5 October 2018 APFF Financial Strategies and Instruments Roundtable Q. 7, 2018-0761511C6 F - Rollover to spousal trust on death

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70(6)(b)(ii)

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Principal Issues: Following the death of a taxpayer, when a spousal trust becomes the owner and the revocable beneficiary of an insurance policy on the life of the trust’s residual beneficiaries, whether the rollover provided in subsection 70(6) is available if the trustee is required to pay life insurance premiums out of the trust capital or income?

Position: No, the spousal trust will generally not qualify for a rollover under subsection 70(6).

Reasons: As a result of the duty to pay life insurance premiums out of the trust capital or income, persons other than the surviving spouse or common-law partner may, before the survivor’s death, obtain the use of the trust income or capital.

FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE

Question 7

Life Insurance for Children and Spousal Trust

Mr. A dies and in his will he bequeaths the residue of his property to a spousal trust. Among the assets that make up the residue of the estate are two insurance policies taken out by Mr. A (the holder and beneficiary) on the lives of his adult children (the insureds). The policies have cash surrender values and are subject to the continued payment of premiums.

The CRA has previously confirmed in Technical Interpretations 2006-0174041C6 (footnote 1), 2006-0185551C6 (footnote 2) and 2012-0435681C6 (footnote 3) that the fact that the spousal trust held a policy on the life of the spouse and paid the premiums had the effect of tainting the trust since its income or capital could benefit a third party, as the death benefit would only be paid on the death of the spouse (the beneficiary of the trust):

“In order for property to be transferred on a tax-deferred (“rollover”) basis from a deceased taxpayer to a trust, subparagraph 70(6)(b)(ii) requires that the trust be one under which no person except the surviving spouse or common-law partner (“survivor”) of the taxpayer may, before survivor’s death, receive or otherwise obtain the use of any of the income or capital of the trust. Our position is that the mere possibility of a person other than the survivor receiving or obtaining, before the survivor’s death, use of the trust capital or income is sufficient to disqualify the property transfer from the rollover.

A duty to fund a life insurance policy out of trust capital or trust income would, in our view, be one under which a person may obtain the use of the trust capital or income. This is because the premium payment is assumed to maintain, for the period covered by the premium, the rights to receive insurance proceeds. Therefore, the existence of such a trust term would be relevant whether a rollover of property can occur to the trust under paragraph 70(6)(b) of the Act.”

Question to the CRA

Would CRA have a different policy regarding a policy on the lives of the children who otherwise would be the residuary beneficiaries of the capital of the trust, having regard to the trust being the policyholder and beneficiary of the policy and given that the insured amount could benefit the spouse if a child were to predecease the spouse?

CRA Response

As stated in the CRA documents referred to above, as well as in the answer to question 1 of the 2012 APFF Financial Strategies and Instruments Roundtable (footnote 4), we are of the view that the obligation of a spousal trust for a spouse or common-law partner (the "Trust") to fund a life insurance policy out of the capital or income of the trust could, depending on the circumstances, result in a person other than the spouse or common-law partner obtaining the use of any part of the income or capital of the Trust for the purposes of subparagraph 70(6)(b)(ii).

The question of whether the condition set out in subparagraph 70(6)(b)(ii) is satisfied is a question of fact and law that can only be resolved after a thorough examination of all the facts, actions, circumstances and relevant documents surrounding each situation.

Assuming that the Trust is the revocable beneficiary of a life insurance policy and that the ownership of such contract has been lawfully transferred to it as a consequence of the death of the testator, the fact that the insured children are the residuary beneficiaries of the Trust and the insurance proceeds could benefit the surviving spouse or common-law partner in the event that the insured children predeceased the surviving spouse or common-law partner generally does not change the position provided by the CRA in the above documents.

In fact, the payment of a life insurance premium is presumed to maintain, for the period covered by the premium, the rights to receive the insurance proceeds by the beneficiary of the policy. In this case, the latter could at any time be a person other than the surviving spouse or common-law partner. Accordingly, we are of the view that the condition set out in subparagraph 70(6)(b)(ii) that no person except the surviving spouse or common-law partner may, before the death of such survivor, receive or obtain the use of any part of the income or capital of the Trust, is not satisfied.

Marie-Claude Routhier

(613) 670-8921
5 October 2018
2018-076151

FOOTNOTES

Due to our system requirements, footnotes contained in the original document are reproduced below:

1 CANADA REVENUE AGENCY, Technical Interpretation 2006-0174041C6, 2 November 2006.

2 CANADA REVENUE AGENCY, Technical Interpretation 2006-0185551C6, 11 September 2006.

3 CANADA REVENUE AGENCY, Technical Interpretation 2012-0435681C6, 8 May 2012.

4 CANADA REVENUE AGENCY, Technical Interpretation 2012-0453121C6, 5 October 2012.

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Text of Severed Letter

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.

Principales Questions: Following the death of a taxpayer, when a spousal trust becomes the owner and the revocable beneficiary of an insurance policy on the life of the trust’s residual beneficiaries, whether the rollover provided in subsection 70(6) is available if the trustee is required to pay life insurance premiums out of the trust capital or income?

Position Adoptée: No, the spousal trust will generally not qualify for a rollover under subsection 70(6).

Raisons: As a result of the duty to pay life insurance premiums out of the trust capital or income, persons other than the surviving spouse or common-law partner may, before the survivor’s death, obtain the use of the trust income or capital.

TABLE RONDE SUR LA FISCALITÉ DES STRATÉGIES FINANCIÈRES ET DES INSTRUMENTS FINANCIERS DU 5 OCTOBRE 2018
APFF - CONGRÈS 2018

Question 7

Assurance sur la vie des enfants et fiducie exclusive au conjoint

Monsieur A décède et dans son testament il lègue le résidu de ses biens à une fiducie exclusive au bénéfice de son épouse. Parmi les biens qui composent le résidu de la succession se trouvent deux polices d’assurance prises par Monsieur A (titulaire et bénéficiaire) sur la vie de ses enfants majeurs (les assurés). Les polices ont des valeurs de rachat et ne sont pas libérées des primes.

L’ARC a déjà confirmé dans les interprétations techniques 2006-0174041C6 (footnote 1), 2006-0185551C6 (footnote 2) et 2012-0435681C6 (footnote 3) que le fait que la fiducie exclusive détienne une police sur la vie du conjoint et paie des primes avait pour effet de contaminer la fiducie puisque le revenu ou le capital pouvait profiter à un tiers, puisque le capital-décès ne serait versé qu’au décès du conjoint (bénéficiaire de la fiducie) :

« In order for property to be transferred on a tax-deferred (“rollover”) basis from a deceased taxpayer to a trust, subparagraph 70(6)(b)(ii) requires that the trust be one under which no person except the surviving spouse or common-law partner (“survivor”) of the taxpayer may, before survivor’s death, receive or otherwise obtain the use of any of the income or capital of the trust. Our position is that the mere possibility of a person other than the survivor receiving or obtaining, before the survivor’s death, use of the trust capital or income is sufficient to disqualify the property transfer from the rollover.

A duty to fund a life insurance policy out of trust capital or trust income would, in our view, be one under which a person may obtain the use of the trust capital or income. This is because the premium payment is assumed to maintain, for the period covered by the premium, the rights to receive insurance proceeds. Therefore, the existence of such a trust term would be relevant whether a rollover of property can occur to the trust under paragraph 70(6)(b) of the Act. »

Question à l’ARC

L’ARC aurait-elle une position différente à l’égard des polices d’assurance sur la vie des enfants qui seraient par ailleurs les bénéficiaires résiduels du capital de la fiducie, sachant que la fiducie serait titulaire et bénéficiaire des polices et que le capital assuré pourrait profiter à la conjointe advenant le décès d’un enfant pendant que la conjointe est toujours en vie?

Réponse de l’ARC

Tel qu’il est précisé dans les documents de l’ARC susmentionnés, ainsi que dans la réponse à la question 1 de la Table ronde sur la fiscalité des stratégies financières et des instruments financiers du Congrès de l’APFF 2012 (footnote 4), nous sommes d’avis que l’obligation pour une fiducie exclusive en faveur de l’époux ou du conjoint de fait (la « Fiducie ») de payer les primes d’une police d’assurance vie à même ses revenus ou son capital pourrait, selon les circonstances, faire en sorte qu’une personne autre que l’époux ou le conjoint de fait puisse obtenir l’usage de toute partie du revenu ou du capital de la Fiducie aux fins du sous-alinéa 70(6)b)(ii) L.I.R.

La question de déterminer si la condition énoncée au sous-alinéa 70(6)b)(ii) L.I.R. est respectée constitue une question de fait et de droit qui ne peut être résolue qu’après un examen complet de tous les faits, gestes, circonstances et documents pertinents entourant chaque situation.

En présumant que la Fiducie est la bénéficiaire révocable d’un contrat d’assurance vie et que la propriété dudit contrat lui a été légalement transférée suite au décès du testateur, le fait que l’assuré soit le bénéficiaire résiduel de la Fiducie et que le produit d’assurance pourrait profiter à l’époux ou au conjoint de fait survivant advenant le cas où l’assuré décédait avant celui-ci ne modifie généralement pas la position émise par l’ARC dans les documents susmentionnés.

En effet, le paiement d’une prime d’assurance vie est présumé maintenir, pour la période couverte par la prime, les droits de recevoir le produit d’assurance par le bénéficiaire de la police. Dans le cas présent, ce dernier pourrait à tout moment être une personne autre que l’époux ou le conjoint de fait survivant. Par conséquent, nous sommes d’avis que la condition énoncée au sous-alinéa 70(6)b)(ii) L.I.R. selon laquelle nulle autre personne que l’époux ou le conjoint de fait survivant ne peut, avant le décès de ce dernier, recevoir ou obtenir l’usage de toute partie du revenu ou du capital de la Fiducie n’est pas respectée.

Marie-Claude Routhier
(613) 670-8921
Le 5 octobre 2018
2018-076151

FOOTNOTES

En raison des exigences de nos systèmes, les notes de bas de page contenues dans le document original sont reproduites ci-dessous :

1 AGENCE DU REVENU DU CANADA, interprétation technique 2006-0174041C6, 2 novembre 2006.

2 AGENCE DU REVENU DU CANADA, interprétation technique 2006-0185551C6, 11 septembre 2006.

3 AGENCE DU REVENU DU CANADA, interprétation technique 2012-0435681C6, 8 mai 2012.

4 AGENCE DU REVENU DU CANADA, interprétation technique 2012-0453121C6, 5 octobre 2012.

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(b) - Subparagraph 70(6)(b)(ii)

tainting effect of the payment by a spousal trust of premiums on its policy on the lives of the children

The decedent bequeathed, to a spousal trust, insurance policies (for which he had been the policyholder and beneficiary) on the lives of his children, which had a cash surrender value and on which premiums continued to be payable. The children were the trust’s residuary beneficiaries. In finding that the payment by the spousal trust of the premiums would have the effect of tainting the trust, as its income or capital could benefit the children, CRA stated:

[T]he payment of a life insurance premium is presumed to maintain, for the period covered by the premium, the rights to receive the insurance proceeds by the beneficiary of the policy. In this case, the latter could at any time be a person other than the surviving spouse or common-law partner. Accordingly, we are of the view that the condition set out in subparagraph 70(6)(b)(ii) that no person except the surviving spouse or common-law partner may, before the death of such survivor, receive or obtain the use of any part of the income or capital of the Trust, is not satisfied.

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5 October 2018 APFF Financial Strategies and Instruments Roundtable Q. 7, 2018-0761511C6 F - Rollover to spousal trust on death

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