Principal Issues: [TaxInterpretations translation] 1. Is what was created by a taxpayer's will a trust?
2. Does a trust that is otherwise a trust described in paragraph 70(6)(b) of the Act lose that status if the spouse has the discretion not to require the annual distribution of income, with any undistributed portion being added to the capital of the trust?
3. Is the trust testamentary if the spouse chooses not to require the distribution of all or part of the income or capital of the trust?
Position: 1. The validity of a trust is a question of law. This question must be determined in accordance with civil law or common law, as the case may be.
2. In order for a spouse to be considered entitled to all the income of the trust, only the spouse can have discretion as to the distribution of all or part of the income of the trust. To the extent that the spouse is entitled to all of the income of the trust under the trust document but indicates in writing a desire not to receive all or part of that income, the fact that the portion of the trust income renounced by the spouse is retained by the trust and added to the capital of the trust will not in and of itself disqualify the trust from being a trust described in paragraph 70(6)(b).
3. With respect to income, this depends on the circumstances. As to the capital, there is no contribution to the trust by the spouse because the trustees have decided not to distribute capital to the spouse or the spouse has not requested the distribution of capital.
Reasons: 1. Section 104(1) does not define what a trust is.
2. The spouse is still entitled to all the income of the trust and no one other than the spouse is entitled to that income during his or her lifetime.
3. Where a spouse disclaims income while the income is payable to the spouse, the spouse returns to the trust the property that consists of the income payable. In respect of the capital, there is no amount payable until the trustees exercise their discretion or the spouse requests it.
XXXXXXXXXX Sylvie Labarre, CA
2004-009382
April 18, 2005
Dear Sir,
Subject: Trust created by a will
This is further to your letters of September 2 and 20, 2004, in which you asked for our opinion regarding the concepts of trust, spouse trust and testamentary trust in a particular situation. We apologize for the delay in responding to your request.
Facts
A taxpayer's will provides for the formation of a trust for the benefit of the taxpayer's spouse (or common-law partner). Under the will, the spouse has the exclusive and unconditional right to all annual income generated by the property held in trust.
It remains in the spouse's discretion to require annual payment of the income, and any portion of the income not paid to the spouse is capitalized in the trust and will be distributed to the spouse, at the spouse's discretion, in the same manner as the capital.
The spouse is the sole capital beneficiary during the spouse’s lifetime. No one else is entitled to the capital and income of the trust as long as the spouse lives. The distribution of the capital remains in the sole discretion of the trustees. Notwithstanding this discretion, the trustees must distribute all or part of the capital to the spouse at the spouse’s sole request.
On the death of the spouse, the trust shall continue for a period of up to two years, the discretion to terminate the trust remaining with the trustees. At the termination of the trust, all of its assets are to be distributed in equal shares to the taxpayer's children (who are also the spouse's children).
During the lifetime of the spouse, the trustees of the trust are the spouse and a third party. Decisions of the trust must be made by majority vote, which necessarily means that both trustees must agree at all times.
The trust is governed by the Civil Code of Quebec.
Questions
You wish to know whether the trust qualifies as a trust under subsection 104(1) of the Income Tax Act (the "Act").
You inquired as to whether the trust qualifies as a spouse trust within the meaning of subsection 70(6).
You also wish to know whether the trust would lose its status as a testamentary trust within the meaning of subsection 108(1) if the spouse decides not to require the distribution of all or part of the income or capital for several years.
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 a written opinion regarding 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 which we hope you will find helpful. These comments may not, however, apply to your particular circumstances in certain circumstances.
The definition of "trust" in subsection 104(1) does not establish the circumstances in which an entity will be considered a trust for the purposes of the Act. At most, the definition establishes that an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property is deemed not to be a trust for purposes of the Act.
Furthermore, the jurisprudence indicates that the validity of a trust is a question of law. Whether an entity constitutes a trust for the purposes of the Act must be determined by reference to the civil law or the common law, as the case may be. We express no opinion as to the civil or common law.
Proceeding on the basis that the will created a trust under the provisions of the Civil Code of Québec, it is necessary to examine whether this trust is a spouse trust under paragraph 70(6)(b). This paragraph refers to a trust, created by the taxpayer’s will, that was resident in Canada immediately after the time the property vested indefeasibly in the trust and under which the taxpayer’s spouse or common-law partner is entitled to receive all of the income of the trust that arises before the spouse’s or common-law partner’s death, and no person except the spouse or common-law partner may, before the spouse’s or common-law partner’s death, receive or otherwise obtain the use of any of the income or capital of the trust.
Based on the information you provided, one of the conditions for the trust to come within paragraph 70(6)(b) is satisfied in your situation since no person other than the spouse can, before the death of the spouse, receive or otherwise obtain the use of any of the income or capital.
As to the other condition, for a spouse to be considered entitled to all of the trust income, only the spouse can have discretion as to the distribution of all or part of the trust income. To the extent that the spouse is entitled to all of the income of the trust under the trust document but indicates in writing a desire not to receive all or part of that income, the fact that the portion of the trust income renounced by the spouse is retained by the trust and added to its capital will not in and of itself disqualify the trust as a spouse trust within the meaning of subsection 70(6).
With respect to qualification as a testamentary trust, subsection 108(1) provides that a trust created after November 12, 1981 is not a testamentary trust if, before the end of the taxation year, property has been contributed to the trust otherwise than by an individual on or after the individual’s death and as a consequence thereof.
The question is therefore whether the fact that the spouse chooses not to require the distribution of some or all of the trust income results in property having been contributed to the trust by the spouse.
Where the trust indenture provides that a spouse may elect not to receive income from the trust in a particular year and the spouse makes this election before any income is earned and becomes payable, the making of the election will not be considered to be a contribution of property to the trust by the spouse since the income is not yet property of the spouse at the time the election is made.
On the other hand, if the spouse notifies the trustee that he or she does not want to receive the income from the trust when that income is payable to the spouse, this would result in the spouse contributing property to the trust. In effect, the spouse would hold an amount receivable as property and would pay it to the trust. Thus, in such a situation, the trust would no longer be a "testamentary trust" as defined in subsection 108(1).
Furthermore, the spouse would generally not be considered to have contributed property to the trust merely by not receiving trust capital because the trustees had not exercised their discretion to pay capital to the spouse or because the spouse has not made a request therefor. Indeed, from what you stated in your letter, the spouse does not appear to be entitled to the capital of the trust until the trustees exercise their discretion or until the spouse requests a distribution of capital.
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch