Principal Issues: Whether the trust created by an individual, on the receipt of insurance proceeds, payable upon his death to one of his children will be viewed by the Canada Revenue Agency as a testamentary trust or an inter vivos trust.
Position: The trust created will be viewed as a testamentary insurance trust provided the trust is a valid trust and was created by the individual whose life is insured.
Reasons: A trust created pursuant to the individual's will or other testamentary instrument will not lose its testamentary trust status solely be reason of the receipt of the proceeds of an insurance policy on that individual (who was the policyholder), where the trust is the designated beneficiary under the policy and the trust was not created or settled before the death of the individual.
XXXXXXXXXX
2009-035081
W. King
January 6, 2011
Dear XXXXXXXXXX :
Re: Testamentary Insurance Trust
This is in response to your correspondence received on December 7, 2009. It is our understanding, from your discussion with William King, the documents previously forwarded to you on December 14, 2009 did not sufficiently address the hypothetical situation as presented. Given the situation as presented, you have asked for our comments on whether the type of trust, if indeed one was created, would be a testamentary trust or inter vivos trust.
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
A testamentary trust is a trust that arises on and as a consequence of the death of an individual with certain exceptions. One of these exceptions is a trust created after November 12, 1981 if, before the end of the taxation year, property has been contributed to the trust otherwise than by an individual on or after the individual's death and as a consequence thereof. An inter vivos trust is a trust other than a testamentary trust. In essence, an inter vivos trust is created by a person to take effect in his/her own lifetime; sometimes referred to as a "living trust".
The question of whether a trust comes into existence is a matter of fact and trust law. In order that a trust exists three elements, known as the "three certainties", must be present: certainty of intention, certainty of subject matter (the trust property) and certainty of objects (the beneficiaries). In the situation you have presented, it is unclear if the trust is to be created inside or outside of the father's will and whether the relationship between the trustee and the beneficiary (minor child) is defined by a formal written document. While the Canada Revenue Agency (CRA) recognizes that a formal trust deed is not required in order to establish a trust, it is well advised to set out the terms and conditions of the trust in a formal trust deed and to handle the trust funds in accordance with those terms and conditions. In order to be viewed as a testamentary trust, the trust must be created by the person whose life is insured. With this in mind, we would recommend that independent legal advice be retained to ensure the creation of a valid trust.
As previously provided in other technical interpretations issued by the CRA, a trust created pursuant to the individual's will or other testamentary instrument will not lose its testamentary trust status solely by reason of the receipt of the proceeds of an insurance policy on the life of that individual (who was the policyholder), where the trust is the designated beneficiary under the policy and the trust was not created or settled before the death of the individual.
Where the terms of the trust provide or allow for the change of trustees, it is our view that the addition of a trustee, in and of itself, would not affect the type of trust given that there is no change in beneficial ownership of the trust property.
In our opinion, a trust funded from the proceeds of a life insurance policy available on the death of an individual and the terms of which have been established by the individual during his lifetime, within or separate from his will, will be viewed as a testamentary trust for purposes of the Income Tax Act.
The foregoing comments are intended as a general discussion only and we note that the income tax consequences will depend on the actual facts of the particular situation. Therefore, while we hope that our comments are of assistance to you, this opinion is not a ruling and accordingly, it is not binding on the CRA.
Yours truly,
Roger Filion CA
For Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch