Income Tax Severed Letters - 2006-09-22

Principal Issues: A bare trust is not recognized for the purpose of the Act because subsection 104(1) of the Act profides that, in situations where the trustee can reasonably be considered to act as agent for all the beneficiaries in respect of all dealings with the trust property and the trust is not a trust described in any of paragraphs (a) to (e.1) of the definition "trust" in subsection 108(1), the arrangement is not considered to be a trust for all but a few purposes of the Act. When an individual transfers property to a bare trust, no disposition is recognized because there is no change in beneficial ownership. However, paragraph (b)(v) of the definition of "disposition" in subsection 248(1) of the Act has the effect of creating a disposition when the trustee of a bare trust ceases to act as such in respect of the trust property. One interpretation of this provision would result in a disposition whenever a bare trustee distributes the property back to the sole beneficiary of the turst who is also the sole contributor to the trust. Can you comment on this?

Position: No disposition arises on the distribution of the trust's property to the contributor who is the beneficiary of the bare trust.

Reasons: Since paragraph (e) of the definition is not one of the provisions for which a bare trust is considered to be a trust, the exceptions in paragraph (e) will not apply to the distribution of the bare trust's property to the contributor-beneficiary. Since there is no change in the beneficial ownership as a result of the distribution, paragraph (e) will apply and the distribution will not result in a disposition. If a trusee ceases to act as agent for all the beneficiaries in respect of all dealings with the trust property without a distribution to the beneficiary, subparagraph (b)(v) will operate to ensure that a disposition arises at the time. Also, a disposition will arise at any time when there is any change in beneficial ownership that is not covered by the exception in paragraph (e) of the definition of disposition (such as the transfer of property from one person to a bare trust for another person.

Principal Issues: Can you give an update on any changes that are being proposed to the way T3's are assessed? In particular, there has been some discussion about whether financial statements for trusts will be required in the future. What is the current thinking on this matter?

Position: The AG has recommended that a statement of assets and liabilities (a balance sheet) be required to be filed with the T3 return; her recommendation is under consideration

Reasons: See 2005 AG report, chapter 3 in particular for full details of the AG's recommendations with respect to the assessment and auditing of trusts.

Principal Issues: Whether 70(6) rollover available if trustee required to pay life insurance premiums.

Position: No.

Reasons: As a result of the duty to pay life insurance premiums, persons other than the surviving spouse or common-law partner may, before the survivor's death, obtain the use of trust income or capital.

Principal Issues: At last year's STEP conference, we addressed the issue of whether a trust that only held property that was subject to subsection 75(2) of the Act was required to file a T3 return. As stated in the 2004 and 2005 T3 Guides, a trust that holds property that is subject to subsection 75(2) of the Act is required to file a T3 return regardless of whether or not it has tax payable or meets any of the other conditions relating to dispositions and distributions of trust property that would give rise to an obligation to file an income tax return. Certain commentators have challenged your position on this issue, on the basis that subsection 150(1.1) of the Act provides an exemption for individuals, which presumably includes trusts, that have no tax payable for a particular taxation year. Can you comment any further on this issue?

Position: A T3 return is required whenever 75(2) applies to attribute any of the income of the trust to a contributor.

Reasons: Section 221 of the Act contains a broad range of prescribing powers, including the powers to promulgate regulations imposing requirements to file information returns. Therefore, given the nature of the T3 return as both a return of income and an information return, the statutory requirement to file a T3 return exists where the trustee has control of or receives income, gains or profits in the trustee's fiduciary capacity, even if the trustee computes nil income for the trust for tax purposes. This includes circumstances where the trust has no income for tax purposes because of subsection 75(2) of the Act.

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