23 May 2002 External T.I. 2002-0135235 - trust; agency

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: tax consequences re fund for handicapped child

Position: donations not taxable
-taxation of investment income depends on whether trust or agency

Reasons: common law

XXXXXXXXXX 	2002-013523
		Denise Dalphy, LL.B.
(613) 957-9231
May 23, 2002

Dear XXXXXXXXXX:

Re: Fund for Handicapped Child

We are writing in reply to your facsimile transmission of April 17, 2002.

Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.

Facts

1. A service club has received contributions from members and the public at large.

2. These funds have been segregated and invested for the exclusive help of a severely handicapped child.

3. Each year, for a number of years, some of the funds have been used to help the child.

4. When the child reaches the age of majority, the remaining funds will be distributed to him.

5. You are not aware of any related formal documents such as trust agreements.

Our Comments

While the amounts received by the child as donations would not be subject to income taxation, any investment income generated from the donations will be subject to tax, either by the child or, if the funds are held in trust at law, by the trust.

Although you are not aware of any legal documents, this in and of itself is not determinative of whether an "in-trust" account is considered a trust at law. The existence of a trust is determined by the relationship between the settlor, the trustees and the beneficiaries. The relationship, which may or may not be defined by a formal written document, is codified by any applicable trust legislation and common law. It is accepted at law that a trust cannot be established unless three certainties are present, namely the certainty of:

• the intent to create a trust;
• the property to be placed in trust; and
• who the beneficiaries of the trust are.

The certainty of intention is established where it is clear that a trust relationship was intended as opposed to some other relationship such as an agency, or a transfer, or gift of property. The property, or property substituted therefor, must be clearly identifiable in order for the certainty of property to exist. Lastly, in creating a valid trust, the beneficiaries must be identifiable.

Whether these three certainties are present is a question of fact, which can only be determined on a case-by-case basis. Where an "in-trust" account is opened by a service club for a severely handicapped child, in absence of a formal trust document, the certainty of intention to set up a trust arrangement would be difficult to prove. Also, since in this case the child is a minor, an "in-trust account arrangement" may simply have been designed to accommodate the fact that the minor does not have the capacity to enter into legally binding contracts and purchase financial instruments in his own name. Thus, the arrangement may be one akin to agency as opposed to a trust, in which case, the investment income, when earned, would be subject to income taxation in the hands of the child.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of the Circular, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate