15 June 2021 Roundtable, 2021-0883211C6 - STEP 2021 – Revised Q14 - Lifetime benefits trust

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. Can a lifetime benefit trust established under a will that is subject to a 21 year accumulations limit under provincial law qualify as such under section 60.011 from the time of the testator's death? 2. If so, can it continue to qualify after the end of the 21 year accumulations period when income must be paid to a residuary beneficiary or other person specified in the will by operation of provincial law?

Position: Probably not.

Reasons: There appears to be a conflict between provincial accumulations law and the exclusive beneficiary requirement in subparagraph 60.011(1)(b)(i). We are preparing a technical interpretation that will provide a more considered response.

2021 STEP CRA Roundtable – June 15, 2021

REVISED QUESTION 14 Lifetime Benefit Trust, Impact of the accumulations legislation

A Lifetime Benefit Trust (LBT) permits the tax otherwise payable on the death of an RRSP or RRIF annuitant to be deferred so that the proceeds can be used to purchase a qualifying trust annuity. Payments from the annuity are received by the LBT Trustees and then applied at the trustees’ discretion for the comfort and care of the LBT beneficiary. The beneficiary must be either the spouse, child or grandchild of the deceased testator. If a spouse, the beneficiary must be mentally infirm. If a child or grandchild, the beneficiary must be dependent on the testator for support because of mental infirmity. LBTs are generally established under a will as a testamentary trust separate from the testator’s estate.

The LBT definition in subsection 60.011(2) of the Income Tax Act requires that the LBT be "…a personal trust under which no person other than the taxpayer [the LBT beneficiary] may, during the taxpayer’s lifetime, receive or otherwise obtain the use of any of the income or capital of the trust”. In Ontario and certain other provinces, however, accumulations legislations precludes a trust from accumulating income beyond 21 years. Under these laws, trust income must be paid out to the residuary beneficiary under the will or to another specified individual after the 21 year period ends. In most cases, the LBT beneficiary could not be a residuary or specified beneficiary because of mental infirmity. By operation of the law of certain provinces, therefore, it is possible that a person other than the LBT beneficiary could receive LBT income during the LBT beneficiary’s lifetime. This possibility appears to breach the LBT definition.

Consider a will drafted in a province such as Ontario subject to a 21 year accumulations limit, under which an LBT is established as a separate fund for the benefit of the testator’s dependent, mentally infirm child. The will also contains a standard residue clause, the beneficiaries of which are the siblings of the dependent child. The will contains no express language about what happens after the end of the accumulations period. If the accumulations law remains in force more than 21 years after the testator’s death, however, the LBT income would fall into residue and become payable to the siblings. If the LBT as drafted otherwise qualified under the Act:

1. Would the LBT qualify as an LBT from the testator’s death even though in Year 22 the provincial accumulations law might (if it remained in force at that time) require that the LBT’s income be paid to the siblings of the LBT beneficiary?

2. Assume the answer is yes and the arrangement qualifies as an LBT for the first 21 years. In Year 22, however, the LBT trustees are compelled by provincial law to pay to the beneficiary’s siblings all of the LBT’s income that was not directed to (or to the care of ) the LBT beneficiary. Would the LBT continue to qualify as an LBT under the Act from that time?

CRA Response

Based on a preliminary review, we believe that the accumulations legislation still in force in some provinces conflicts with the LBT rules in the Act. We have serious reservations about whether the arrangement described above could qualify as an LBT, given the possibility that trust income could be diverted away from the mentally-infirm LBT beneficiary after the end of the accumulations period. This result would be inconsistent both with the text of subparagraph 60.011(1)(b)(i) and with the overall policy goals of the LBT regime.

In light of the complexities involved, however, we are considering the question further and will provide a more detailed response in a forthcoming technical interpretation.

H. Ferrigan
2021-088321