Principal Issues: Can a trust be designated as a beneficiary under an RRSP? If yes, is it possible for the trust to be a testamentary trust as defined in subsection 108(1) of the Act?
Position: Yes. Question of fact.
Reasons: The Income Tax Act does not restrict who can be designated as a beneficiary under an RRSP. Provided the trust satisfies the definition of testamentary trust in subsection 108(1) of the Act and certain conditions are satisfied.
XXXXXXXXXX 2005-011649 G. Allen April 6, 2005
Dear XXXXXXXXXX:
Re: Designating a Trust as the Beneficiary of an RRSP or RRIF
This is in reply to your letter dated August 11, 2004 to the Canada Revenue Agency ("CRA"), Trust Division, wherein you enquire whether it is acceptable to designate a trust as the beneficiary under a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF). Specifically, you enquire whether a trust established by a trust declaration referenced through a beneficiary designation under a RRSP or RRIF would qualify as a testamentary trust and be taxed as such under the Income Tax Act (the "Act").
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the CRA. All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.htm l.
Our Comments
The Act does not contain any restrictions concerning who may be designated as a beneficiary under an RRSP or an RRIF, however, there may be restrictions concerning the designation of a beneficiary under provincial legislation.
It is a question of fact whether a particular trust is a testamentary trust for purposes of the Act and, therefore, taxed accordingly. In general, subsection 108(1) of the Act defines "testamentary trust" as a trust that arose on and as a consequence of the death of an individual. Paragraphs (a), (b) and (c) of the definition of "testamentary trust" exclude certain trusts from this definition. Paragraph (a) excludes a trust if the trust is created by anyone other than the deceased. Paragraph (b), applicable to trusts created after November 12, 1981, excludes a trust if any property is contributed to the trust otherwise than by an individual on or after the individual's death and as a consequence thereof. Paragraph (c) excludes certain trusts created before November 13, 1981. As well, draft legislation released by the Minister of Finance on February 27, 2004, includes proposed paragraph (d) of the definition "testamentary trust". Proposed paragraph (d) is an anti-avoidance rule that is intended to respond to the use of testamentary trusts as vehicles for income splitting. This new paragraph provides that a testamentary trust in a taxation year does not include a trust or estate that incurs, after December 20, 2002 and before the end of the taxation year, a debt or any other obligation to pay an amount to, or guaranteed by, a beneficiary or any other person or partnership with whom any beneficiary of the trust or estate does not deal at arm's length (see the Department of Finance Explanatory Notes Draft Legislation - Technical Amendments - February 27, 2004 and the Department of Finance Comfort Letter dated April 28, 2004 for more information concerning proposed paragraph (d)).
In order for a trust, funded with the proceeds of an RRSP or an RRIF available on the death of an individual and the terms of which have been established during the individual's lifetime separate from his will, to be considered a "testamentary trust" within the meaning of subsection 108(1) of the Act, in our view, the following conditions would have to be satisfied:
? The trust was created by the deceased individual or his legal representative;
? The deceased individual had designated the trust as the beneficiary of the RRSP or RRIF;
? The designation of the trust as beneficiary of the RRSP or RRIF is considered under the applicable provincial legislation to be a testamentary instrument;
? No property was contributed to the trust prior to the receipt of the proceeds of the RRIF or RRSP on the death of the individual; and
? No property is contributed to the trust otherwise than by an individual on or after the individual's death and as a consequence thereof.
We trust the above comments will be of assistance.
Yours truly,
Roberta Albert, CA
Manager
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch