Principal Issues: [TaxInterpretations translation] 1) Does the trust agreement signed by the heirs of the deceased qualify as a testamentary trust for the purposes of the Act? If so, can the trust be taxed on income?
2) If there is no civil law trust, do the three directors have to add the income from the trust account to their personal income?
Position: (1) The validity of a trust is a question of law and it is not clear whether the "trust" is established under the will of the deceased. 2) If no trust exists in civil law, it must be determined, in fact and in law, who owns the net assets. If ownership of the property has not been transferred upon deposit in the "trust account" to the beneficiary, the income from the trust account will be that of the person who deposited the property in the account.
XXXXXXXXXX 2009-032844 Danielle Bouffard October 20, 2009
Dear XXXXXXXXXX,
Subject: Agreement signed by the heirs of a deceased person
This is in response to your fax of June 10, 2009 in which you asked our opinion regarding the concept of a testamentary trust in a particular situation.
Under the terms of a deceased person's will, all property is bequeathed in equal shares to the deceased’s children. The heirs want to financially protect their sister until her death, given her precarious health. The children have therefore signed an agreement whereby the net assets of the estate will be held in trust in a separate account and administered by three of the deceased's children. The three administrators will be able to use the income and capital from these assets to support their sister until her death. Upon the sister's death, the money held in trust will then be distributed to the remaining children.
Questions
1) Does the agreement signed by the heirs of the deceased qualify as a testamentary trust for the purposes of the Income Tax Act (the "Act")? If so, is the trust subject to tax on income and what tax rate applies?
2) If there is no trust under the civil law, are the three trustees required to add the income from the trust account to their personal income?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions other than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
The definition of "trust" in subsection 104(1) does not address the circumstances under which an entity will be considered a trust for the purposes of the Act. At most, the definition establishes that an arrangement under which a trust can reasonably be considered to act as an agent for all of its beneficiaries in connection with transactions involving its property is deemed not to be a trust for the purposes of the Act. On the other hand, the case law indicates that the validity of a trust is a question of law.
The question of whether an entity is a trust for the purposes of the Act must therefore be determined on the basis of the civil law or common law, as the case may be. Article 1260 of the Civil Code of Québec (hereinafter the "Code") sets out the essential conditions for the creation of a trust in Québec. Thus, according to this Article: "A trust results from an act whereby a person, the settlor, transfers property from his patrimony to another patrimony constituted by him which he appropriates to a particular purpose and which a trustee undertakes, by his acceptance, to hold and administer.” According to Article 1264 of the Code, when a trust is established by will, the effects of a trustee's acceptance are retroactive to the day of the testator's death. Article 1265 of the Code also states that the acceptance by the trustee of the trust divests the settlor of the property, charges the trustee with seeing to the appropriation of the property and the administration of the trust patrimony and is sufficient to establish the right of the beneficiary with certainty. Finally, Article 1297 of the Code provides that at the termination of a trust, the trustee shall deliver the property to those who are entitled to it.
A "testamentary trust" as defined in subsection 108(1) means a trust that arose on and as a consequence of the death of an individual (including a trust referred to in subsection 248(9.1). As provided in subsection 248(9.1), for the purposes of the Act, a trust shall be considered to be created by a taxpayer’s will if the trust is created, inter alia, under the terms of the taxpayer’s will. We are of the view that a trust described in subsection 248(9.1) of the Act may be considered to be a trust that arose on and as a consequence of the death of an individual even if it is not legally created on the date of the individual's death. Generally, a testamentary trust does not include a trust created by a person other than a deceased individual, or a trust created after November 12, 1981 if property has been contributed to the trust otherwise than by an individual on or after the individual’s death and as a consequence thereof.
Usually, the income of a testamentary trust is distributed to the beneficiaries or taxed as income of the trust, according to the terms of the will or trust document. A testamentary trust is taxed at the same graduated tax rates as those applicable to individuals. On the other hand, an inter vivos or inter vivos trust is subject to the 29% tax rate on its taxable income under subsection 122(1). For more information on the taxation of trusts and their beneficiaries, you can consult the 2008 version of the T4013- T3 "Trust Guide" available on our website at the following address: http://www.cra-arc.gc.ca/E/pub/tg/t4013/t4013-f.html#P1691_228883.
The few facts described here about the agreement signed by the children are not detailed enough to conclude that a civil law trust exists. Without a review of the terms of the will and the agreement signed by the heirs, we cannot determine whether the net assets that are held "in trust in a separate account" constitute a trust that was established under the will of the deceased. In addition, we cannot establish that the provisions of subsection 248(8), including that a transfer, distribution or acquisition of property has occurred under or as a consequence of the terms of the will or other testamentary instrument and therefore may be considered to be a transfer, distribution or acquisition of the property as a consequence of the death of the deceased person. Therefore, it is unlikely that income derived from net assets held in trust in a separate account would be subject to progressive personal income tax rates. If the entity created by the heirs is a trust for civil law purposes but is not a testamentary trust for the purposes of the Act, the provisions of subsection 75(2) apply to the heirs resulting in an allocation of income on the property they have transferred to the trust (or property substituted for it) since it is expected that the property will revert to them at the time of their sister's death.
Finally, if no trust exists under the civil law, it is necessary to determine, in fact and in law, to whom the net assets belong. If ownership of the property has not been transferred upon deposit in the "trust account" to the beneficiary, the income from the trust account is that of the person who deposited the property in the account.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.