Principal Issues: [TaxInterpretations translation] Will the renunciation of the income of a spouse trust by the spouse constitute a contribution of property so as to disqualify the trust as a testamentary trust? The renunciation is made under Article 1285 of the Civil Code of Québec.
Will subsections 56(2), 105(1), 106(2) and 246(1) apply to the spouse in respect of that renunciation?
Position: No if the renunciation is in respect of potential unrealized income of the trust (income not due and payable to the spouse).
The spouse would not be considered to have received proceeds of disposition for the purposes of subsection 106(2). Subsections 56(2), 105(1) and 246(1) do not appear to apply.
Reasons: The position is the same as where the trust deed contains a clause allowing the spouse to renounce the income, a position referred to at the 2005 Conference Roundtable.
Same position as in paragraph 9 of IT-385R2 with respect to 106(2). The conditions for the application of 56(2), 105(1) and 246(1) do not appear to be met.
XXXXXXXXXX 2005-015943 Sylvie Labarre, CA February 26, 2007
Dear Sir,
Subject: Renunciation of a testamentary trust
This is in response to your fax of November 17, 2005, on the above subject. We apologize for the delay in responding to this request.
Your situation involves a spouse trust as defined in subsection 70(6) of the Income Tax Act (the "Act"). The trust deed does not contain any clause allowing the spouse to renounce the income. However, the Civil Code of Quebec (CCQ) would allow for the renunciation of income.
You wish to know whether a renunciation of trust income pursuant to Article 1285 C.C.Q. would constitute a contribution of property for the purpose of determining whether a trust is a testamentary trust in any of the following circumstances:
- at the beginning of certain fiscal years, the spouse renounces the benefit of the trust by notarial act under Article 1285 C.C.Q., income that would otherwise be payable to the spouse for the coming year;
- at the beginning of a fiscal period, the spouse renounces in the same manner but definitively the income of the trust for all future years.
The spouse does not indicate who is entitled to benefit from the renunciation. The spouse receives no consideration for the renunciation.
You referred to the position we took in response to Question 27 of the Roundtable at the 2005 APFF Conference in this regard when income is renounced following the exercise of a clause in the trust deed that allows the spouse to renounce income. In addition, you asked whether the renunciation of income in the above-described circumstances results in the application of any of the following provisions: subsection 56(2), subsection 105(1), subsection 106(2) or section 246 of the Act.
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 (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 that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Question 27 of the 2005 APFF Conference Roundtable concerned a spouse trust whose trust deed contained a clause allowing the spouse to renounce income. As stated in the answer to that question, the waiver by the spouse of the receipt of certain income earned by the trust and payable to the spouse constituted a contribution of property to the trust that would disqualify it as a testamentary trust within the meaning of subsection 108(1). That would not be the case if a renunciation were made in respect of potential income not realized by the trust.
Despite the fact that the answer was given in a situation where the trust deed contained a clause allowing for the renunciation of income by the spouse, we are of the view that our position would be the same as that indicated in the preceding paragraph when the renunciation is exercised under the C.C.Q. and not pursuant to a clause in the trust deed. Thus, the question would be whether, at the time the renunciation is exercised by the spouse, the income has been realized by the trust and thus has become payable to the spouse.
You indicated in your request that this is contingent and unrealized income. Consequently, it would not be due and payable to the spouse. In such circumstances, we are of the view that the position taken in paragraph 9 of Interpretation Bulletin IT-385R2 would apply to your situation of renunciation under Article 1285 C.C.Q. since the spouse does not indicate who is entitled to benefit from the renunciation and does not receive any consideration. Thus, the spouse would not be considered to have received proceeds of disposition for the purposes of subsection 106(2) of the Act. With respect to the application of subsections 56(2), 105(1) and 246(1), while it does not appear to us that these provisions would apply, it is not possible for us to offer a definitive opinion in a hypothetical situation.
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