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: Tax implication applicable to a blind trust on death of sole settlor/beneficiary.
Position: Deemed disposition of all trust property.
Reasons: Per 104(4)(a)
June 25, 2014
Re: Blind Trusts
We are responding to your November 9th, 2012 query as to the tax implications in respect of the trust property when the sole beneficiary of a blind trust passes away. We apologize for the delay in our response. You provided the following assumptions in regard to the relevant attributes of a trust to which your question relates:
- The settlor and the beneficiary of the trust is one and the same individual; and
- The settlor/beneficiary is required to set up the trust because of the public office the settlor/beneficiary holds.
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings. Where the particular transactions are completed, the inquiry should be addressed to the audit division of the applicable CRA Tax Services Office.
Existence of a valid trust for tax purposes
The income tax implications associated with a blind trust agreement depend on whether the agreement results in the creation of a valid trust for purposes of the Income Tax Act (the "Act").
The existence of a trust is determined by the relationship between the settlor, the trustees and the beneficiaries and is a question of fact. It is accepted at common law that an express trust cannot be established unless three certainties are present, namely the certainty of:
- the intent to create a trust;
- the property to be placed in trust; and
- the identity of the beneficiaries of the trust.
The certainty of intention is established where it is clear that a trust relationship was intended as opposed to some other relationship such as an agency, a transfer, a gift of property or co-ownership. The property, or property substituted therefor, must be clearly identifiable in order for the certainty of property to exist. Lastly, in creating a valid trust, the beneficiaries must be identifiable. The attempt to establish a trust will fail unless it is certain that the settlor intended to bring a trust relationship into existence and both the property and the beneficiaries or other objects of the trust are described with sufficient certainty.
If the blind trust agreement does not create a valid trust for purposes of the Act, then it may be some other relationship as noted above. There is nothing in the Act that precludes a taxpayer from entering into an agreement to simply delegate the management of the taxpayer's properties and the tax implications if any would depend on the terms of the arrangement.
Transfer of capital property to a valid trust for tax purposes
Assuming the blind trust agreement created a valid trust for purposes of the Act, a transfer of capital property to the blind trust is generally treated as a disposition of the property at fair market value, with the resulting recognition of any capital gain or capital loss. However, in certain circumstances, the Act allows an individual to transfer property to a trust on a tax-deferred basis. Of relevance to the divestment obligations of reporting public office holders is the tax-deferred rollover in subsection 73(1) of the Act where the conditions in subparagraph 73(1.01)(c)(ii) and subsection 73(1.02) of the Act are met.
The condition in subparagraph 73(1.01)(c)(ii) and subsection 73(1.02) of the Act may be summarized as follows:
- the trust is created after 1999;
- the settlor and the trust are resident in Canada at the time of the transfer;
- only the settlor is entitled to receive or use all of the income or capital of the trust arising during the settlor's lifetime;
- either the settlor has attained the age of 65 at the time the trust was created or the transfer of property to the trust does not result in a change of beneficial ownership in the property;
- no person other than the settlor may have any absolute or contingent right as a beneficiary under the trust; and
- the trust does not make an election under subparagraph 104(4)(a)(ii.1) of the Act.
Deemed disposition of trust property by a valid trust on death of the settlor
Pursuant to paragraph 104(4)(a) of the Act, a blind trust, the terms of which satisfy the conditions in subparagraph 73(1.01)(c)(ii) and subsection 73(1.02), as discussed above, such that it qualified for the tax-deferred rollover pursuant to subsection 73(1), is generally subject to the deemed disposition of its property at fair market value at the time of death of the settlor/beneficiary.
We trust our comments will be of assistance.
Manager, Trusts Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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