7 March 2007 External T.I. 2006-0218191E5 - testamentary trust administrative error

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: taxpayer concerned that administrative correction to properly evidence the testamentary trust would result in a disposition of all trust property.

Position: no disposition upon correction

Reasons: testamentary trust assets invested, erroneously placed in name of primary beneficiary; as long as correction of an error and assets had not actually been distributed to the beneficiary, correction would have no tax consequence.

XXXXXXXXXX 								2006-021819
									Lena Holloway CA
March 7, 2007

Dear XXXXXXXXXX:

Re: XXXXXXXXXX - XXXXXXXXXX

Your letter of October 24, 2006, to the Ottawa Technology Centre has recently been forwarded to us for reply. In your letter you ask about the tax implications on the correction of an administrative error involving the above named testamentary trust.

The decedent's will (copy attached to your letter) indicates that the deceased (XXXXXXXXXX) intended that a testamentary trust be set up for the benefit of his daughter (the primary beneficiary) with the remainder of his estate. The trustees of the trust were named in the will as yourself (XXXXXXXXXX) and the primary beneficiary (XXXXXXXXXX). The terms of this trust provide the trustees with various discretionary powers concerning the distribution of income and capital to the primary beneficiary. On the death of the primary beneficiary, any amounts remaining in the trust are to be distributed to the decedent's son (with representation in favour of his children).

The estate assets were managed by the decedent's long time financial advisor. You explain that this financial advisor invested the remaining assets erroneously in the primary beneficiary's name as opposed to naming the trustees of the testamentary trust as the holder of the assets. Provided the remaining assets have not in fact been distributed to the primary beneficiary and the trust has not been liquidated or collapsed, the matter becomes simply one of requesting the financial institution to correct the error. Changing the account name to properly reflect your name and XXXXXXXXXX name as co-trustees of the testamentary trust would not trigger any tax consequences. While it is the trustees responsibility to ensure all trust tax returns have been filed as required, a T3 return is not required if the estate is distributed immediately after the person dies (i.e. if a testamentary trust was not set up). As detailed in the T3 Trust Return Guide, a T3 return must be filed each year that the trust has income from the trust property and in the tax year the trust:

• has tax payable;
• is a Canadian resident and has either disposed of, or is deemed to have disposed of, a capital property or has a taxable capital gain;
• receives from the trust property any income, gain, or profit that is allocated to one or more beneficiaries, and the trust has:
• total income from all sources of more than $500;
• income of more than $100 allocated to any single beneficiary; or
• made a distribution of capital to one or more beneficiaries.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

cc. Mario Lafontaine

Service a la clientele 541
Cf de Shawinigan-Sud