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.
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Dear Sir:
RE: Receipt of Compensation by Testamentary Trust from Co-Executor
This is in reply to your letter of July 5, 1993 concerning the potential receipt of "compensation" by two testamentary trusts from a co-executor. The payment would be made to compensate the trusts for substantial unrealized losses in connection with the acquisition of certain common shares comprising the majority of the trusts' assets. We apologize for the delay in responding to your letter.
As your letter relates to an actual situation, it should be the subject of an advance income tax ruling. The attached copy of Information Circular 70-6R2 outlines the procedures for making such a request. We offer the following general comments which may be of assistance to you.
We have not previously considered a situation similar to that described above. We have, however, considered a registered retirement savings plan damages suit against investment management companies as outlined in ATR-24.
A testamentary trust is defined in paragraph 108(1)(i) of the Income Tax Act (the "Act") as:
...a trust or estate that arose upon and in consequence of the death of an individual ...other than ...a trust created after November 12, 1981 if, before the end of the taxation year, property has been contributed to the trust otherwise than by an individual on or after his death and as a consequence thereof ....
A contribution of property to a trust generally implies that the trust receives the property without any value being given to the contributor. Thus, for example, a loan to a trust, or a purchase for full face value by a trust does not constitute a contribution.
In our opinion, where a co-executor obtains a settlement of a claim against him or her in return for a payment of compensation to a trust, it would be reasonable to conclude that the co-executor has not contributed property to the trust. Therefore, a trust would not cease to be a testamentary trust solely as a consequence of the receipt of such compensation.
The determination of which provisions of the Act could be applicable to a trust in receipt of such compensation would depend on the terms of the settlement agreement negotiated between the co-executor and the beneficiaries of the trust. If pursuant to the settlement agreement there is a disposition of property or if the payment is compensation for lost profits, then the amount paid would be proceeds of disposition or income, respectively. See, for example, Interpretation Bulletin IT-365R2 and the recent decision in Her Majesty the Queen v. Mowhawk Oil Co. Ltd., 92 DTC 6135 (F.C.A.).
With respect to the beneficiaries and subsection 105(1) of the Act, in our opinion, if pursuant to a settlement agreement a co-executor is required to pay compensation to a trust, that provision would not be applicable to include the compensation in the beneficiaries' income.
While we trust our comments will be of assistance, as indicated in paragraph 21 of Information Circular 70-6R2, they do not constitute a ruling and, accordingly, they are not binding on Revenue Canada, Customs, Excise and Taxation.
Yours truly,
DirectorManufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993
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