13 December 2005 External T.I. 2004-0090941E5 - application of 104(2)

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.

Principal Issues: Will 104(2) be applied to designate 3 trusts as one.

Position: Question of fact.

Reasons: Subsection is designed to prevent a beneficiary or group or class of beneficiaries from being able to split income by using multiple trusts. Therefore depending on the facts-- there may be legitimate non-tax reasons for multiple trusts being set up.

XXXXXXXXXX

December 13, 2005

Attention: XXXXXXXXXX

Dear Sir/Madame:

This is in reply to your letter of August 13, 2004, in which you ask whether the Minister of the Canada Revenue Agency (the "CRA") would use the discretionary power granted to him under subsection 104(2) of the Income Tax Act, R.S.C. 1985 (5th supp.) c.1 as amended (the "Act") in the scenario proposed in your letter as follows. We apologize for the delay in our response.

Upon his death a taxpayer will create by Will three separate trusts for the benefit of his three children. The taxpayer/settlor (a widower) will be contributing 100% of the trust assets on his death. The three adult children are the only beneficiaries (Child A, Child B and Child C). Child A is the proposed trustee of the taxpayer's estate and any trust created by Will. The following trusts will be created upon death:

Trust 1 - $1,000,000 - sole beneficiary is child A
Trust 2 - $1,000,000 - sole beneficiary is child B
Trust 3 - $1,000,000 - sole beneficiary is child C

The balance of the estate ($5,000,000) is to be distributed evenly to child A, B and C. Separate bank and brokerage accounts and bookkeeping will be used for the various trusts created.

The situation outlined in your letter appears to relate to an actual transaction. Note that written confirmation of the tax implications arising from particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with some general comments which may be of assistance.

Our Comments

The discretion given to the Minister by subsection 104(2) of the ITA can be exercised where substantially all of the property of the various trusts has been received from one person, and the trusts are "conditioned" so that the income accrues to the same class of beneficiaries. The Minister of National Revenue has authorized the Director of the relevant Tax Services Office, among others, to exercise the powers and duties of the Minister under subsection 104(2) by a document dated September 27, 1999 as amended to September 22, 2005.

The determination of whether the trusts have been structured so that their income accrues to the same group or class of beneficiaries is a question of fact. The applicability of subsection 104(2) of the Act and the relevance of the various facts will be determined mainly in light of its object which is to prevent a beneficiary, group or class of beneficiaries from being allowed to split income by using various trusts for the same beneficiary, group or class of beneficiaries. We do however recognize that often with respect to family and estate planning there may be legitimate non-tax reasons for wanting to keep the interests of specific family members separate. All these factors will be considered when determining whether several trusts will be considered one individual for the purposes of the Act. In general, it is our opinion that subsection 104(2) of the Act would not apply in a situation where a testator creates a separate trust for each of his or her children.

Nevertheless, with respect to the second condition set out in subsection 104(2), it should be noted that the CRA provided the following comments in respect to question 8 of the APFF 1999 round table:

"Class of beneficiaries" is not defined in the Act. We should therefore use its common meaning. We would also take any definition into account that may exist in legislation governing trusts that would apply to the particular case. One definition of "class" in Webster's reads "a group, set, or kind sharing common attributes". The definition in the Oxford reads "group of persons or things having some characteristics in common".

It is our view that "members of the same family" could be one class of beneficiaries. At that round table, it was also stated that one of the criteria that would be examined in making such a determination is whether the trusts have common beneficiaries. The number of common beneficiaries and the nature of their respective interests in each of the trusts are factors that might have some bearing in determining whether the income of those trusts accrues to the same group or class of beneficiaries. In this regard, it is not necessary that each trust have the same beneficiaries in each trust; it is sufficient that the beneficiaries of each trust be of the same group or class of beneficiaries. However, as stated above, the Minister would not normally exercise his discretion to designate multiple trusts as a single trust when a settlor or testator has established a separate trust for each of his or her children.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

Yours truly,

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