Income Tax Severed Letters - 2016-08-03

Principal Issues: Whether in a multiple will scenario, the status of the estate as a GRE could be invalidated?

Position: There may be concerns in meeting the GRE requirements.

Reasons: There can be only one GRE for a deceased individual irrespective of the number of wills and pursuant to paragraph (e) of the definition of GRE only one designation may be made.

Principal Issues: 1. Has the introduction of the QDT rules affected the availability of the preferred beneficiary election? 2. Does a trust that otherwise qualifies to be a QDT and to make the preferred beneficiary election have the ability to choose which election to make, if any? 3. Can a trust that has elected to be a QDT for a taxation year also make a preferred beneficiary election in the same year?

Position: 1. No. 2. Yes. 3. Yes.

Reasons: 1. There have been no changes to the preferred beneficiary election rules as a result of the changes to the rules applicable to testamentary trusts, including the introduction of the QDT. Similarly, there has been no change to the method in which the preferred beneficiary election is made. 2. Both the QDT and preferred beneficiary election are elective provisions. As such, the trustees together with the disabled beneficiary can choose which joint election will be made, if any. 3. QDTs and the preferred beneficiary election are not mutually exclusive elections. It is possible for a trust that has made a joint election to be a QDT to also make a preferred beneficiary election.

Principal Issues: Whether the CRA will continue with its practice of not assessing interest and penalties where a trust does not make instalment payments as required under section 156.

Position: Yes

Reasons: Consistent with current administrative practice, the CRA will continue to not assess interest and penalties where a trust does not make sufficient instalment payments. If there is any change to this administrative practice in the future, sufficient information will be made available to trustees and estate administrators to assist in meeting the instalment filing requirements.

Principal Issues: Whether LLPs and LLLPs governed by the laws of Florida or Delaware would generally be treated as corporations for the purposes of the Act?

Position: Generally yes; certain administrative relief provided for entities formed before July 2016 that, among other conditions, convert before 2018 to forms of entities that are generally recognized as partnerships for Canadian income tax purposes.

Reasons: The provisions of the foreign legislation and the articles creating these entities support the general conclusion that these types of entities should generally be treated as corporations for the purposes of the Act.

Principal Issues: 1. Does the CRA's policy as it relates to the taxation of US revocable living trusts which was announced at the CTF Conference in 1995 still reflect the current view of the CRA? 2. Would the remainder beneficiary of the revocable living trust be considered to have “acquired” the capital interest from the decedent such that subsection 70(5)(b) is applicable?

Position: 1. Yes. 2. No.

Reasons: 1. There is a change in beneficial ownership upon the transfer of property to US revocable living trusts and subsection 104(1). 2. The remainder beneficiary acquires his/her interest as a consequence of the terms of the trust.

Principal Issues: Where a trust makes a section 48.1 election can the phantom income created by the election be taxed in the hands of a beneficiary? If so, how does the trust meet the requirement that the income is paid or payable to the beneficiary by the end of the year? Assuming the trust meets this requirement; can the payment be made "in kind" by distributing the shares that were the subject of the section 48.1 election?

Position: It depends on the terms of the trust indenture.

Reasons: The terms of the trust must specifically give the trustees the discretion to pay out or make payable an amount equivalent to a deemed capital gain or the discretion to pay out or make payable an amount that is defined as income under the Act. Where the trust makes the payment in kind, the trust must specify that such payment is in respect of the deemed taxable capital gain and not in satisfaction of a beneficiary's capital interest in the trust.

Principal Issues: Current statistics regarding the Offshore Tax Informant program

Position: Response provided by CPB

Reasons: See below.