Section 107

The sole beneficiary of an inter vivos trust (the "Trust"), whose interest under the Trust had vested indefeasibly, died, as a result of which his capital interest passed as part of his estate to his beneficiary. The sole asset of the trust was all the shares of a corporation (the "Property"). What is the cost to the estate of the deceased beneficiary of the Property distributed by the Trust in satisfaction of the capital interest therein of the estate?

CRA noted that the deceased was deemed on death to have disposed of his capital interest for its fair market value which, under s. 107.4(4) "was at least equal to the FMV of the Property of the Trust" and that, under s. 70(5)(b), "the estate was deemed to have acquired the capital interest at its FMV."

The Trust was deemed by s. 107(2)(a) to have disposed of its Property to the estate for its cost amount. After noting that "paragraph 107(1.1)(b) would not deem the cost of the interest in the Trust of the estate to be nil because it would acquire the interest from a person who was the beneficiary immediately before such acquisition," and that under s. 108(1) – "cost amount" – (a), "the cost amount of the [estate's] interest in the Trust was deemed to refer to the cost amount, immediately before the distribution, of each of the properties distributed to the beneficiary," CRA stated (TaxInterpretations translation):

…as in this case, the cost amount of the Property to the Trust would correspond to the cost amount to the estate of the capital interest in accordance with subsection 108(1), the application of paragraph 107(2)(b) would ensure that the cost of the property to the estate would be equal to the ACB of its capital interest, and thus, generally, to its cost determined in accordance with paragraph 70(5)(b).

The proceeds of disposition of the capital interest by the Trust also would be equal to the cost of the interest established under s. 70(5)(b).

Where a discretionary personal trust issues a note to a beneficiary in satisfaction of her capital interest, CRA considers that "the issuance of a note does not constitute the distribution of property of a trust to a beneficiary," so that s. 107(1) would not apply to deem her to have a high ACB for her capital interest, and s. 107(2) would not apply to the note issuance. See detailed summary under s. 108(1) – cost amount.

When a personal trust with appreciated property is wound-up and a portion of the property is transferred to the capital beneficiary is settlement of a debt owing to him or her. Does the s. 107(2) rollover apply? After noting that Chan indicated that a distribution under s. 107(2) is an allotment made in accordance with the beneficiary's interest and not made for consideration, CRA stated:

Under the law of equity, fiduciary duties are imposed on a trustee and are enforceable by the beneficiaries of a trust. In our view, the settlement of the debt owing by the trust to the beneficiary would not constitute a distribution undertaken by the trustee under a fiduciary duty to a beneficiary qua beneficiary, but rather, the fulfilment of requirements imposed on a debtor.

It cannot be said that a transfer that settles a debt can also constitute a distribution for purposes of subsection 107(2) of the Act. …The settlement of the debt by the transfer of property to the creditor does not occur by virtue of rights of the holder of the interest as a beneficiary under the trust. It occurs by virtue of the rights held as a creditor.

The Deceased had three wills in respect of defined components of her estate (the "Trust"), including a second will in respect of the "Secondary Estate." CRA found that the second will did not accord the trustees the discretion to make a gift to specified Charities, so that s. 118.1(5) did not deem distributions made to the Charities to have been gifts made by the Deceased.

Respecting the potentially competing application of ss. 118.1(3) and 107(2) on the distribution of capital property of the trust to discretionary capital beneficiaries including charities, where the will accords the trustees with the discretion to make charitable gifts, CRA stated that this determination should be made based on the "specific wording of the trust agreement and ... whether the intention of the trustee was to have the trust make a distribution to the charity as a donation of capital property of the trust, or in settlement of a capital interest which the charity may have in the trust."

After referring to 2013-0488061E5 (below) and 2013-0488381E5, CRA stated:

[A] transfer of property by a trustee in settlement of a debt cannot also be a distribution for purposes of subsection 107(2)…; it is one or the other. A distribution is the fulfilment of a fiduciary duty owed to the beneficiary in respect of the trust property. Thus, for the portion of a transfer of value that settles a debt owing by the trust, the preamble to subsection 107(2) of the Act is not met, and by extension, paragraph 107(2)(a) will not apply.

In commenting further on its position in 2013-0488061E5 (immediately below) and 2013-0488381E5 that the distributions of trust property in satisfaction of trust debt were not eligible for rollover treatment under s. 107(2), CRA stated:

It cannot be said that a transfer that settles a debt can also constitute a distribution for purposes of subsection 107(2) of the Act. In order for both a distribution for purposes of subsection 107(2) and a settlement of debt to occur, it is our view that two transfers of property must occur. Note that the settlement of the debt by the transfer of property to the creditor does not occur by virtue of rights of the holder of the interest as a beneficiary under the trust. It occurs by virtue of the rights held as a creditor.

