8 February 1990 Ruling 59281 F - Transfers or Loans to a Testamentary 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.

February 8, 1990

Dear Sirs:

This is in reply to your letter dated December 13, 1989 in which you requested our views whether subsection 74.3(1) and paragraph 108(1)(i) of the Income Tax Act ("Act") apply to the following situation.

1.     On the death of an individual, a testamentary trust is created. The trust documents indicate that the beneficiaries of the trust are the children of Mr.X as well as children of his children (i.e. grandchildren) whether born or unborn at the time of his death.

2.     The Trustees have total discretion with respect to how the income and capital of the trust is to be distributed (i.e. Discretionary Trust) amongst the beneficiaries.  The beneficiaries are entitled to enforce payment of income amounts in any year.

3.     At the time of Mr. X's death, the beneficiaries of the trust are determined to be his two adult children. There are no minor beneficiaries.

4.     The capital of the trust will consist of assets worth $200,000.

5.     In the first year of the trust, the trust earns income of $20,000. In accordance with subsection 104(6)(b) of the Act, the income of the trust is allocated to the adult children in equal proportions and taxed in their hands.  The income is left in the trust to be reinvested.

6.     In the subsequent year, each of the adult children has children of their own, who in accordance to the trust documents, become beneficiaries of the trust.

You are of the view that the $20,000 amount payable left in a testamentary trust (or an inter-vivos trust) for reinvestment purposes would not constitute "loaned or transferred property" for purposes of subsection 74.3(1) of the Act. Further, you are of the view that income left in a trust as an amount payable does not constitute an additional contribution of property to the trust for purposes of the definition of "testamentary trust" in paragraph 108(1)(i) of the Act.

Our comments follow.

Where there is a continuing direction from a beneficiary of a trust (testamentary trust or inter-vivos trust) to reinvest trust income of a taxation year after the beginning of the following taxation year of the trust, it is our position that the income in question will not become an "amount payable" for purposes of subsections 104(6) and (24) of the Act. However, if such income is payable on the last day of the taxation year of the trust, and thereafter the beneficiary elects to recontribute his entitlement thereto to the trust we would regard the amount of such income as an amount payable under those subsections. Such an election may, we note, create an undesirable result for your purposes under subparagraph 108(1)(i)(ii) of the Act in the case of a trust that was otherwise a testamentary trust. Further, where a beneficiary elects to recontribute his "amount payable" to the trust we would regard such recontribution as a transfer of property for purposes of subsection 74.3(1) of the Act.

We trust that our comments will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate