Income Tax Severed Letters - 2007-08-31

Principal Issues: (1) Can the CRA provide comments as to when it views a testamentary trust to be created? (2) Can the CRA ever envision circumstances where such a trust could be created at a time long after the time of the decedent's death while still retaining the status of a testamentary trust?

Position: (1) A testamentary trust is generally created on the day that a person dies. (2) The terms of the will may provide that on the death of the first generation beneficiary (e.g., the spouse or common law partner), the trustee is to divide the remaining property into equal parts for the children and then create a new trust for the interest of each child. The trusts for the interest of each child would be testamentary trusts as they may be said to arise on and as a consequence of death even though the official create date of the new trusts is at a later point in time.

Reasons: Wording in subsection 108(1) of the ITA.

Principal Issues: It is becoming increasingly common for trusts to have investments in other trusts. These investments may be income trusts, or mutual funds that are structured as trusts. In such circumstances, the filing due date for the trust is coincident with the date on which T3 information slips are to be furnished. Thus, as a practical matter, it is difficult to complete a tax return for the trust by the due date. This difficulty was acknowledged in the March 19, 2007 federal budget. Until this matter is resolved in some way, possibly by legislative amendment, what would you advise practitioners to do in these circumstances? It is noted that while it is possible to file an amended T-3 return, it is not possible to retroactively make income payable to a beneficiary.

Position: As outlined in the T3 Guide and consistent with the other guides for filing income tax returns, where the preparer of a trust return does not have all of the information slips needed to complete the return when it is due, the income should be estimated. If the estimate differs from the actual amounts when the actual information slips are received, the information slips, including any revised information slips that are being issued by the trust, accompanied by a letter requesting an adjustment to the trust's income, should be sent to the Ottawa Technology Centre accompanied by a letter requesting an adjustment to the trust's tax return.
With respect to the inability to retroactively make income payable, it is noted that a trust is only entitled to a deduction under subsection 104(6) for amounts of income that became paid or payable to the beneficiaries in the year in which the income was earned, and is not entitled to a deduction for amounts that only became payable after the end of the year. Thus, the timing of the receipt of slips will not impact on how much income the trustees made payable to the beneficiaries before the end of the taxation year. In determining whether an amount was payable to the beneficiaries before the end of the taxation year in which the income was earned, we would look to the terms of the trust and any resolutions of the trustees in respect of the exercise of any discretion they might have in respect of the distribution of the trust's income.

Reasons: same response as given at 2005 STEP conference

Principal Issues: When a resident of Canada receives a distribution from a non-resident trust or estate following the death of a parent, is the resident of Canada required to file Form T1142, Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust?

Position: Only distributions from the estate are exempt from the filing requirements under 233.6

Reasons: The exception in 233.6 for "an estate that arose on and as a consequence of the death of an individual" only applies to distributions from the estate before it is fully administerd. It does not apply to distributions from an alter ego trust or any other inter vivos trust that makes distributions following the death of an individual, nor does it apply to distributions from an on-going testamentary trust that was created under the terms of the will.

Principal Issues: What is the CRA's view of in-trust accounts and how does it determine the nature of the account?

Position: The CRA's position has consistently been that the determination of the nature of an "in-trust" account has to be made on a case by case basis in light of the specific facts. The legal relationship between the parties must be determined before applying the Act

Reasons: For tax purposes, no distinction is made between a formal trust and an informal trust except that it is typically more difficult to establish whether an informal trust is in fact valid. As noted in the question, the three certainties must be present in order for a trust relationship to be established. It will often be very difficult for the person creating the trust - typically a parent of the child - to prove that the three certainties are met unless the creation of the trust has been clearly documented. While the CRA recognizes that a formal trust deed is not required in order to establish a trust, a parent who wants a reasonable degree of certainty as to whether the CRA will agree that a trust has been established for the child would be well advised to set out the terms and conditions of the trust in a formal trust deed and to handle the trust funds in accordance with the terms and conditions so established.

Principal Issues: In Technical Interpretation # 9812245 (dated June 22, 1998) the CRA indicated that the social insurance number (SIN) of a child (under age 18) is not required if the child's income is expected to be $2500 or less. The CRA also commented that the SIN to be recorded on the information slip would depend on whether the attribution rules apply - if they apply, the parent's SIN must be used; if they do not apply, the child's SIN is to be used. Does the above represent CRA's position, and if so, how is the issuer of the information slips to know which SIN should be used?

Position: Where the funds are held in the child's name only, with the parent acting as agent or guardian of the child's property, the financial institution would issue the appropriate information slip in the name of the child. If the parent is also listed as a joint account holder, the financial institution would issue the appropriate information slip in the name of both the parent and the child in the same manner as for other joint account holders. In either case, the child's social insurance number would not be required where a beneficiary is under 18 and the beneficiary's total income is expected to be less than $2500. If the parent is listed as a joint account holder, the parent's social insurance number will be required in all cases.

Reasons: The application of the attribution rules does not impact on whose social insurance number is required on the information slip as the payor is not normally in a position to determine the extent to which the attribution rules apply.

Principal Issues: In the event that Bill C-33 is not passed before the filing dates for the 2007 taxation year, is it still the Canada Revenue Agency's ("CRA") view that taxpayers should file in accordance with the proposed legislation? In particular, can immigrant taxpayers who contributed property to a trust that is not resident in Canada in circumstances where the conditions in subsection 75(2) are met continue to rely on proposed paragraph 75(3)(c.2) of the ITA to exclude the income earned by that trust from their income? What is required of taxpayers who have previously filed tax returns in accordance with draft legislation when the effective date was for taxation years after 2002?

Position: It is the CRA's longstanding practice to ask taxpayers to file on the basis of proposed legislation. Consequently, even if the legislation does not receive Royal Assent by the filing due dates for 2007, taxpayers will be expected to file their 2007 returns on the basis of that proposed legislation. For trusts created in 2001 or subsequent taxation years, the trust may elect to have the proposed rules apply from the date the trust was created. If the trust has filed based the proposed legislation and intends to elect, no further action is required. Additionally, as there is no change to the proposed implementation date for proposed paragraph 75(3)(c.2) of the ITA no action is required at this time for taxpayers who have filed based on this proposal. If adjustment requests are required, taxpayers should write to the CRA, as soon as possible. Adjustment requests for NRTs should be sent to the International Tax Services Office and adjustment requests for FIEs should be sent to the local tax office where the taxpayer lives.

Reasons: Wording of provisions and CRA practice.