A child of the settlor of a discretionary trust who now is the sole trustee and one of the beneficiaries distributes all the trust real property to herself prior to the 21st anniversary date of the trust, with a portion of that distribution being in repayment of all the trust debt owing to her. After stating that "where property is distributed by a trust to a beneficiary in satisfaction of their capital interest in that trust, subsection 107(2) should apply provided that the preconditions for application are met," CRA went on to indicate in the following example (described in greater detail in the full text) that there would be no rollover to the trust under s. 107(2)(a) with respect to the transfer of that portion of the real property which repaid the debt:

The trust transfers a property to the beneficiary with a cost amount of $75 and a fair market value of $120, with a portion of the property repaying a $15 debt owing by the trust to the beneficiary. Under paragraph 107(2)(a) the trust is deemed to have disposed of $105/$120 of the property (being the portion distributed in partial or total satisfaction of the beneficiary's interest) for proceeds equal to its proportionate cost amount, being $65.63 ($75 x (105/120)). As the $15 debt was settled with a portion of the asset with a cost amount of $9.37 ($15/$120 x $75), the trust would recognize a gain of $5.63 (proceeds of $15 less cost of $9.37) on the disposition of that portion of the asset required to settle the debt.

Respecting a distribution of Canadian real property by a personal trust resulting in a disposition of the beneficiary's capital interest, CRA rejected a suggestion that s. 107(2)(a) deemed there to be a disposition of the property before its actual distribution, with the result that there was no disposition for purposes of the Act as at that time there was no change in the beneficial ownership of the property:

The phrase "immediately before that time" as used in paragraph 107(2)(a) of the Act, qualifies only the words "... its cost amount to the trust..." for the purposes of determining the proceeds of disposition. It is our position that paragraph 107(2)(a) does not deem a disposition of property to occur by the non-resident trust to the beneficiary prior to the actual disposition time....[W]hen the non-resident trust actually makes the distribution of the real property to the beneficiary, subsection 116(3) of the Act will need to be complied with. CRA has also taken the position that section 116 will also need to be complied with upon the disposition of the capital interest in the trust by the non-resident beneficiary.

A non-resident inter vivos trust distributes its shares of a private Canadian real estate corporation (Canco) in satisfaction of the capital interest of its sole non-resident benficiary. S. 107(2.1) rather than (2) applied:

[S]ubsection 107(2) is not applicable in this case because the shares of Canco would not qualify as property described in any of subparagraphs 128.1(4)(b)(i) to (iii). The conclusion that the Canco shares might qualify as "Canadian real, immovable or resource property" is not relevant for the application of subsections 107(2), 107(2.1) and 107(5), as this expression is not used under those provisions.

A trust distributes shares of a Canadian corporation to its beneficiary on the condition that the beneficiary assumes indebtedness on a loan owing by the trust. The amount of the debt assumed generally will be an eligible offset used in calculating the beneficiary's proceeds of disposition of a part of its capital interest.

S.105(1) does not apply to a distribution of property to which s. 107(2) is applicable.

In finding that s. 107(2)(b) rather than 69(1)(c) applied to the acquisition by a resident of Canada of property in satisfaction of an interest in a non-resident estate, RC stated that "the reference to a trust in subsection 107(2) of the Act includes a non-resident trust even if it is not subject to income tax in Canada".

S.107(2)(b) will apply to determine the cost of property distributed to a Canadian beneficiary of a non-resident personal trust. However, because the non-resident trust is not a "taxpayer" (i.e., it does not carry on business in Canada, does not hold taxable Canadian property and is not subject to s. 94 of the Act), ITAR 26(3) and (5) would not apply to step up the cost base of the property to the beneficiary.

It is a question of law whether, upon the variation of a trust, the distribution of property can be said to be made under the terms of a testator's will or another trust, for the purposes of the meeting of "testamentary trust", "personal trust" and s. 248(8)(a).

A variation of trust affecting only administrative or investment powers, or containing provisions for naming replacement trustees, or extending or amending powers of the trustees (such as an authorization to "freeze" some or all of the assets of the trust) would not normally result in the creation of a new trust. However, serious consideration would be given to the addition of discretionary beneficiaries given that there would be a resulting disposition of interests in the trust.

Where a personal trust is wound up and the assets distributed to the sole beneficiary, such property will be considered to have been received by the beneficiary in exchange for his capital interest pursuant to s. 107(2), with the result that the rollover will be available.

Where a member of an agency co-operative receives her proportionate share of machinery of the co-op on withdrawal therefrom, the rules in s. 107(2.1) rather than s. 107(2) will apply.

S.107(2.1) acts in concert with s. 52(6) to ensure that distributions of income and taxable capital gains retain their identity as income for tax purposes.

A personal trust holds a principal residence of a specified beneficiary (as defined in subpara. (c.1)(ii) of the "principal residence" definition in s. 54), and has several other beneficiaries who are not specified beneficiaries.

If the trust distributes the principal residence to all the beneficiaries equally and makes a s. 107(2.01) designation, the designation will not be invalidated because the other beneficiaries are not specified beneficiaries (as only one such beneficiary is required). Respecting the reference in s. 107(2.01) to a distribution "by the trust to the taxpayer," the singular includes the plural.

If no election is made, then each beneficiary claiming the principal residence exemption must, in his or her own right, satisfy the requirements of ss. 40(2)(b) and (c), although s. 40(7) will deem a residence acquired by a beneficiary in satisfaction of a part of a capital interest in the trust to have been owned continuously since the trust last acquired it.

As there is no prescribed form, how is the election made? CRA indicated that the trust should include in a letter attached to the T3 Return: a declaration that it is electing under s 107(2.11); its name and trust account number; the name and residence status of the beneficiary receiving the distribution; and the distributed property's description, ACB and FMV.

CRA sets out, inter alia, the information that CRA requires for a s. 107(2.11) election. A letter containing this information should be included with the taxpayer's T3 form.

Can a trust make the s. 107(2.001) election on a property by property basis? As there is no prescribed form, how is the election made? CRA stated:

…The words "a property" refers to a singular property, such that the election can be used in respect of only one property of all the property distributed. For example, if the property being distributed is shares of a corporation, the trust may elect in respect of a single share… .

As a prescribed form is not available for the election, a letter should be filed with the trust's … Return for the year the distribution occurs… . A list of the information that should be included in the letter is provided on page 31 of the 2013 T3 Trust Guide... .

///?p=18479">18 April 2013 T.I. 2012-0470391E5): The s. 107(2.001) election can be applied on a property-by-property basis - for example, on a single share or several shares, but not on a fraction of a share.

There are currently no prescribed forms for s. 107(2.001) or s. 107(2.11). Instead, a letter should be filed with the trust's T3 form. CRA sets out detailed requirements for a s. 107(2.11) (see the letter for a full list). Information to be included in a s. 107(2.001) election is set out in the T3 Trust Guide (at the time of writing, p. 28 of cra-arc.gc.ca/E/pub/tg/t4013/t4013-12e.pdf).

As there is no prescribed form, how is the election made? CRA indicated that the beneficiary should include in a letter attached to beneficiary's T1 Return (or in an election sent separately if the return is filed electronically): a declaration that the beneficiary is electing under s 107(2.11); his or her name, address and ID number (e.g., SIN); the distributed property's description, cost amount and FMV; the ACB of his or her capital interest in the trust; a description , address and country of residence of the trust and the name and address of the trustees.

CRA stated:

Under paragraph 107(2.002)(b), the cost amount of the capital interest to the beneficiary is deemed, for purposes of subparagraph 107(l)(a)(ii), to be nil. Generally, the beneficiary's proceeds of disposition in respect of the capital interest are calculated in accordance with paragraph 107(2.l)(d). The beneficiary will be treated as having disposed of the capital interest for an amount equal to the fair market value of the property, less the portion of the distribution that is a payment to which paragraph (h) or (i) of the definition of "disposition" in subsection 248(1) applies, and any eligible offset as defined in subsection 108(1). As a result, the beneficiary may realize a capital gain on the disposition of their capital interest in the trust.

Subsection 107(2.002) lacks a prescribed form. For the taxation year in which the non-resident trust distributes property, the beneficiary should send a letter to CRA with their return (or mail separately if the return was filed electronically) stating:

• a declaration to elect under subsection 107(2.002) of the Act;
• the name and address of the beneficiary;
• the beneficiary's CRA identification number (for example, social insurance number, business number etc.);
• the taxation year;
• a description of the property being distributed in satisfaction of the capital interest in the trust;
• the cost amount of the property to the trust;
• the fair market value of the property at the time of the distribution;
• the adjusted cost base of the beneficiary's capital interest in the trust;
• description and name of the trust;
• name and address of the trustee(s); and
• country of residence of the trust.

Also included is a general description of the gains consequences of making the election.

where a cottage is contributed to an inter vivos trust by a Canadian-resident individual (B) who is one of the beneficiaries, then the s. 107(2) rollover will be available if the cottage is distributed to B out of the trust (e.g., in advance of the 21-year deemed disposition date under s. 104(4), given that B will be "the person...from whom the particular trust...received the property); however, the rollover will be available if the cottage is distributed out to another capital beneficiary (D) at a time that the contributor (B) is still living as the quoted condition will be satisfied. CRA stated:

It should be noted that the fact that D has never contributed any property to the trust is not relevant in this case, as the property referred to in subparagraph 107(4.1)(c)(i) is the property referred to in pargraph 107(4.1)(b), which is the cottage that was contributed to the trust by B: Ref 1999-0013085 ...and 2002-0118255.

S.107(4.1) does not apply where a trust distributes property back to the settlor.

Where there are identical properties some of which were transferred to the trust by the settlor and some of which were not, it is RC's practice to allow the trust to identify which properties were distributed, except that s. 245 will be applied where the only purpose of the transactions is to shift the adjusted cost base of property from the settlor to another taxpayer or vice versa.

S.75(2) can be considered to be applicable even if there has been no income attribution by the trust to the settlor under that provision.

After being referred to proposed amendments to s. 107(5) to be effective for distributions made after February 27, 2004, CRA stated:

we agree with your conclusion that where property distributed by a non-resident trust is either shares of the capital stock of a non-resident owned investment corporation or property described in subparagraphs 128.1(4)(b)(i) to (iii), under either the currently enacted version or the proposed amendments to subsection 107(5), subsection 107(2) of the Act would apply to the distribution (if the conditions therein are met and subsection 107(4.1) is not applicable).