8 May 2012 Roundtable, 2012-0435701C6 - CALU CRA Roundtable Q4

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: The potential impact of a "joint last to die" life insurance policy held by a trust on various provisions of the Act

Position: General comments provided

CALU CRA Roundtable – May 2012

Question 4 – Testamentary Spousal Trust as Beneficiary

Background

In CRA TI 2010-0358461E5, dated December 15, 2010, the CRA was asked to consider whether the payment of insurance proceeds to the trustees of a testamentary spousal trust could “taint” the trust for purposes of the rollover under subsection 70(6) of the Act. The following sets out the specific question and response.

(Note – the words in italics are modifications from the original TI which contemplated two separate testamentary trusts).

Question - “If a valid declaration affecting a life insurance policy on the life of the taxpayer provides that the proceeds thereof are payable to the named persons who are the trustees of the spousal testamentary trust and directs that the insurance proceeds are to be held by the trustees, and invested and distributed in accordance with the provisions in the will and that such proceeds are to be added to the capital of the trust, would the addition of the insurance proceeds into the trust fund of and by itself preclude the application of subsection 70(6) of the Act to other properties transferred to the trust?”

CRA Response - ….if the proceeds of the insurance policy are validly designated in favour of the trustees and the trustees in that capacity and wholly in accordance with the terms of the designation add the proceeds to the capital of the trust, this would not, in our view, of and by itself preclude the application of subsection 70(6) to determine the tax consequences in respect of other properties transferred to the trust.

However, we would caution that the addition of the proceeds of the insurance policy to the capital of the trust could, depending on the circumstances, impact the trust’s status as a testamentary trust. We would note that, pursuant to paragraph (b) of the definition of “testamentary trust” in subsection 108(1), a trust created after November 12, 1981 would not be a testamentary trust if before the end of the taxation year, property has been contributed to the trust otherwise than by an individual on or after the individual’s death and as a consequence thereof.

This may be a relevant consideration where, for example, the insured has not appointed the named persons in the insurance designation in their capacity as trustees of the estate or where the policyholder was not the taxpayer (bolding added).”

Question 4.1

Assume that Mr. A and Mrs. A are the joint owners of a joint second to die insurance policy. The policy has provision for a death benefit to be paid on the first death of Mr. A and Mrs. A. Mr. A designates the trustees of a testamentary spousal trust as beneficiary for any insurance proceeds payable under this policy as a result of his death. Assuming that Mrs. A survives Mr. A, would the fact that insurance proceeds are paid to the testamentary trust and Mrs. A is the joint owner of the policy, preclude the application of subsection 70(6) of the Act to other properties transferred to the trust? Could you also confirm that such a trust would be considered a testamentary trust under subsection 108(1) of the Act?

CRA Response

Similar to the position expressed in document 2010-035846, the CRA is of the view that if proceeds are paid out of a “joint second-to-die” insurance policy on the death of first policyholder and these proceeds are validly designated in favour of the trustees and the trustees in that capacity and wholly in accordance with the terms of the designation add the proceeds to the capital of a trust (as created pursuant to Mr. A’s will or other testamentary instrument), this would not, of and by itself preclude the application of subsection 70(6) to determine the tax consequences in respect of other properties transferred to the trust on the death of Mr. A.

However, again we would caution that the addition of such a payment under the joint policy to the capital of the trust could, depending on the circumstances, impact the trust’s status as a testamentary trust.

Question 4.2

In CRA Technical Interpretations TI 2008-0270421C6 and 2008-0278801C6, Q.2., the CRA provided the following guidance:

“….a trust created pursuant to the individual's will or other testamentary instrument will not lose its testamentary trust status solely by reason of the receipt of the proceeds of an insurance policy on the life of that individual (who was the policyholder), where the trust is the designated beneficiary under the policy and the trust was not created or settled before the death of the individual.

In the case of a joint last-to-die life insurance policy where the only amount that is payable to the trust under the policy is paid on the death of the last of the two persons insured under the policy, our position would be the same - that is, a trust created from the receipt of the proceeds of such a policy will not lose its testamentary trust status solely by reason of the receipt of the proceeds of that insurance policy provided that the life insurance policy is owned by the individual who survives the other immediately before his or her death and the policy qualifies as a testamentary instrument of that person at that time.”

Assume the same facts as under Question 4.1, and that Mrs. A has designated the trustees of the testamentary trust created under Mr. A’s will to be the beneficiary of the insurance proceeds payable on her death. Will the receipt of the insurance proceeds on Mrs. A’s death result in the trust losing its status as a testamentary trust?

CRA Response

The definition of “testamentary trust” in subsection 108(1) of the Act sets out, in its preamble, the general requirement that to qualify as a testamentary trust in a taxation year, a trust must have arose on and as a consequence of the death of an individual. For a trust created after November 12, 1981, paragraphs (a) and (b) of the definition then provide circumstances which, if they exist, will result in the trust not being a testamentary trust for purposes of the Act, despite meeting the words of the preamble.

Pursuant to paragraph (a), the trust will not qualify if it is created by a person other than the individual referred to in the preamble, who is the individual on whose death and as a consequence of, the trust arose. Paragraph (b) applies if at any time before the end of the taxation year, a contribution of property to the trust occurs which is not a contribution by an individual on or after that individual’s death and as a consequence thereof.

Obviously, there exists a wide variety of insurance products available to serve many goals. Given this, CRA would caution that the particular facts that may arise in respect of the scenario in this question could, depending on the unique policy terms, and related relationships of the parties to the insurance policy, result in the trust not meeting the testamentary trust definition.

Based on the wording in paragraph (b) of the testamentary trust definition, it appears that the Act contemplates the possibility of certain contributions to an existing testamentary trust by an individual other than the individual on whose death the trust first arose (i.e. as long as the subsequent contribution is as a consequence of the death of the contributor). It is worth noting that the points raised in document 2010-0358461E5, referred to in your question, remain valid. However, if:

• immediately before the death of Mrs. A the trust was a testamentary trust,
• the facts lead to a conclusion that Mrs. A was the sole policyholder after the death of Mr. A, and
• the contribution occurs as a consequence of her death,

then in our view, the receipt of the insurance proceeds on her death would not result in a loss of testamentary status of the trust.

Kim Duval
2012-043570