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Principal Issues: What will the first deemed disposition date be of the property of children's trust?
Position: October 20, 2012
Reasons: The day on which each of the Child Trusts was created was October 20, 1991. Thus, under subparagraph 104(4)(b)(ii), the first deemed disposition date of the property of such trusts would be October 20, 2012.
Federal Tax Roundtable, 5 October 2012
2012 APFF Conference
Successive testamentary trusts and deemed disposition rule at 21st anniversary
The questions of whether a trust has been formed and its creation date are matters of a legal nature. Consequently, in Quebec, it is the rules of the Civil Code of Québec that must be examined, as recognized by the CRA in Technical Interpretations 9527695 and 2009-0328441E5.
For the purposes of the Civil Code of Québec, a trustee’s acceptance of holding and administering an initial gift made to a trust will trigger the formation of a trust, but retroactively to the death of the settlor of the trust, if it is a testamentary trust, regardless of the date on which the trust will receive the property bequeathed to it under the will.
It is very common for a will to contain a legacy in favor of an exclusive spousal trust ("Spousal Trust") established under the provisions of subsection 70(6) whose beneficiaries of the capital are trusts established in the will for the benefit of the children of the deceased ("Child Trusts").
Mr. X died on October 20, 1991. Under his will, he bequeathed the totality of his property to a Spousal Trust. The will provides that on the death of his spouse, the residue of the property of the Spousal Trust will be transferred to three Child Trusts (i.e., a trust established for the benefit of each of his three children) in equal shares with each other. No other legacy is provided for in the will to the Child Trusts. Mr. X's surviving spouse, Ms. X, died on March 1, 2010. On April 1, 2010, the Spousal Trust distributed the remainder of its capital equally among the Child Trusts.
First, we understand that the Spousal Trust will be deemed, under the provisions of paragraph 104(4)(a), to have disposed at FMV of all of its property at the end of the day of the beneficiary spouse's death, i.e. March 1, 2010.
With respect to the Child Trusts, even though they are deemed to have been formed under the Civil Code of Quebec since October 20, 1991, it appears that the first deemed disposition of their property takes place 21 years after their formation, namely October 20, 2012. This makes little sense, since those assets will have already been disposed of less than two years previously on the death of the beneficiary spouse, on March 1, 2010.
Rather, we are of the view that in the circumstances set out above, the first deemed disposition of the Child Trusts’ property should be at the end of the day that will be 21 years after the death of the surviving spouse, March 1, 2031, because of the fact that prior to the death of the spouse, the Child Trusts had no property in their possession, other than the potential right to benefit from the capital of the spousal trust on the death of the spouse. The CRA's common law Technical Interpretation 9226315 supports this view as it states that, in general, in such circumstances, the date of creation of the Child Trusts will be the date the assets of the first trust are transferred to them.
The provisions of subsection 104(5.8) provide that in a case where property is transferred from one trust to another, the first day that ends at or after the particular time between the deemed disposition of the transferor trust (the Spousal Trust) to the transferee trust (the Child Trusts) will be the first deemed disposition date of the transferee trust property. These provisions have no impact on this issue, if the date of formation of the Child Trust for tax purposes is considered to be the day of the settlor's death.
In fact, in a case like the one described above, the first of these dates would be October 20, 2012 if we consider that the Child Trusts were formed on the death of the settlor, which, again on the basis of the position of the CRA in Technical Interpretation 9226315, would be inequitable in the case of trusts formed under the Civil Code of Québec as compared to those formed under the Common Law.
Question to the CRA
In the above case, according to the CRA, when will be the first deemed disposition date of the Child Trusts’ property determined under the provisions of section 104?
This question is based on several statements concerning the applicable private law, notably the Civil Code of Lower Canada and the C.C.Q., regarding the formation of trusts in Quebec. Since a private law analysis is beyond the scope of this letter, the following comments are made on the basis that the preamble to this question is a fair statement of the applicable private law.
On this basis, we are therefore of the view that for the purpose of the application of the Act, the date of creation of each of the Child Trusts would be October 20, 1991. Thus, under subparagraph 104(4)(b)(ii), the first deemed disposition date of the property of such trusts would be October 20, 2012.
However, we intend to consult the Department of Finance to determine if this position is consistent with the underlying tax policy.
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