Principal Issues: [TaxInterpretations translation]
Is the property of the C-1 and C-2 testamentary family trusts (as well as D-1 and D-2 and E-1 and E-2) received from one person so that the condition set out in paragraph 104(2)(a) of the Act is satisfied?
Position: General comments
Reasons:
In the particular situation, a detailed study of the trust instruments and assets would be required to determine whether a designation pursuant to subsection 104(2) is appropriate. That designation is a matter for the directors of the Tax Services Offices.
XXXXXXXXXX Danielle Bouffard 2006-017803 June 13, 2007
Dear Madam,
Subject: Request for technical interpretation: Subsection 104(2) of the Income Tax Act (the "Act")
This is in response to your fax of March 27, 2006, requesting our opinion on the application of the subsection referred to above in relation to the hypothetical situation described below. We apologize for the delay in responding to this request.
Facts
1. Mr. A, his spouse Ms. B and their children C, D and E are Canadian residents.
2. Mr. A wishes to make a will and to include provision for testamentary trusts.
3. The following will be found in Mr. A's will:
- Bequest of his non-registered investments to a spousal trust ("spousal trust");
- Bequest of $500,000 to each of his children, to be transferred to a trust. Thus, $500,000 will be paid to Testamentary Family Trust C-1, $500,000 will be paid to Testamentary Family Trust D-1 and $500,000 will be paid to Testamentary Family Trust E-1.
4. Upon Ms. B's death, the residue of the spousal trust will be divided among Mr. A's three children in trust. Thus, one third of the assets will be paid to Testamentary Family Trust C-2, another third will be paid to Testamentary Family Trust D-2 and the remaining third will be paid to Testamentary Family Trust E-2.
5. The beneficiaries of Testamentary Family Trusts C-1 and C-2 will be C and her children. The beneficiaries of Testamentary Family Trusts D-1 and D-2 will be D and her children. Finally, the beneficiaries of Testamentary Family Trusts E-1 and E-2 will be E and her children.
Question
Is the property of the C-1 and C-2 testamentary family trusts (as well as D-1 and D-2 and E-1 and E-2) received from one person so that the condition set out in paragraph 104(2)(a) of the Act is satisfied?
Comments of Representatives
This planning is for asset protection and income splitting. You are of the opinion that the assets are transferred according to Mr. A's wishes, but that the assets come from two different people, Mr. A and the spousal trust.
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 written opinions on proposed transactions otherwise than through 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. These comments may, however, under certain circumstances, not apply to your particular situation.
Subsection 104(2) provides, inter alia, that the Minister may combine two or more trusts to treat them as a single individual if both of the conditions in paragraphs 104(2)(a) and 104(2)(b) are satisfied: first, substantially all of the property of the various trusts has been received from one person, and second, the income from the trusts ultimately accrues to the same beneficiary or group or class of beneficiaries.
By a document dated September 27, 1999, as amended on September 22, 2005, the Minister of National Revenue authorized the directors of the Tax Services Offices to exercise the powers and perform the duties conferred on the Minister by virtue of subsection 104(2) of the Act.
First transmission of property: from the testator Mr. A to the spousal trust and the testamentary family trusts C-1, D-1 and E-1
A "testamentary trust" within the meaning of subsection 108(1) includes 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). By virtue of subsection 248(8), property is considered to have been transferred or distributed to, and acquired by, a trust (such as a spousal trust and each of the C-1, D-1 and E-1 testamentary family trusts) as a consequence of the death of a taxpayer if the transfer, distribution or acquisition was made, inter alia, under or as a consequence of the terms of the will or other testamentary instrument of the taxpayer. Taking into account the few facts described in the hypothetical situation, we have assumed that the property of the testator Mr. A is transmitted by will to the trusts referred to in this paragraph. Consequently, for the purposes of paragraph 104(2)(a), all of the property of the said trusts comes from a single person, Mr. A.
Second transmission on Mrs. B's death: property held by the spousal trust to testamentary family trusts C-2, D-2 and E-2.
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 that will. We are of the view that a trust referred to in subsection 248(9.1) would be considered to be a trust that arose on and as a consequence of the death of the individual even though that trust (for example, any of the C-2, D-2 and E-2 testamentary family trusts) does not receive the property until a specific future date such as, for example, the death of the surviving spouse, or even though it is not legally created at the date of the individual's death. It is not clear from the facts described in 3 above whether testamentary Family Trusts C-2, D-2 and E-2 are established under Mr. A's will. However, for the purposes of our comments and taking into account that, according to you, the "property is transferred in accordance with Mr. A's wishes", we have assumed that this is the case and that such trusts are "testamentary trusts" within the meaning of subsection 108(1), subject to non-application under paragraphs (a), (b) and (c) of the definition.
In the hypothetical situation described here, assuming that all the property transmitted to the various trusts comes from the testator, Mr. A, we are of the view that the property that the spousal trust would transfer to the testamentary family trusts C-2, D-2 and E-2 upon Ms. B's death would originate from Mr. A. Consequently, the condition set out in paragraph 104(2)(a) would be satisfied.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
Best regards,
Alain Godin
For the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.