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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Do the agreements entered into constitute a trust for income tax purposes?
Position TAKEN:
No
Reasons FOR POSITION TAKEN:
For a trust to exist the "three certainties" (certainty of intention, property and objects) must be met. The agreements in this case do not constitute a trust for income tax purposes because two of the above certainties - certainty of intention and certainty of property - have not been satisfied, therefore, a trust has not been created. However, the provisions of subsection 56(4) may apply in this particular set of circumstances.
December 17, 1996
Vancouver Island Tax Services Office Trusts Section
Office Audit G.W. Keable
Cindy Vandal (613) 957-2046
960412
XXXXXXXXXX
This is in reply to your memorandum dated January 22, 1996 and subsequent memorandum of July 8, 1996 concerning the above-noted trust and individuals. You have asked us to review the various documents (including the purported trust agreements) attached to your memorandum and to advise you if the XXXXXXXXXX constitutes a trust for tax purposes.
Our understanding of the facts are as follows:
XXXXXXXXXX
As a general comment, we would like to mention that under common law a trust is not a legal entity but is the relationship between the trustee and the beneficiary. It is an equitable obligation binding the trustee to deal with property over which the trustee has control (the trust property) for the benefit of the beneficiary. For income tax purposes, the trust is the trustee or group of trustees who have ownership or control of the property that is subject to the terms of the trust. The determination of whether a trust exists is a question of fact and trust law. In order for a trust to exist there must be certainty of intention, certainty of subject matter (the trust property), and certainty of objects (the beneficiaries). The requirement that all three certainties be satisfied was set out in Kingsdale Securities Co. Ltd. v. M.N.R., 74 DTC 6674 (F.C.A.).
As indicated above the three certainties (certainty of intention, property and objects) must be met for a trust to exist. In cases where there is a written indenture, the indenture should adequately describe the settlor's intention to create a trust relationship and describe the property to be held in trust for the beneficiary(s).
XXXXXXXXXX
With regard to the certainty of property requirement, a trust must have property which can be clearly identified. In the agreements, the property is described as "XXXXXXXXXX" It is not clear from this description just exactly what property, if any, is the subject of these agreements. For example, "XXXXXXXXXX" could be interpreted as meaning the income interest or the capital interest, or both the income and capital interest, that XXXXXXXXXX may have in any trust. Therefore, it can be argued that it is impossible to determine precisely what property the trust is meant to encompass. XXXXXXXXXX In this regard, the comments at page 553 of the book Taxation and Estate Planning (Third Edition) by Maurice Cullity and Catherine Brown are relevant: "It should be remembered that a trust cannot be created with property that is not to come into existence until some time in the future."
As these agreements do not adequately describe the settlor's intention to create a trust nor adequately describe the property to be held in trust, is there other evidence indicating that a trust relationship exists. Such evidence could include:
a)Documentation proving that the initial corpus of the trust provided by the settlor was transferred to the trustee at the time the trust was created. For example, if the property was cash, one would expect that it was deposited into the trust's bank account, or in the case of other property, the legal title to that property was transferred to the name of the trustee in trust.
b)Bank statements and other related documents for the trust's bank account (in the name of the trustee) in which the trust's deposits and disbursements have been made.
c)Indications that the trustee has carried out his or her duties in accordance with the terms of the trust and relevant provincial legislation. Some of those duties include: distributing the income and capital of the trust to the beneficiaries in accordance with the terms of the trust; administering, managing and investing the trust's property; and acting in the best interests of the beneficiaries. In addition, a trustee is required to maintain adequate books and records which show details of the trust's property; payments to the beneficiaries; and income received and disbursements made by the trust. The actual transactions undertaken by a trustee and the T3 trust income tax and information returns filed for the trust should be consistent with the terms of the trust. However, as stated in the case Cole Trusts v. M.N.R., 81 DTC (T.R.B.), the filing of a T3 trust return does not by itself initiate or formalize actions taken by a trustee.
From a review of the information forwarded to our attention, it does not appear that a separate bank account was set up for the trust nor was the legal title to other property, such as mutual fund units or mortgages, transferred to the name of the trustees in trust. For example, the T5 slips (XXXXXXXXXX) for the bank accounts, which are supposedly subject to the agreements, were issued to XXXXXXXXXX and there is no indication that the interest earned on these accounts was paid to them in trust.
Based on our review, it is our opinion that the agreement(s) between XXXXXXXXXX do not create a trust for income tax purposes because two of the three certainties, certainty of intention and certainty of property, have not been satisfied. Since in our view a trust does not exist, we support your intention to reassess (to the extent permitted by the Act) the income tax returns of XXXXXXXXXX to include in income for the relevant years the amounts specified in 3 above and the relevant income tax returns of XXXXXXXXXX to delete these same amounts. In this regard, you may wish to review the provisions of subsection 56(4), which seem to be applicable in this set of circumstances, and the findings of the Tax Court of Canada in George Robinson v. M.N.R., 85 DTC 84.
We trust our comments are of assistance to you.
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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