis:

Resettlement of a Trust: A resettlement of a trust occurs when a variation of the trust is of significant magnitude to cause a fundamental change in the terms of the trust. If this were to occur, there would be an actual disposition of the trust's property from the "old" trust to the "resettled" trust. As discussed in Purves (Re), [1984] B.C.J. No. 3059 (SC), a "resettlement" occurs when there is, in effect, a creation of an entirely new trust. While this determination will always be fact driven, courts have held that it is permissible to view an arrangement not at as resettlement, but rather as a variation. In Ball's Settlement (Re), [1968] All ER 438 (Ch.D.), Megarry J said "if an arrangement changes the whole substratum of the trust, then it may well be a that it cannot merely be regarded as varying that trust. But, if an arrangement, while leaving the substratum, effectuates the purpose of the original trust by other means, it may still be possible to regard that arrangement as merely varying the original trusts, even though the means employed are wholly different and even though the form is completely changed."

Therefore, if there is no fundamental change to the trust as a result of the variation, there will be no resettlement of the trust.

Disposition by the beneficiary of all or part of his or her beneficial interest due to the amendments: In order for the proposed amendments to amount to a "disposition", as defined in the Act, there would need to be a resettlement of the trust, meaning there is a variation of significant magnitude that would amount to a fundamental change in the terms of the trust. Where the variation has not resulted in a fundamental change to the trust, there will be no resettlement, but rather a variation, which would not cause a disposition by the beneficiaries of all or part of their beneficial interest.

Provided the trust allows for a variation of its terms, such variations may be effected by resolution. In all other cases, variations and amendments must be approved by the Court of Queen's Bench, pursuant to subsection 42(2) of the Trustees Act RSA 2000 c T-8.

Will subsection 107(2) of the Act apply to the distribution: Pursuant to subsection 107(2) of the Act, a personal trust may distribute trust property on a tax-deferred basis to Canadian resident beneficiaries in satisfaction of all or part of their capital interest in the trust. If applicable, the trust is deemed to have disposed of trust property, and the beneficiary is deemed to have acquired the property at an amount equal to the cost amount at the...