Principal Issues: [TaxInterpretations translation]
1. What are the tax consequences of a renunciation of the benefits of a trust under article 1285 of the Civil Code of Québec without consideration and without having indicated who was entitled to benefit from the renunciation? The beneficiary does not renounce the income already earned by the trust.
2. If the conditions of paragraph 70(6)(b) are otherwise met, does the fact that the spouse subsequently renounces prevent the application of that paragraph?
3. Is the trust deemed to dispose of its property on renunciation?
Position: 1. The beneficiary would generally not be considered to have received proceeds of disposition for the beneficiary’s income and capital interest. Since the renunciation is not made to a person, subsection 69(1) of the Act does not apply.
2. No
3. No
Reasons: 1. Paragraph 9 of Interpretation Bulletin IT-385R2 and previous opinions.
2. The conditions are satisfied at the time of the transfer of the property and the vesting. Paragraph 8 of Interpretation Bulletin IT-305R4 states that the trust will remain a spouse trust even if its terms are varied by agreement, legal action or breach of trust.
3. The trust has not disposed of any property and there is nothing in the Act that deems a disposition for the trust solely by reason of a renunciation.
XXXXXXXXXX 2006-018993 Sylvie Labarre, CA May 9, 2007
Dear Sir,
Subject: Renunciation by a spouse of his or her rights in a testamentary trust
This is in response to your fax dated June 6, 2006, in which you requested our opinion on the tax consequences of a spouse beneficiary renouncing income and capital of a testamentary spousal trust. We apologize for the delay in responding to this request.
A trust was created by the will of an individual. The trust met the criteria of subsection 70(6) of the Income Tax Act (the "Act") in that the spouse is entitled to all the income of the trust during the spouse’s lifetime and no person other than the spouse may, before the spouse's death, receive or obtain the use of any of the income or capital of the trust.
The spouse initially accepts the benefits of the trust, and then purely and simply renounces all of the spouse’s rights under the trust except for the income already earned by the trust. The renunciation is validly made by notarial act en minute in accordance with article 1285 of the Civil Code of Québec (C.C.Q.).
The beneficiaries of the income and capital, following the renunciation of the spouse, will be determined in accordance with article 1286 C.C.Q. However, none of them will be able to receive the income or capital of the trust as long as the spouse is alive.
Questions
You wish to know the tax consequences of the renunciation to the spouse. You also wish to know whether the rollover rules in subsection 70(6) apply on death in light of the spouse's subsequent renunciation. You also asked whether the renunciation results in a deemed disposition of the property held in the trust prior to the spouse's death.
Finally, you asked whether the answers to the preceding questions would be the same if the beneficiaries. determined in accordance with article 1286 C.C.Q., subsequently sought, through a court application, to change in the rules governing the trust and to obtain a distribution of the trust property in their favour.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance 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.
Our comments concern situations where a spouse renounces the benefit of the trust pursuant to article 1285 C.C.Q. without renouncing the income that has already been realized, where article 1286 C.C.Q. makes it possible to determine who is entitled to benefit from the renunciation since the spouse has not indicated this, and where the spouse receives no consideration for the renunciation.
The term disposition is defined by indicating what constitutes a disposition. However, this definition of disposition is not exhaustive. Consequently, transactions other than those specifically mentioned in the definition can be considered as dispositions. We are of the view that a renunciation made pursuant to article 1285 C.C.Q. constitutes an extinguishment of rights and, as such, constitutes a disposition.
However, since the spouse made no indication of who is entitled to the benefit of the renunciation and received no consideration, it is our view that the position taken in paragraph 9 of Interpretation Bulletin IT-385R2 would apply in such a situation with respect to both the income interest and the capital interest so that the spouse would not be considered to have received proceeds of disposition for the purposes of subsection 106(2) in respect of his or her income interest and for the purposes of the Act in respect of the capital interest.
Since, in the above situations, the rules of article 1286 C.C.Q. determine who the beneficiaries of the renunciation are, we are of the opinion that the renunciation does not constitute a disposition in favour of a person and that, consequently, subsection 69(1) does not apply.
Thus, a renunciation by the spouse under Article 1285 C.C.Q. in the above situations would generally have no tax consequences to the spouse.
Our comments would be different if the spouse received consideration for the waiver.
To answer your second question, we have assumed that paragraph 70(6)(b) applied on the transfer of property to a trust created by the will of a taxpayer, being a trust that was resident in Canada immediately after the transfer, and that the property vested indefeasibly in the trust within the time limit set out in subsection 70(6).
As noted in paragraph 8 of Interpretation Bulletin IT-305R4, once a trust qualifies as a spouse trust under the terms of subsection 70(6), it remains a spouse trust and is subject to the provisions affecting such trusts (for example, paragraph 104(4)(a)) even if its terms are varied by agreement, legal action or breach of trust. Thus, a renunciation by the spouse after the application of paragraph 70(6)(b) of would not normally call into question the application of that paragraph.
Furthermore, a renunciation, as such, does not result in a disposition of the trust property. The trust remains subject to the application of paragraph 104(4)(a) upon the death of the disclaiming spouse.
The above comments also apply where the beneficiaries determined in accordance with article 1286 C.C.Q. subsequently seek through a court application to amend the terms of the trust so as to have the trust property distributed to them. The amendment to the trust indenture that would be granted to allow for the distribution of the property would not, in and of itself, result in a disposition of the trust property or by those beneficiaries. However, if there were eventually a distribution of the property to the beneficiaries determined in accordance with article 1286 C.C.Q. by reason of their capital interests in the trust, and the renouncing spouse was not deceased, subsection 107(4) would apply, the trust would be deemed to have disposed of the distributed property for fair market value proceeds and the proceeds of disposition of the capital interests to those beneficiaries would be equal to the amount determined under paragraph 107(2.1)(c).
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