26 April 2013 External T.I. 2013-0486211E5 - Multiple Trusts

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: Whether 104(2) applies in the given hypothetical scenario

Position: Question of fact

Reasons: See details

Question #14 of the Institute of Chartered Accountant of Alberta

Document 2011-0430261E5 posited three spousal trusts created under the will of a deceased person, with the residual beneficiaries under each trust being a different child of the taxpayer. CRA indicated these would likely be deemed a single trust. Document 2004-0090941E5 indicated that three trusts, with each having a different child as a beneficiary, would not likely be so deemed. The difference appears to be the widow(er), a beneficiary in common. Document 2011-0430261E5 seems much more definitive than past interpretations (for example, documents 2004-0090941E5 and 9M19190, Question 8) in setting out CRA's views on the designation of multiple trusts to be a single trust, under subsection 104(2).

(a) Has CRA's approach or interpretation changed? What circumstances are considered relevant in determining whether this provision would be applied?
(b) In the scenario presented in document 2011-0430261E5, would CRA accept a single spousal trust, the residue of which is to be divided into three separate trusts, one for each of the three children of the deceased (i.e. the situation in 2004-0090941E5 implemented after death of the survivor spouse), referred to as "residual trusts" herein, or would CRA consider that the residual trusts would still properly be deemed a single trust in perpetuity?
(c) Assuming CRA would consider the residual trusts in (b), above, to properly be separate trusts, would they also consider the three trusts created under the will in document 2011-0430261E5 to cease to be deemed to be a single trust on death of the survivor spouse?

Our Response

As stated in document 9M19190, the determination of whether the trusts have been structured so that their income accrues to the same group or class of beneficiaries is a question of fact. The applicability of subsection 104(2) of the Act and the relevance of the various facts will be determined mainly in light of its object which is to prevent a beneficiary, group or class of beneficiaries from being allowed to split income by using various trusts for the same beneficiary, group or class of beneficiaries. We do however recognize that often with respect to family and estate planning there may be legitimate non-tax reasons for wanting to keep the interests of specific family members separate. All these factors will be considered when determining whether several trusts will be considered one individual for the purposes of the Act. In general, it is our opinion that the discretion in subsection 104(2) of the Act would not be exercised in a situation where a testator creates a separate trust for each of his or her children. In addition, we comment as follows:

(a) CRA's approach has not changed. For the purposes of determining whether the discretion in subsection 104(2) of the Act would be exercised, certain criteria are examined, including but not limited to:

• whether there was a clear intention to create separate trusts, according to the provisions of the will or trust deed;
• whether the trusts have common beneficiaries, in particular the number of common beneficiaries and the nature of their respective interests in each of the trusts;
• whether the assets of each of the trusts are administered and accounted for separately; and
• the powers of the trustees.

(b) If the scenario presented in document 2011-0430261E5 is amended such that there is created a single spousal trust, the residue of which is to be divided into three separate trusts pursuant to the terms of the testator's will, one for each of the three children of the deceased (with each child as sole beneficiary), and referred to as the "Residual Trusts" herein, we comment as follows:

• As at the date of death of the beneficiary spouse of the spousal trust, there would be a deemed disposition of the assets held in the spousal trust pursuant to paragraph 104(4)(a) and the aggregate gain, if any, would be taxable in the spousal trust.
• If the condition in paragraph 248(9.1)(a) is met, the Residual Trusts may qualify as testamentary trusts.
• Subject to the criteria detailed in the foregoing paragraph (a), the Residual Trusts would not generally be subject to the exercise of discretion afforded the Minister in subsection 104(2) of the Act.

(c) If the scenario presented in document 2011-0430261E5 is not amended and the three spousal trusts were treated as a single trust pursuant to subsection 104(2) of the Act, we comment as follows:

• As at the date of death of the common beneficiary spouse of the three spousal trusts, there would be a deemed disposition of the assets held in each of the spousal trusts pursuant to paragraph 104(4)(a) of the Act and the aggregate gain, if any, of each of the three spousal trusts treated as that of a single trust for tax purposes pursuant to subsection 104(2) of the Act.
• Subject to the criteria detailed in the foregoing, the Residual Trusts would not generally be subject to the discretion in subsection 104(2) of the Act in the taxation year following the taxation year in which the date of death of the beneficiary spouse occurred.

April 26th, 2013
D Tiu