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. 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.
STEP CRA Roundtable – June 10, 2016
Question 10. US Revocable Living Trusts
It is common in U.S. estate planning for a U.S. person (non-resident of Canada) to create a “revocable living trust”, in which the settlor (or ‘grantor’) is the sole trustee and for as long as the settlor / grantor is living, he/she is also the sole beneficiary who can request, from time to time, that herself/himself, as trustee, pays or applies for her/his own use and benefit any portion or all of the trust’s net income and principal. Further, the settlor / grantor can exercise his / her power to revoke the trust at any time. The settled property often includes all personal, tangible, intangible and real property of the settlor / grantor. Finally, such trust provisions often provide for a distribution of the trust property to certain named beneficiaries upon the death of the settlor / grantor, for example to a child or a surviving spouse.
Even if both the trust and the settlor / grantor are non-residents of Canada, there could be situations where the arrangement is relevant from a Canadian tax perspective, such as where the trust invests in taxable Canadian property or where a remainder beneficiary is a Canadian resident.
a) Given the above, can the CRA please comment on its previously published general policy - and the continued relevance thereof - that such an arrangement constitutes a trust pursuant to subsection 104(1) in light of the findings of the court in De Mond v. R. 4 CTC 2007? In De Mond, the court found that such a trust was a ‘bare’ trust and hence not a trust for the purpose of subsection 104(1), given the fact that the settlor could cause the trust property to revert to himself at any time. Further, the settlor could exercise his power to revoke the trust at any time and the trustee has no choice but to convey the property. For these reasons, the court found that it was difficult to say that the trustee has significant powers or responsibilities or can take action without instructions from the settlor, or that the trustee is not subject to the control of his beneficiary, since the appellant in fact plays the role of all three of the constituent parties. Therefore, the individual settlor was at all times the true beneficial owner of the trust property.
b) In such instances that a Canadian resident is a remainder beneficiary of a U.S. revocable living trust as described above, and assuming that such an arrangement is a trust in accordance with subsection 104(1), the beneficiary will be required to ascertain the adjusted cost base of her/his capital interest in the trust, as well as the trust’s cost amount in the trust property, in order to accurately apply the provisions of section 107, and certain elections available therein on a future distribution of property from the trust to the remainder beneficiary.
Paragraph 70(5)(b) applies to any person who “acquires any property” that is deemed by paragraph 70(5)(a) to have been disposed of by the decedent. Given such, would the remainder beneficiary of the revocable living trust be considered to have “acquired” the capital interest from the decedent such that the capital interest in the revocable living trust will be acquired by the remainder beneficiary at a cost equal to the fair market value immediately prior to the death of the settlor/life interest beneficiary?
The CRA announced its opinion in respect of the Canadian income tax consequences of a transfer to a revocable living trust at the 1995 Canadian Tax Foundation annual conference. It was the CRA’s opinion that a revocable living trust should be recognized for income tax purposes at the time that legal title to property is transferred to it and that the transfer of the property is at its full fair market value (and not the value of the remainder interest only). This continues to be the CRA’s opinion in respect of U.S. revocable living trusts.
Although the Court concluded that the trusts in question in De Mond were bare trusts in its decision rendered on July 7, 1999, the decision has not altered the CRA’s opinion as it relates to revocable living trusts. It is the CRA’s view that a key distinguishing factor between a revocable living trust and a bare trust is that a revocable living trust generally includes beneficiaries that are contingent on the death of the settlor/grantor. As such, there is a change of beneficial ownership in respect of a transfer to a revocable living trust.
Further, it is the CRA’s view that the 2001 amendments to subsection 104(1) of the Income Tax Act (the “Act”) further support this view. In particular, subsection 104(1) of the Act provides that, “except for the purposes of this subsection, subsection (1.1), subparagraph (b)(v) of the definition “disposition” in subsection 248(1) and paragraph (k) of that definition, a trust is deemed not to include an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property unless the trust is described in any of paragraphs (a) to (e.1) of the definition “trust” in subsection 108(1).”
Under paragraph 70(5)(a) of the Act, a deceased taxpayer is deemed to have disposed of any capital property owned by the taxpayer immediately before his or her death at fair market value. Under paragraph 70(5)(b) of the Act, any person who acquires such property as a consequence of the taxpayer’s death is deemed to have acquired the property at the time of death at a cost equal to fair market value.
The expanded definition of “as a consequence of death” in subsection 248(8) of the Act generally provides that an acquisition of property under or as a consequence of the will or other testamentary instrument of a taxpayer or as a consequence of the law governing the intestacy of a taxpayer is considered to be an acquisition of the property as a consequence of the death of the taxpayer.
In the circumstance described, the remainder beneficiary acquired his or her interest in the revocable living trust pursuant to the terms of that trust and not as a consequence of the decedent’s death. Accordingly, it is the CRA’s view that paragraph 70(5)(b) of the Act is not applicable to determine the adjusted cost base of the capital interest in the trust to the remainder beneficiary.
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