23 March 2001 External T.I. 2000-0059755 - Trust rec'g property from an 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 				2000-005975
					Annemarie Humenuk

March 23, 2001

Dear XXXXXXXXXX:

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

This is in reply to your letters of November 28, December 11, 2000 and February 5, 2001, 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" or upon the death of both the settlor and the settlor's spouse or common-law partner (referred to as spouse in this letter) in the case of a "joint spousal or common-law partner trust," as those terms are defined in the Notice of Ways and Means Motion tabled in the House of Commons on March 16, 2001. Although the remainder of this letter refers only to alter ego trusts, the analysis and result apply equally to a trust receiving a contribution from either an alter ego trust or a joint spousal or common-law partner trust.

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

It is your view that a trust which is created on or after the death of the settlor of an alter ego trust will be a testamentary trust for purposes of the Act, notwithstanding that the trust is settled with property previously held by the alter ego trust. In support of your view, you provided an analysis of the timing of the creation of the second trust and the identity of the person who contributes the property to the second trust. You also make reference to various interpretations given by the Canada Customs and Revenue Agency (the "CCRA") on related issues which you believe support your view.

In your letter of November 28, 2000, you state that all that is required to establish a testamentary trust for income tax purposes is that the trust arise "on and as a consequence of the death of an individual". In the example described on the bottom of the first page of your letter, the individual referred to in that phrase is the settlor of the inter vivos trust which held the property prior to the settlor's death. The term "testamentary trust" is defined in subsection 108(1) to be a trust or estate that arises on and as a consequence of 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.

In your analysis of the issue of the identity of the contributor to the second trust, you take the view that it is the settlor, and not the first trust, who contributes the property to the second trust by means of the direction set out under the terms of the trust which holds the property prior to the settlor's death, citing CCRA document 9733905 as support for your view. In CCRA document 9733905, the issue was whether a trust was subject to a deemed disposition of its property on the day that was 21 years after the creation of the trust. In that case, the deemed disposition under paragraph 104(4)(b) which would otherwise have occurred on the day that was 21 years after the creation of the trust was deferred until the end of the day on which the spouse died. Since subparagraph 104(4)(a)(ii) only requires a trust to meet the conditions described in subparagraphs 104(4)(a)(iii) and (iv) "at any time", the deemed disposition which would otherwise have occurred on the day that was 21 years after the creation of the trust was deferred even though the trust did not meet the conditions in (iii) and (iv) at all times since its creation. It is not clear how this document supports the position advocated in your letters.

You also referred to CCRA documents 9226315 and 9801035 which address the issue of when a particular testamentary trust is created. Both interpretations involved a transfer from one testamentary trust to another. In CCRA document 9226315, the issue was whether the terms of a will created one testamentary trust or two successive testamentary trusts. In CCRA document 9801035, the issue related to the interpretation of the phrase "on and as a consequence of the death of the individual" in the preamble to the definition of testamentary trust in subsection 108(1). The 1985 amendment to the definition of testamentary trust addressed the issue of transfers from one testamentary trust to another.

As stated in the Department of Finance's technical notes to the 1985 amendment to the definition of testamentary trust in subsection 108(1), the exception in (b) for a contribution made by an individual on or after that individual's death and as a consequence thereof ensures that a contribution made 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, since it is our understanding that a person cannot transfer his or her property on or after his or her death otherwise than by will or other testamentary instrument, the transfer of property from an alter ego trust to a trust created after the death of the settlor of the alter ego trust is not a transfer of property by the settlor of that alter ego trust. Furthermore, in the case of property which has been transferred to an alter ego 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, 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. In our view, a trust, which receives the property of an alter ego trust, will not be a testamentary trust for the purposes of the Act.

You referred to CCRA document 9238555, 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. 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 or joint spousal or common-law partner 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