11 October 2013 APFF Roundtable, 2013-0493671C6 F - Testamentary trust beneficiary of inter vivos trust
Principal Issues:
1. In the light of CRA's position in the technical interpretation 2011-0417391E5, would any testamentary trust to be established in the future for one of the beneficiaries of an inter vivos trust lose its status as a testamentary trust or otherwise fail to qualify?
2. What follow up will CRA undertake to determine if a testamentary trust is a beneficiary of an inter vivos trust?
3. Whether a trust would keep its status as a testamentary trust, if it renounces its rights as a beneficiary at the time that the trust is established or created?
Position: 1. The position in 2011-0417391E5 is maintained.
2. and 3. General comments.
Reasons : See below.
Financial Strategies and Financial Instruments Roundtable, 11 October 2013
2013 APFF Conference
Question 5
Testamentary trust beneficiary of an inter vivos trust
It is common practice, when drafting an inter vivos trust deed, to add to the list of beneficiaries any testamentary or inter vivos trust for the benefit of one or more of the beneficiaries listed in that inter vivos trust deed. However, such clause generally states that such a trust will become a beneficiary of the inter vivos trust only if so designated by the trustees. This means that, in principle, if the trustees do not make the beneficiary designation, a testamentary trust does not automatically become a beneficiary of the inter vivos trust.
The CRA has addressed this issue in Technical Interpretation 2008-0285431C6 (footnote 1). The CRA's finding was that "the trust created by the will would not qualify as a testamentary trust when the trust indenture of an inter-vivos trust provides that it will be beneficiary of the inter vivos trust." However, this Interpretation does not refer to a beneficiary designation.
Accordingly, a further request was made to the CRA to determine whether the answer would have been the same if it had been clarified that the testamentary trust should be designated as such by the trustee(s) as the beneficiary of the inter vivos testamentary trust in order to become a beneficiary. The CRA responded (footnote 2) by stating:
“Although the determination of a beneficiary of a particular trust is a question of fact that requires a review of the terms of the trust deed, we consider that a trust created by will, that is part of the category of persons from which the trustee can designate beneficiaries of an inter vivos trust, is beneficially interested by virtue of subsection 248(5).
In addition, subsection 108(1) defines a taxpayer's income interest in a trust as a right (whether immediate or future and whether absolute or contingent) of the taxpayer as a beneficiary under a personal trust to, or to receive, all or any part of the income of the trust and, after 1999, includes a right, to enforce payment of an amount by the trust that arises as a consequence of any such right. []
A testamentary trust, which is also defined in subsection 108(1), []
More specifically, paragraphs (b) and (c) of the definition of testamentary trust generally exclude any trust whose property has been contributed to it otherwise than by an individual on or after the individual’s death and as a consequence thereof. []
In defining the scope of the phrase "property has been contributed" in paragraphs (b) and (c) of the definition of testamentary trust in subsection 108(1), it is necessary in our view to consider the ordinary meaning of the words, the legislative context and the relevant case law.
[]
In light of the foregoing, we are of the view that the expression "property has been contributed" should not be restricted to property that is the assets of the inter vivos trust. In fact, we are of the view that the interest held by a trust created by a will in an inter vivos trust is property that was gratuitously contributed to it otherwise than by an individual who died on or after the individual’s death and as a consequence thereof.
Consequently, even if its entitlement to the capital or income of the inter vivos trust is future and contingent, a trust established by a will would lose its status as a testamentary trust - or simply would not receive it in the first place – by virtue of subsection 108(1) if it receives an interest in an inter vivos trust. The testamentary trust would receive such an interest as soon as it becomes beneficially interested within the meaning of subsection 248(25).”
Questions to the CRA
It is clear that a significant number of inter vivos trusts already in existence have a clause in their trust indenture allowing the trustees to designate a testamentary trust as a beneficiary of the inter vivos trust. However, in civil law, it does not seem possible for the settlor or the trustees to modify on their own initiative a trust deed without leave of the court.
1. Given the position taken by the CRA in Technical Interpretation 2011-0417391E5 (footnote 3), does this mean that all the testamentary trusts which are created in the future for one of the beneficiaries of an inter vivos trust will, in the context discussed above, lose their status of testamentary trust or not obtain it in the first place?
2. How will the CRA monitor to determine whether a testamentary trust is beneficiary of an inter vivos trust?
3. If a testamentary trust renounces its beneficial interest in an inter vivos trust upon formation, could it then maintain its testamentary trust status?
CRA response
In response to the first question, the position described in 2011-0417391E5 (footnote 4) is confirmed. However, if you wish to have the CRA reconsider this position, we invite you to submit a request for a technical interpretation including a detailed submission of your arguments regarding your position. Please note, however, that the Department of Finance is considering terminating tax benefits from the taxation of certain trusts and estates at graduated rates.
With respect to the second question, we cannot describe the detailed follow-up performed by the CRA to verify or corroborate information submitted by a taxpayer in a particular situation. That being said, when reviewing Form T3RET (footnote 5) filed by a personal inter vivos or testamentary trust (including an estate), the CRA will analyze all information provided including in the trust indenture, the will or any other testamentary act.
The question of whether a testamentary trust may renounce its beneficial interest in an inter vivos trust as soon as it is constituted or established in a particular situation is a question of fact and law that can only be resolved after a full review all relevant facts and legal documents. It is therefore impossible for us to comment on your question. However, we could consider this issue as part of an advance ruling respecting a particular situation.
Danielle Bouffard
(613) 957-2747
2013-049367
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CANADA REVENUE AGENCY, Technical Interpretation 2008-0285431C6, 10 October 2008.
2 CANADA REVENUE AGENCY, Technical Interpretation 2011-0417391E5, 26 June 2012.
3 Id.
4 Id.
5 CANADA REVENUE AGENCY, T3RET T3 Trust Income Tax and Information Return