17 April 2003 External T.I. 2002-0154435 - Payment of trust expenses by beneficiary

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: 1. Does the payment of trust expenses by the (spousal) beneficiary taint the trust's status as a testamentary trust?

2. If the terms of trust provide that the property can be distributed to the children of the deceased if the spouse doesn't pay the required expenses, will the trust still qualify as a spousal trust?

Position: 1. Normally, no. 2. No.

Reasons: 1. Where the spouse pays operating expenses only in lieu of rent, such payments will not be viewed as a contribution to a testamentary trust but a capital expenditure in respect of trust property would.

2. Where the terms of the trust provide for a potential distribution to anyone other than the spouse while the spouse is alive, the trust will not be a spousal trust.

XXXXXXXXXX 	2002-015443
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

April 17, 2003

Dear XXXXXXXXXX:

Re: Cottage held by a Trust

This is in reply to your letter of July 23, 2002, concerning the status of a trust created upon the death of an individual where the terms of the trust require the spousal beneficiary to pay certain expenses in respect of the property held in the trust. We apologize for the delay in our response.

All statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

You describe the situation where the terms of a will provide that the family cottage is to be held in trust for the use of the surviving spouse on the condition that she pay the operating expenses of the cottage. For this purpose, operating expenses are defined as utilities, water, sewer, electricity, property taxes and normal repairs and maintenance and do not include any capital expenditures. In the event that the spouse is unwilling to pay such expenses, the property will be distributed to the residual beneficiaries. Otherwise, none of the income or capital is available to anyone other than the spouse prior to her death. You ask whether such a trust could still as qualify as a testamentary trust even though the spouse is required to pay expenses which would otherwise be payable by the trust. Secondly, you ask whether the trust would qualify as a post-1971 spousal or common-law partner trust as defined in subsection 248(1).

The particular circumstances outlined in your letter appear to relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, it is not our practice to comment on a proposed transaction involving a specific taxpayer, except by way of an advance income tax ruling. When the transaction related to the enquiry is completed, the enquiry should be addressed to the relevant tax services office. However, we offer the following general comments in accordance with paragraph 22 of Information Circular 70-6R5.

A testamentary trust, as defined in subsection 108(1), excludes a trust that has received any contribution otherwise than on or after the death of the contributor and as a consequence of the death of that contributor. Consequently, if the payment of the operating expenses of the cottage by the spouse were considered to be a contribution of property to the trust, the trust would lose its status as a testamentary trust.

It is a question of fact as to whether a particular payment results in a contribution to the trust. While a contribution normally involves a transfer of property to the trust, it could also include an indirect transfer of property or an assignment of an interest in property to the trust. However, where the occupant of the property pays the general operating expenses of that property as a condition of using the property, the payment of such expenses can be viewed as tantamount to rent for the property as stated in Peardon v. MNR (86 DTC 1045). As a result, the Canada Custom and Revenue Agency would not normally view the payment of the operating expenses of the trust's property by the beneficiary using that property as a contribution to the trust. However, such a payment would be considered to be a contribution where the payment is made as a capital expenditure in respect of the trust's property or where a provision of the Act, such as proposed paragraph 94(2)(a), deems it to be so.

With respect to your second question, as stated in paragraph 5 of Interpretation Bulletin IT-305R4, Testamentary Spouse Trusts, a trust will not qualify as a post-1971 spousal or common-law partner trust if, among other things, the terms of the will provide for the distribution of, or otherwise permits the use of, any of the trust's capital to anyone other than the spouse during his or her lifetime. Thus, where the terms of the trust provide for a possible distribution of the cottage to the residual beneficiaries during the lifetime of the spouse, the trust would not be a post-1971 spousal or common-law partner trust and subsection 70(5) would apply in respect of the deemed disposition on the death of the taxpayer who created the trust.

However, where the will is silent in respect of the disposition of the property where the spouse does not wish to pay the operating expenses and it is clear from the terms of the will that, in addition to having the right to occupy the property, the spouse is entitled to all the income of the trust, the trust may qualify as a post-1971 spousal or common-law partner trust. The fact that a spousal beneficiary may be required to pay operating expenses in respect of the property occupied by the spouse would not, in and by itself, prevent the trust from being considered a post-1971 spousal or common-law partner trust. However, it must be clear from the terms of the will that the spouse is entitled to any income earned in respect of the trust property.

A trust that qualifies as a post-1971 spousal or common-law partner trust at the time it is created will always be a post-1971 spousal or common-law partner trust even if the spouse subsequently renounces or surrenders the income interest in the trust. In such a case, the comments in Interpretation Bulletin IT-385R2, Disposition of an Income Interest in a Trust, will be applicable. The fact that the spouse is no longer an income beneficiary of the trust would not, in and by itself, result in the trust being considered to have disposed of any property retained by the trust. However, if any property is distributed to the residual beneficiaries while the spouse was still alive, subsection 107(4) will apply to ensure that the trust's proceeds of the disposition of such property is computed under subsection 107(2.1).

We trust our comments will be of assistance.

Theresa Murphy
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch