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Transfer to Settle Debt to Beneficiary

Trusts are used as part of tax planning, but the planning doesn’t stop with the set-up of a trust. Where a Canadian resident trust that meets the definition of a “personal trust” in subsection 248(1) of the Income Tax Act holds property that has appreciated in value since it was acquired by the trust, the gain may be further deferred. If the trust is to be wound up the trustee can distribute property to a capital beneficiary.

Question

A trust has an outstanding amount that is owed to a capital beneficiary in respect of a loan that was previously extended to the trust. Can the transfer of property by the trust to the capital beneficiary settle the debt owing and also constitute a rollover pursuant to subsection 107(2) of the Income Tax Act?

Answer

No. A settlement of debt does not represent a settlement of a capital interest. A capital interest is the right of a taxpayer as a beneficiary of a trust.

Testimonial

Sam Faris reduced the significant unreported income based on net worth audit to be nil. Sam’s approach in fighting these types of complex audits is unique and sophisticated. He found countless mistakes made by the auditor which were rectified when Sam appealed the audit decision. Instead of owing significant amount of taxes, Sam reduced it to zero. I highly recommend to hire Sam for this type of audits and any CRA problem.”

E.M., Ottawa