Principal Issues: When is a testamentary trust considered to have been created for purposes of the deemed disposition in paragraph 104(4)(b)?
Position: Ultimately, it is a question of fact, but the CRA generally considers the trust to be created on the testator’s date of death. Where a new trust is created subsequent to the date of death, subsection 104(5.8) will likely apply.
Reasons: Previous positions.
2018 STEP CRA Roundtable – May 29, 2018
QUESTION 2. Creation of a Trust
Assume that the will of a deceased person creates a graduated rate estate, and several testamentary trusts for the testator’s children or grandchildren. For various reasons, no property is transferred to these testamentary trusts, and all property remains in the graduated rate estate for a period of time. When does CRA consider that the testamentary trusts came into existence for purposes of the 21-year deemed disposition rule?
CRA Response
The question of the creation date of a testamentary trust has been considered in past STEP Roundtables (footnote 1). Traditionally, the CRA has not attributed any tax consequences to the transition from estate administration to trust administration and generally has viewed trusts created out of the residue of an estate as arising on death. This would generally apply to the situation you have described.
This view would also apply in a situation where the will directs the executor and trustee to hold the residue of the estate in trust for the testator's child during their lifetime. On the death of the child, the will of the testator then directs that the trustee is to continue to hold the residue in trust for the testator's grandchildren then living under certain terms and conditions specified in the will. It is our opinion that under those circumstances only one trust would have been created upon the testator's death.
Therefore, in the above situations where a testator’s will establishes a trust for a beneficiary other than the testator’s spouse or common-law partner, the timing of the 21 year deemed disposition under paragraph 104(4)(b) of the Income Tax Act (the “Act”) would be based on the testator’s date of death (footnote 2). To this end, the CRA T3 Assessing section will generally assign the same commencement date to each trust created out of the estate residue.
It is ultimately a question of fact as to when a trust is considered to be established and there may be situations where the creation date of a testamentary trust is not concurrent with the testator’s date of death. For instance, certain terms of a will may provide that on the death of the first generation beneficiary (such as the spouse or common law partner), the trustee is to divide the remaining property into equal parts to be held in a new trust for the interest of each child. In this situation, the trust may be viewed as being created at a later point in time than the testator’s date of death. That being said, the deemed disposition date of the new trusts for the purposes of paragraph 104(4)(b) will be determined in accordance with subsection 104(5.8) of the Act which generally prevents the avoidance of the 21-year deemed disposition through the use of trust transfers. As a result, the new trust’s deemed disposition date will generally be based on the 21 year deemed disposition date applicable to the estate.
Tara Mathanda
2018-074410
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 See 2007 Question 3 (CRA document # 2007-0233721C6), 2012 Question 8 (2012-0442931C6), 2015 Question 2 a) (2015-0572091C6) and 2016 Question 1 a) (2016-0634871C6).
2 Where the testamentary trust is established for the testator’s spouse or common-law partner, the deemed disposition of the trust’s property occurs on the beneficiary’s death, pursuant to paragraph 104(4)(a).