23 March 2001 External T.I. 2000-0005135 - Trust - Property From Alter Ego Trust

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.

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 that is created as a consequence of death considered a testamentary trust if it receives property from an alter ego trust?

Position: no

Reasons: A trust that is created by the trustee of an inter vivos trust is excluded from the def'n of testamentary trust by reason of (a) of that def'n and a trust that receives property from an inter vivos trust created after Nov 12, 1981 is excluded from the def'n of testamentary trust by reason of (b) of that def'n.

XXXXXXXXXX  				2000-000513
A. Humenuk

March 23, 2001

Dear XXXXXXXXXX:

Re: Status of a Trust Created upon Death of an Individual

This is in reply to your letter of January 11, 2000, concerning the status of a trust to be created upon the death of the settlor of an inter vivos trust which qualifies as an "alter ego trust" as that term is defined in the Notice of Ways and Means Motion tabled in the House of Commons on March 16, 2001. We apologize for the delay in our response.

All statutory references in this letter are references to the provisions of the Income Tax Act (the "Act").

An alter ego trust, as defined in the proposed legislation, is an inter vivos trust created after 1999 by a taxpayer who has attained the age of 65 at the time the trust is created and which imposes restrictions on the disbursement or use of the income and capital of the trust in the manner described in proposed clause 104(4)(a)(iv)(A). In order for a trust to meet the conditions described in proposed clause 104(4)(a)(iv)(A) and qualify as an alter ego trust, the settlor of the trust must be entitled to receive all of the trust's income which arises before the settlor's death and no one other than the settlor can be entitled to receive or otherwise obtain the use of any of the income or capital of the trust while the settlor is alive. Under the proposed changes to section 73 and in particular, the introduction of subsections 73(1.01) and (1.02), the provisions of subsection 73(1) are extended to transfers of property to an alter ego trust.

You asked whether a trust which is created upon the death of the settlor of an alter ego trust would be a testamentary trust if, upon the death of that settlor, the newly-created trust receives the property from the alter ego trust in accordance with the terms of that trust. In this regard, you ask us to consider both the situation in which the trust to be created upon the death of the settlor is named as a contingent beneficiary of the alter ego trust and the situation in which the property of the alter ego trust is distributed to the other trust through the operation of a power of appointment exercisable through the will of the settlor.

The term "testamentary trust" is defined in subsection 108(1). A testamentary trust means a trust or estate that arises on or after the death of an individual, subject to the exclusions set out in paragraphs (a) to (c) of that definition. Paragraph (a) excludes a trust from the definition of testamentary trust if it is created by anyone other than the deceased. Paragraph (b), applicable to trusts created after November 12, 1981, excludes a trust from the definition of testamentary trust if any property is contributed to it otherwise than by an individual on or after the individual's death and as a consequence thereof. Paragraph (c) is applicable to trusts created before November 13, 1981 and is not relevant for the purpose of your enquiry.

A trust which is created by the trustees of an inter vivos trust pursuant to the terms of that inter vivos trust would not be a testamentary trust for the purposes of the Act by reason of the exclusion in paragraph (a) of the definition of testamentary trust. Similarly, a trust which receives a contribution from an inter vivos trust would not be a testamentary trust for the purposes of the Act by reason of the exclusion in paragraph (b) of that definition, regardless of whether the authority for making that contribution arises under the terms of the inter vivos trust or from the exercise of a power of appointment. Since a trust is deemed to be an individual under the Act, separate from both the settlor and the trustee, a contribution to a trust created on or after the death of an individual by an inter vivos trust settled by that individual would be a contribution that disqualifies the trust as a testamentary trust within the meaning of subsection 108(1).

A contribution to a trust by an individual on or after the individual's death and as a consequence thereof does not disqualify the trust as a testamentary trust as defined in subsection 108(1) provided the trust otherwise so qualifies. As stated in the Department of Finance's technical notes to the 1985 amendment to the definition of testamentary trust in subsection 108(1), this exception ensures that a contribution to a trust by an individual that is intended to take effect at some later date, such as following the death of the individual's surviving spouse, does not disqualify the trust as a testamentary trust. Thus, a transfer of property from one testamentary trust to another does not disqualify the second trust from being a testamentary trust within the meaning of subsection 108(1) since the property in question is contributed to the second trust by the deceased person through the direction given in that person's will.

Likewise, when an individual gifts property in his or her will to an existing testamentary trust (e.g., when the will of a parent directs that some portion of the estate is to be placed in a testamentary trust previously created by the will of a grandparent for the benefit of the children of that parent), the contribution does not disqualify the existing trust as a testamentary trust because the contribution is made by an individual on or after that individual's death and as a consequence thereof. However, in the case of property that is transferred to an inter vivos trust prior to the death of the settlor, the property does not belong to the settlor at the time of the settlor's death and thus, despite any direction given in the settlor's will with respect to that property, the property cannot be considered to be a contribution by the settlor as a consequence of the settlor's death to a trust that is created subsequent to the settlor's death.

You referred to previous correspondence, E9605575, issued by this Directorate in which we opined that a trust which is created upon or after the death of an individual is not disqualified as a testamentary trust solely by reason of receiving the proceeds from a life insurance policy as a consequence of the death of that individual, notwithstanding that the terms of that trust may have been established prior to the individual's death. That opinion was based on the understanding that no amount would be settled on the insurance trust prior to the receipt of funds from the insurance policy as a result of the individual's death, that the individual who died was the owner of the policy and had designated the trust as the beneficiary of the insurance policy and that the insurance designation was a testamentary instrument. Although the terms of such a trust may be set out before the individual's death, separate from the individual's will, our comments were based on the understanding that the trust would not be created until such time as the insurance proceeds were settled upon the trust. It remains our view that a trust which is settled prior to the individual's death remains an inter vivos trust following the death of that individual, even though it may receive the bulk of its capital as a beneficiary under an insurance policy.

The above comments are based on our understanding of the law as it applies in general. If you have a client who is considering establishing an alter ego trust and would like the issue to be considered further, you may submit a request for an advance income tax ruling in the manner set out in Information Circular 70-6R4.

Yours truly,

T. Murphy, Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch