Oct 03, 2016
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“Tax practitioners often recommend the use of trusts.”
Tax practitioners often recommend the use of trusts in tax and estate planning for private clients to enhance confidentiality protection, reduce probate costs, split income and capital gains with lower rate family members, reduce tax on death and provide for children without giving up control of assets.
However, it is often critical to ensure that the trust attribution rule in subsection 75(2) of the Income Tax Act does not apply. This rule applies where a person who transferred property to the trust can receive it back, decide who can have it or must approve of its sale. If this provision applies, then any income, loss, capital gain or capital loss realized on the trust property will attribute back to the person who transferred the property to the trust. In addition, the trust will not be able to distribute its assets, tax free, to the beneficiaries unless the property is transferred to the contributor or the contributor’s spouse.
We discussed the application of subsection 75(2) in Tax Tip 04-12. Practitioners have struggled for decades as to what exactly is the correct interpretation of the provision in various fact situations. What exactly constitutes a transfer of property? Is a loan a “transfer”? Is a sale a “transfer”? For example, can a beneficiary of a trust sell, at fair market value (FMV), property to a trust and have subsection 75(2) not apply? Good question.
The Tax Court of Canada decision of Sommerer in 2011 addressed this last question and found that subsection 75(2) did not apply to a FMV transfer by a beneficiary to a trust. While that decision was certainly “taxpayer friendly”, many tax practitioners chose to wait for the Federal Court of Appeal (FCA) decision (given that the Crown appealed the Tax Court decision) before relying on it. On July 13, 2012, the FCA released its decision and dismissed the Crown’s appeal.
Assuming that the FCA decision in Sommerer is not challenged further and that the CRA does not distinguish it from cases with slightly different facts, sales of property to a trust at FMV should not be subject to the punitive results of subsection 75(2). On its face, this is very good news for taxpayers who use trusts in their tax and estate planning affairs.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.