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: Can an attorney under a power of attorney create an alter ego or joint partner trust, such that the property transferred to such trust will constitute a qualifying transfer
Position: It would depend on the unique facts and legislation.
Reasons: See comments below.
CALU CRA Roundtable May 2014
Question 6 Alter Ego / Joint Partner Trusts
Pursuant to subsection 73(1) of the Act, if an individual (other than a trust) makes a qualifying transfer of capital property (as defined in subsection 73(1.01)), he/she will be deemed to have disposed of that property for proceeds equal to his/her adjusted cost base for the property and the acquiree will be deemed to have acquired the property for an amount equal to the deemed proceeds.
Pursuant to subsections 73(1.01) and (1.02) of the Act, qualifying transfers include transfers to certain trusts, commonly referred to as alter ego trusts and joint partner trusts. In each case, to qualify, the property transferred must be transferred by the individual and the trust must be a trust created by the individual.
If an individual becomes incapable of managing his/her affairs, an attorney for property (an "Attorney") may be appointed under the individual's Power of Attorney for Property. While the laws governing Attorneys differ slightly from province to province, under a general power of attorney, the Attorney generally has the authority to act on behalf of the grantor of the power in the same way that the grantor could have acted (subject to any specific terms in a validly executed Power of Attorney for Property and the Attorney's fiduciary obligations in the role). One exception shared by all jurisdictions is that an Attorney may not make a testamentary disposition.
In the recent case of Easingwood v. Cockroft, 2013 BCCA 182, the British Columbia Court of Appeal considered whether an Attorney under a general power of attorney could establish an inter vivos trust on behalf of the grantor of the power and/or transfer assets of the grantor to such a trust. In the specific facts of the case, the Attorney created an alter ego trust for the benefit of the grantor and transferred all of the grantor's property to it. In the decision it was confirmed that "[i]n general terms, unless there is an external impediment to the creation of the trust, it [is] within the attorney's power to create an inter vivos trust because it [is] within [the grantor's] power to do so"; although there are circumstances where the creation of an inter vivos alter ego trust can be challenged. For example, if the trust adds beneficiaries not named in the grantor's will, the trust avoids a gift made in a will or where the trust disposes of assets in a situation where the grantor chose not to make a will. In the facts of the case, the decision was made that there was no reason to interfere with the Attorneys' decision to create the alter ego trust for the grantor.
Can the CRA confirm that, if an Attorney creates an alter ego or joint partner trust for the benefit of the grantor of the power, and transfers capital property of the grantor to the trust, that subsection 73(1.01) will apply such that the property transfer will be a qualifying transfer?
Pursuant to subsection 73(1) of the Income Tax Act (the "Act"), an individual (other than a trust) can transfer capital property on a tax-deferred basis, where certain conditions are met. In order for subsection 73(1) to apply, the following conditions must be met:
1. at the time of the transfer of property, both the transferor of the property and the transferee must be resident in Canada (without regard to section 94 of the Act);
2. the transferor must not elect out of the rollover rule; and
3. subsection 73(1.01) must apply in respect of the transfer (a "qualifying transfer").
Subsection 73(1.01) provides that, subject to the requirements of subsection 73(1.02), qualifying transfers include, inter alia, transfers to a trust created by the individual transferring the property:
1. that meets the requirements of subparagraph 73(1.01)(c)(ii), such that the individual is entitled to receive all the income of the trust arising before his or her death and under which no person except that individual may receive or otherwise obtain the use of any of the income or capital of the trust before that individual's death; or
2. that meets the requirements of subparagraph 73(1.01)(c)(iii), such that the individual and his or her spouse or common-law partner is entitled to receive all the income of the trust arising before their deaths and under which no one other than the individual or the individual's spouse or common-law partner is permitted to receive or otherwise obtain the use of any of the income or capital of the trust before the death of both the individual and the individual's spouse or common-law partner.
Subsection 73(1.02) imposes additional conditions that must be met in order for a trust to meet the requirements of either subparagraph 73(1.01)(c)(ii) or (iii). In either case:
- the trust must be created after 1999; and
- the individual must be at least 65 years of age at the time the trust is created, or, the transfer of property by the individual must involve no change in beneficial ownership of the property and no person (other than the individual) or partnership has any absolute or contingent right as a beneficiary under the trust (determined with reference to subsection 104(1.1)).
For purposes of this response, we assume that the focal issue is, as is noted in the second paragraph of the question, that the preamble to subsection 73(1.01) requires that the property be transferred by the individual to which the rollover provision will apply, and that paragraph 73(1.01)(c) requires that the trust must have been created by that individual.
In our view, the decision of the Court of Appeal for British Columbia in Easingwood does not stand for the general proposition that an Attorney may create such trusts for the grantor of a Power of Attorney for Property.
As was noted in paragraph 6 of the decision, the Court of Appeal addressed three issues:
1. Did the power of attorney authorize the two attorneys to create an inter vivos trust in circumstances of mental incapacity of the settlor?
2. Would such a trust be testamentary in nature and therefore beyond the capacity of the attorneys?
3. Were the terms of the specific inter vivos trust consistent with their fiduciary duties under the power of attorney?
In paragraph 29, the Court stated that the issues raised engage questions of law, questions of fact, and the interpretation of instruments. In paragraph 44, it concluded that the creation of an inter vivos trust under a valid power of attorney is possible, "provided the trust created does not otherwise step into territory prohibited by other general principles of law or statutory prohibitions".
It is clear that the decision in this case was driven by its rather unique facts and particular circumstances. For example, the Court noted the decision of the Ontario Superior Court of Justice in Bank of Nova Scotia Trust Co. v Lawson (2005), which concluded that a variation of a trust that was executed under a power of attorney was invalid, as it would alter the arrangements made by the donor for disposition of assets on death, and thus was testamentary in nature. The BC Court of Appeal differentiated Lawson, in that it "did not concern an attorney operating through a trust conforming with the testator's testamentary dispositions." It also noted that the Lawson decision turned on the application of Ontario legislation (the Substitute Decisions Act).
In conclusion, given that the issue of whether a proposed trust to be created by an Attorney would meet the requirements of subsection 73(1.01) of the Act involves questions of law, the CRA would expect that an Attorney that is contemplating the creation of an alter ego trust would seek the affirmation of the applicable court that the particular terms of the Power of Attorney for Property provide for such a power and that the terms of the proposed trust conform with the terms of the existing will and any other relevant agreements.
May 6, 2014
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