23 March 2001 External T.I. 2001-0075375 - 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 					2001-007537
						Annemarie 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 September 25, 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" or upon the death of both the settlor and the settlor's spouse 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.

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

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 the settlor, the newly created trust receives the property from the alter ego trust in accordance with the terms of that trust. 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. We will be responding to your questions related to proposed subsection 104(1.1) of the Act under separate cover.

You acknowledge that the transfer of property from an alter ego trust to a newly created trust would be considered to be a contribution to the newly created trust by the alter ego trust. However, you ask whether the definition of testamentary trust in subsection 108(1) might be broad enough to include a trust created upon the termination of an existing trust on the basis that the existing trust is deemed to be an individual for the purposes of the Act and the termination of the trust could be considered to be the death of an individual.

Although subsection 104(2) deems a trust to be an individual for the purposes of the Act, this provision does not apply to alter the meaning of terms or phrases, such as birth and death, which are ordinarily only used in the context of natural persons. Thus, it is our view that a trust, which would otherwise qualify as a testamentary trust, would cease to be such if it received a contribution from an alter ego trust.

You state that the issue of whether the transfer qualifies as a testamentary disposition under provincial law is not relevant for the purpose of determining whether or not the newly created trust qualifies as a testamentary trust. Since a testamentary trust is defined as one which, among other things, has received no contribution other than a contribution from an individual as a result of that individual's death, a trust created in the circumstances you describe could only qualify as a testamentary trust if the contribution could be considered to have been made by the settlor on or after the settlor's death and as a result of the settlor's death. 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 to a trust created after the death of the settlor of the alter ego trust cannot be considered to be a transfer by the settlor that occurred on or after the settlor's death. Thus, it is our view that a trust which receives the property from an alter ego trust is not a testamentary trust for the purposes of the Act.

You refer to previous correspondence, 9605575, issued by this Directorate in which we opined that a trust 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 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.

We trust our comments will be of assistance.

Yours truly,

T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch