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: 1. For paragraph (g) of the definition of “trust” in subsection 108(1), what are the conditions for all interests in a trust to vest indefeasibly? 2. How is this disclosed on the trust’s T3 return? 3. What are the tax implications when a beneficiary resident in Canada holds an interest which has vested indefeasibly, and the beneficiary dies?
Position: 1. Question of fact and law, general guidance provided in 2018-0744111C6. 2. The T3 Return does not explicitly request this information. 3. The capital interest is deemed to have been disposed on death for an amount that is not less than the beneficiary’s pro-rata share of the fair market value of the total net assets of the trust.
Reasons: See below.
2021 STEP CRA Roundtable – June 15, 2021
QUESTION 6. Vested Indefeasibly
A trust in which all interests have vested indefeasibly is excluded from the scope of the 21-year deemed disposition rule in paragraph 104(4)(b) of the Act. This result arises from the definition of “trust” in subsection 108(1) of the Act. It is noted that other conditions apply under paragraph (g) of that definition, such that in order for a trust to qualify for the exclusion, the trust cannot be described in subparagraphs (g)(i) to (vi) of the definition of “trust” - for example, subparagraph (iv) stipulates that not more that 20% of the total value of all interests of a trust that is resident in Canada may be held by non-resident beneficiaries.
a) Can the CRA provide clarity as to what is required to meet the condition that all interests in the trust have vested indefeasibly?
b) How is this disclosed on the trust return for the trust?
c) What are the tax implications when a beneficiary resident in Canada holds an interest which has vested indefeasibly, and the beneficiary dies?
CRA Response
a) Paragraph (g) of the definition of “trust” in subsection 108(1) provides for a potential exception to the 21-year deemed disposition rule in paragraph 104(4)(b) where all interests of the trust at that time have vested indefeasibly. The Act does not define the term vested indefeasibly; however, our response to Question 9 at the 2018 STEP Roundtable (document 2018-0744111C6) provides useful guidance as to what is required in order for an interest in a trust to be vested indefeasibly. The comments in our 2018 response continue to apply.
Ultimately, whether a trust would fall under the exclusion in paragraph (g) is a question of fact and law that requires reference to the applicable law, jurisprudence, the will or trust agreement and all other relevant documents and circumstances in respect of those interests. It is also a question of fact and law as to whether a trustee has the power within the terms of a trust to vest all interests indefeasibly.
b) The T3 Trust Income Tax and Information Return does not request information on whether all of the trust’s interests have vested indefeasibly and as such, that the trust qualifies for the exclusion from the deemed disposition rule in paragraph 104(4)(b).
c) A beneficiary holding an indefeasibly vested capital interest in a trust, is deemed to have disposed of their capital interest for proceeds equal to the fair market value of the interest immediately before their death, pursuant to subsection 70(5). Subsection 107.4(4) provides that the fair market value of the capital interest is deemed to be not less than the beneficiary’s pro-rata share of the fair market value of the total net assets of the trust.
Tara Mathanda
2021-088302
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