15 December 2010 External T.I. 2010-0358461E5 - Spousal Trusts

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: 1. Would the application of subsection 104(2) of the Act to the two trusts preclude the application of subsection 70(6) to the properties transferred on a tax deferred basis to the trusts? 2. If subsection 104(2) is applied to the trusts as noted above, would only one T3 return need to be filed? 3. If a valid declaration affecting a life insurance policy on the life of the taxpayer provides that the proceeds thereof are payable to the named persons, who are the trustees of the two trusts referred to above, and directs that the insurance proceeds are to be held by the trustees, and invested and distributed in accordance with the provisions in the wills and that such proceeds are to be added to the capital of one or both, of such trusts, would the addition of the insurance proceeds into one or both of the trust funds in and of itself preclude the application of subsection 70(6) of the Act in respect of other properties transferred to the trusts?

Position: 1. It depends on the facts; 2. A T3 return must be filed for each trust; and 3. It depends on the facts in each case.

Reasons: 1. legislation; 2. legislation and administration of ITA; and 3. legislation.

XXXXXXXXXX
									2010-035846

December 15, 2010

Dear XXXXXXXXXX :

This is in response to your letter of February 24, 2010, wherein you describe a situation where a taxpayer, resident in Ontario, executes a primary and secondary will which deal respectively with properties for which it is expected that Letters Probate would and would not be required for the purposes of the administration of the estate. The terms of each will provide for the settlement of a trust in which the taxpayer's spouse is to receive all of the income of such trusts that arises before his/her death and no person, except the spouse, may before the spouse's death, receive or otherwise obtain the use of any of the income or capital of the trusts. Upon the death of the taxpayer's spouse, the residue is to be divided between the taxpayer's issue in equal shares per stirpes. You confirm that the property that is transferred to the trusts will vest indefeasibly in the respective trusts within 36 months of the death of the taxpayer. You state that subsection 104(2) of the Income Tax Act (the "Act") is expected to be applied to designate the trustees of the two trusts as an individual whose property is the property of both trusts and whose income is the income of both trusts for the purposes of the Act.

On the basis of the foregoing facts, you have asked that we consider following questions:

1. Would the application of subsection 104(2) of the Act to the trustees of the two trusts, of and by itself preclude the application of subsection 70(6) in respect of the properties transferred to the trusts?

2. If subsection 104(2) is applied to the trustees as noted above, would only one T3 return need to be filed?

3. If a valid declaration affecting a life insurance policy on the life of the taxpayer provides that the proceeds thereof are payable to the named persons who are the trustees of the two trusts referred to above, and directs that the insurance proceeds are to be held by the trustees, and invested and distributed in accordance with the provisions in the wills and that such proceeds are to be added to the capital of one or both of such trusts, would the addition of the insurance proceeds into one or both of the trust funds of and by itself preclude the application of subsection 70(6) of the Act to other properties transferred to the trusts?

The particular situation outlined in your letter appears to relate to a factual one, involving one or more specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. An Advance Income Tax Ruling is not issued where a transaction has been completed or is significantly advanced. In those instances you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are, however, prepared to offer the following general comments which may be of assistance.

With respect to your first two questions we note that subsection 70(6) of the Act provides that, if certain conditions are met, a transfer of the taxpayer's capital property following the taxpayer's death to a trust may occur on a tax-deferred basis. Where subsection 70(6) would otherwise apply in respect of the transfer of the properties to each of two trusts as described in your example, we do not expect that the application of subsection 104(2) to the two trusts would, of and by itself, preclude the application of subsection 70(6) to determine the tax consequence of the transfer of those properties. We also confirm that the application of subsection 104(2) to the trustees of the two trusts does not impact the requirements respecting a trust's obligation to file a T3 Trust Income Tax and Information Return.

With respect to your third question, if the proceeds of the insurance policy are validly designated in favour of the trustees and the trustees in that capacity and wholly in accordance with the terms of the designation add the proceeds to the capital of one or both of the trusts, this would not, in our view, of and by itself preclude the application of subsection 70(6) to determine the tax consequences in respect of other properties transferred to the trusts.

However, we would caution that the addition of the proceeds of the insurance policy to the capital of the two trusts could, depending on the circumstances, impact the trusts' status as testamentary trusts. We would note that, pursuant to paragraph (b) of the definition of "testamentary trust" in subsection 108(1), a trust created after November 12, 1981 would not be 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.

This may be a relevant consideration where, for example, the insured has not appointed the named persons in the insurance designation in their capacity as trustees of the estate or where the policyholder was not the taxpayer.

As noted in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and consequently, is not binding on the CRA in respect of any particular situation. However, we trust that these comments will nonetheless be of assistance.

Yours truly,

Robin Maley
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch