8 November 2001 External T.I. 2000-0059795 - Testamentary Trust Variation

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether a trust created under a will, if varied, is still regarded as a "testamentary trust" within the meaning of subsection 108(1) of the Income Tax Act.

Position: General comments.

Reasons: Insufficient facts to reach a conclusion.

XXXXXXXXXX 							2000-005979
								Éric Allard-Pouliot
November 8, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request : Testamentary Trust Variation

This is in reply to your facsimile of December 4, 2000, in which you requested our opinion regarding the above-noted subject. More particularly, you requested our opinion as to whether a trust that qualifies as a "testamentary trust" within the meaning of subsection 108(1) of the Income Tax Act (the "Act") would still be regarded as such if varied by agreement of all beneficiaries under the trust.

In your letter, you refer to a situation where Mr. A dies without issue or spouse. According to his last will and testament, his estate is left to his executor, Mr. B, in trust for the payment of debts, distribution of certain portions of the estate to specified beneficiaries, and with the residue payable to Mr. B, if he is alive at Mr. A's death. If Mr. B is not then alive, the residue of Mr. A's estate is to be distributed as part of Mr. B's estate, which would pass to Mr. B's children, all of whom are more than eighteen years of age. Mr. B and his children consider this arrangement unfair to the children of Mr. B and, therefore, they wish to vary the terms of the trust created under Mr. A's will to provide Mr. B with a life interest in the residue of Mr. A's estate and certain rights of capital encroachment during his lifetime, with distribution of the remaining capital on Mr. B's death to Mr. B's children.

In light of these facts, you require our opinion as to whether the trust created under Mr. A's will, as varied by agreement between all the beneficiaries under the said trust, would still be regarded as a "testamentary trust" within the meaning of subsection 108(1) of the Act.

The particular circumstances in your letter on which you have asked for our views appear to refer to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Therefore, while we cannot confirm the tax effects of the particular situation outlined in your letter, we are prepared to offer the following general comments which may be of assistance to you.

Although there is a question whether an agreement to vary the terms of a trust operates as a variation of an existing trust or as a creation of a new trust, certain common law reasoning suggests that a variation by an agreement among beneficiaries may result in the creation of a new trust. Accordingly, upon the variation of a trust, it is a question of law whether the distribution of property can be said to be made under the terms of the testator's will or another trust, for the purposes of the meaning of "testamentary trust". Therefore, whether the trust created under the will of Mr. A, as varied by agreement between all the beneficiaries under the said trust, will still be regarded as a "testamentary trust" within the meaning of subsection 108(1) of the Act depends on whether this variation by agreement results in the creation of a new trust. The facts provided in your request are not sufficient to allow us to reach a conclusion as to whether the variation of the trust created under Mr. A's will would be tantamount to the creation of a new trust. However, based on the information provided, we would be inclined to view this variation as being substantial enough (i.e. the addition of beneficiaries and the modifications to Mr. B's interest under the trust) so as to result in the creation of a new trust.

Under common or statutory law in Canada, beneficiaries may be able to vary a testator's will in order to renounce or transfer some or all of their rights under the will. However, in order to establish the tax consequences to a beneficiary of such a renunciation or transfer, it must be determined whether the renunciation or transfer resulted from the execution of a disclaimer, release or surrender as these terms are defined in subsection 248(9) of the Act and in accordance with their true legal meanings. Whether a beneficiary's bequest under a will that is transferred to others after a variation of the will is a true disclaimer, release or surrender for the purposes of subsections 248(8) and (9) of the Act is a question of facts to be determined largely on the wording of the deed of arrangement or variation and the meanings of the terms.

However, in order to qualify as a disclaimer, release or surrender within the meaning of subsection 248(9) of the Act, the following conditions must be met:

• In order to qualify as a disclaimer, the disclaimant must not, expressly nor impliedly, have accepted nor assented to the gifts that he attempts to disclaim (as mentioned by the Federal Court of Appeal in Biderman et al. v. The Queen, 2000 DTC 6149, "A disclaimer occurs before the beneficiary takes the gift and a release occurs only after he or she has accepted the gift"; see also paragraph 7 of Interpretation Bulletin IT-385R2);
• It must be made within the period ending 36 months after the death of the taxpayer (unless written application therefore has been made to the Minister by the taxpayer's representative within that period and the disclaimer is made within such longer period as the Minister considers reasonable in the circumstances); and
• It must not, expressly nor impliedly, direct how or to whom the disclaimed, released or surrendered gift passes on after the disclaimer, release or surrender.

Generally, no tax consequences will ensue for a taxpayer who executes a valid disclaimer, release or surrender within the meaning of subsection 248(9) of the Act. Otherwise, a taxable disposition might result where the disclaimer, release or surrender does not fall within the definition of these terms in subsection 248(9) of the Act. In this regard, we would refer you to Interpretation Bulletin IT-385R2 which discusses disclaimers, releases and surrenders and the tax consequences that result thereof in respect of a disposition of an income interest in a trust.

The above comments are an expression of opinion only and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R4. We trust that the foregoing will be of assistance to you.

Yours truly,

Alain Godin, Manager
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch