11 September 2006 Roundtable, 2006-0185581C6 - 2006 STEP Conference -Question 15

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: Who is the majority-interest beneficiary in an unadministered estate for the purpose of subsection 251.1(1) of the Act? Some commentators have noted that it may be difficult to determine each beneficiary's share of the income and capital of the estate if the amount of the testamentary debts is not known. For example, if one beneficiary is entitled to a specific bequest of $100,000 and the other beneficiary is entitled to the residue of the estate, the determination of who is entitled to the majority of the capital of the estate depends on the amount of capital available to be distributed to the beneficiaries after the payment of all of the testamentary debts.

Position: Question of Fact

2006 STEP Round Table
Q.15 Majority-interest Beneficiaries of an Estate

Who is the majority-interest beneficiary in an unadministered estate for the purpose of subsection 251.1(1) of the Act? Some commentators have noted that it may be difficult to determine each beneficiary's share of the income and capital of the estate if the amount of the testamentary debts is not known. For example, if one beneficiary is entitled to a specific bequest of $100,000 and the other beneficiary is entitled to the residue of the estate, the determination of who is entitled to the majority of the capital of the estate depends on the amount of capital available to be distributed to the beneficiaries after the payment of all of the testamentary debts.

Response

It is a question of fact as to whether any heir is a majority interest beneficiary at any particular point in time. A majority interest beneficiary is defined in subsection 251.1(3) of the Act to be "a person whose interest as a beneficiary, if any, at that time

(a) in the income of the trust has, together with the interests as a beneficiary in the income of the trust of all persons with whom the person is affiliated, a fair market value that is greater than 50% of the fair market value of all the interests as a beneficiary in the income of the trust; or

(b) in the capital of the trust has, together with the interests as a beneficiary in the capital of the trust of all persons with whom the person is affiliated, a fair market value that is greater than 50% of the fair market value of all the interests as a beneficiary in the capital of the trust."

Such an interest could be immediate or future, absolute, contingent or discretionary. If the amount of income or capital that the beneficiary may receive under the trust depends on the exercise or failure to exercise a discretionary power by any person, paragraph 251.1(4)(d) of the Act must be considered.

While it may be difficult at times to value the respective interests in an estate, in most cases, including the period of administration of an estate, it should be possible to make a reasonable estimate of the fair market value of each of the interests such that the majority interest beneficiaries of the estate can be identified. For example, if one beneficiary of the estate is entitled to a specific amount while the other is entitled to the residue of the estate, one would expect to find, in the absence of any wording in the will to the contrary, that the residual beneficiary would be entitled to all of the income of the estate such that the residual beneficiary would be a majority interest beneficiary of the estate. The determination of whether the other beneficiary was also a majority interest beneficiary of the estate would depend on the estimated value of the estate at the relevant time.

It is recognized that the status of a beneficiary of an estate as a majority interest beneficiary of the estate could change over the course of time. For example, a disgruntled heir could make a successful court challenge with respect to his or her share of the inheritance with the result that one or more of the majority interest beneficiaries of the estate could lose his or her status as a majority interest beneficiary and another person could become a majority interest beneficiary. A person with a competing claim to challenge the wording of the will would not be considered to be a majority interest beneficiary solely by reason of that claim until such time as the claim is established by the court. If a competing claim is successful and one or more of the beneficiaries of the estate ceases to be a majority interest beneficiary, that beneficiary will cease to be affiliated with the estate at the time that he or she ceases to be a majority interest beneficiary of the estate.