Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Is a trust created out of an individual’s estate by a court order a testamentary trust in subsection 108(1) of the Act in the scenario described below?
Position: Yes.
Reasons: Subsections 108(1) and 248(9.1) of the Act
XXXXXXXXXX 5-982646
M. Lemire
Attention: XXXXXXXXXX
November 30, 1998
Dear Sirs:
Re: Testamentary Trust
This is in reply to your request for a technical interpretation on the application of the definition of “testamentary trust” in subsection 108(1) of the Income Tax Act (the “Act”) to a trust created by an order of a court in relation to an individual’s death in the scenario provided in your letter of February 10, 1998. XXXXXXXXXX Tax Services Office forwarded your letter to us and requested that we respond directly to you.
Facts situation
The facts situation provided in your letter can be summarized as follows:
- An individual died on XXXXXXXXXX.
- The individual’s brother is the sole executor (the “Executor”) of the individual’s estate (the “Estate”).
- The administration of the Estate has not been completed as there are funds held in the Estate that have not been distributed yet.
- A trust (the “Trust”) has been created out of the individual’s Estate by a court order for the sole benefit of the individual’s mentally handicapped son during his lifetime with the remainder to be distributed to a charity on his death. The court order was granted on XXXXXXXXXX.
- The assets of the Estate available for distribution, after administrative expenses, taxes and gifts of specific assets, are as follows: $XXXXXXXXXX to be used to fund the Trust; a XXXXXXXXXX mineral rights interest in a trust (the “XXXXXXXXXX trust”) having a nominal value to be transferred to the Trust; and $XXXXXXXXXX as a specific bequest to a charity.
- The $XXXXXXXXXX and the mineral rights interest in the XXXXXXXXXX trust were transferred to the Trust following the court order.
- The mineral rights interest in the XXXXXXXXXX trust has never produced income except for the XXXXXXXXXX taxation year. In XXXXXXXXXX, a T3 supplementary slip was prepared for an amount of $XXXXXXXXXX which represents the portion of the XXXXXXXXXX trust income earned in respect of the XXXXXXXXXX% mineral rights interest.
- Finally, it is understood that the Executor is bearing the initial 18 months of payment to his nephew out of his own pocket in order to allow the $XXXXXXXXXX fund, which was itself diminished by brokerage fees incurred in placing it for investment, to build up enough investment income to allow it to cover its own taxes and pay out the benefit for his nephew without further encroachment on the capital of the Trust.
Our comments
Generally, the taxable income of a trust (other than a testamentary trust) is subject to income tax at the top personal income tax rate whereas a testamentary trust is subject under Part I of the Act to the graduated income tax rates applicable to individuals.
The expression “testamentary trust” in subsection 108(1) of the Act generally means a trust or estate that arose on and as a consequence of the death of an individual and generally includes a trust created under the terms of the will and a trust created by an order of a court in relation to the taxpayer’s estate made under any law of a province that provides for the relief of support of dependants. However, a testamentary trust does not include a trust created by a person other than a deceased individual or a trust created after November 12, 1981, if any property was contributed to it other than by an individual on his or her death.
In the scenario described above, we are of the opinion that the Trust created for the benefit of the deceased individual’s mentally handicapped son is a testamentary trust for the purposes of the Act.
We hope that this will be of assistance to you.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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