6 September 1996 Income Tax Severed Letter 9623997 - Express inter vivos trust that has no trust indenture

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.

SUMMARY: Circumstances that Revenue Canada will accept that an express inter vivos trust exists in situations where there is no written trust indenture.

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:

Under what circumstances should Revenue Canada accept that an expressinter vivostrust exists where there is no written trust indenture.

POSITION:

Where the settlor and trustee provide Revenue Canada with both: i) a document stating the terms of the trust and ii) concrete evidence supporting those terms.

REASONS:

It is possible to create an expressinter vivostrust without putting the terms in writing. However, the onus of proof that such a trust was created rests with the settlor and trustee.

September 6, 1996

Kitchener-Waterloo Tax Services Office Trusts Section Tax Audit Division C.R. Bowen Dick Beech (613) 957-8585 Assistant Director Audit

Attention: Gary Huenemoeder 962399

Existence of an ExpressInter VivosTrust

We are writing further to our telephone conversation (Huenemoeder\Bowen) of July 4 and August 7, 1996, wherein you requested our comments on the circumstances under which Revenue Canada should accept that an expressinter vivostrust exists where there is no written trust deed or indenture. Literature

i) An express trust

An express trust is one in which the person creating it has expressed his or her intention to have property held by one or more persons for the benefit of another or others. The intention may be expressed orally, by deed or by will. Moreover, the creator of the trust may intend himself or herself to be the trustee of the property he or she owns, or the creator may intend another person to be the trustee. In the latter situation it is necessary to transfer the property which is to form the subject matter of the trust to the trustee. (page 15 of Text, Commentary and Cases on Trusts (fourth edition) by Oosterhoff & Gillese (student edition))

ii) The three certainties

To create a trust, there must be certainty of intention to create the trust, the subject matter must be described with such certainty that it is ascertained or capable of ascertainment, and those who are to benefit from the trust - that is, the objects or beneficiaries - must also be described in terms clear enough that the trust obligation can be performed properly. These three requirements are known as certainty of intention, certainty of subject matter and certainty of objects. (page 118 of Text, Commentary and Cases on Trusts)

For a trust to come into existence, it must have three essential characteristics. As Lord Langdale M.R. remarked in Knight v. Knight, in words adopted by Barker J. in Renehan v. Malone and considered fundamental in common law in Canada, first the language of the alleged settlor must be imperative; second, the subject matter or trust property must be certain; third, the objects must be certain. (page 107 of Law of Trusts in Canada, (second edition) by D.W.M. Waters)

iii) Comments on the three certainties

On the subject of the three certainties and creating a trust, the book Taxation and Estate Planning (third edition) by Maurice Cullity and Catherine Brown indicates:

It has often been stated that a trust cannot be established unless the "three certainties" are present. The meaning of such statements is that an attempt to create a trust will fail unless it is clear that the settlor intended to bring a trust relationship into existence and that both the property and the beneficiaries or other objects of the trust are described with sufficient certainty. (page 552)

Where the intention is to establish aninter vivostrust for estate planning purposes, the trust should always be in writing and should clearly express the intention of the settlor that particular property is to be held in trust for particular persons who are identified specifically or by reference to a defined class or classes. If this is done, no problem with the first of the three certainties should arise. (page 552)

Similarly, the property which is to form the initial corpus or capital of aninter vivostrust established for estate planning purposes should be identified clearly. Commonly, the initial corpus will consist of a sum of money which may be quite insignificant in amount compared with the value of the property later transferred to the trustees. A statement that such amount in cash or cheque has been transferred to the trustees or is the subject of the declaration of trust by the trustees will be sufficient as long as it can be shown that the cash was in fact in existence and identifiable and as long as the trust was actually constituted with respect to that amount .... (page 553)

In order to establish or constitute the intended trust, it is necessary either for the identifiable property to be transferred to the intended trustees subject to the terms and conditions of the trust instrument or for the intended trustees to declare that they hold the property subject to those terms and conditions. Where, as is most commonly the case, the trust is to be constituted by a transfer of property to the trustee, the trust will not be established until the transfer has been completed.... If the settlor holds legal title to the property, that title should be transferred to the trustee. If the settlor has merely an equitable interest in the property, the trust can be constituted by transferring such interest to the trustee. (page 555)

Strictly, in most common law jurisdictions, writing is not required for either method of creating an express trust of personal property in which the settlor holds the legal title. Writing is required for creating express trusts of land or for the creation of a trust by a transfer of an equitable interest to a trustee. As already indicated, irrespective of the nature of the property or the method by which the trust is constituted, a trust instrument should always be executed. (page 557)

Relevant comments on the subject from Text, Commentary and Cases on Trusts are as follows:

In most situations a trust is created by a document called a trust document, which vests the trust property in the trustee and describes the rights and obligations of the parties to the trust, which are called the trust terms. Typically, a trust instrument is either a deed or will. However, not all trusts are created by an instrument, nor do they always have to be so created. The law in many jurisdictions requires that some trusts, such as trusts involving land, be evidenced in writing, while other trusts may be created orally. (page 13)

To satisfy the certainty of intention requirement, the court must find an intention that the trustee is placed under an imperative obligation to hold property on trust for the benefit of another. (pages 120 and 121)

Footnote 53: If there is uncertainty of intention or property, there is no trust at all. (page 283)

If a person transfers property to trustees and clearly intends to create a trust, but fails to state the terms of the trust and they are not ascertainable by other admissible evidence, the trust fails... (page 286)

Statements from the book Law of Trusts in Canada, (second edition) by D.W.M. Waters on the matter are indicated below:

Footnote 4: For an unusual case, see No. 382 v. M.N.R. (1957) 16 Tax A.B.C. 274 at 282-3 57 D.T.C. 48. If tax avoidance is the object of a transaction, the courts are likely to be particularly concerned with whether there was an intention to create a trust, or merely a desire to give that appearance. See Ablan Leon (1964) Ltd. v. M.N.R.., [ [1976] C.T.C. 506] (1976) C.T.C. 506, 76 D.T.C. 6280 (Fed. C.A.) . The fact that the alleged settlor of a number of trusts, purportedly created at the same time, did not know all the details of the scheme in which he was taking part, and that the amount of the property initially assigned to the trustees for each trust was minimal, were found to be evidence of a desire only to create appearances. (page 108)

A trust may be construed from conduct alone, but it is unlikely that such evidence will conclusively reveal the necessary intention. Words do show that intention, and they must either appear in a document which the maker regarded as final or be orally communicated to another. A recording or communication of a future intention to set up a trust is not enough, unless the statement of future intention was "bought" by another for valuable consideration. If the maker of the statement thus bound himself to set up a trust at a later date, that agreement or covenant is enforceable by the parties to it. But the statement of a would-be donor as to his intention is not enough. Nor is it enough to intend to transfer for another's benefit; the transferor must be shown to have had in mind a transfer on trust. This means that the intention to make a gift by way of handing over is not the intention to make a gift by way of a trust. (pages 108 and 109)

Footnote 8: Executory trusts created by the delivery of trust property to trustees can only exist if there is an intention at the moment of transfer to create a trust: Ablan Leon (1964) Ltd. v. M.N.R., [ [1976] C.T.C. 506].... (page 109)

Even if the trust property is clearly defined or ascertainable, the trust will still be void and the trust property revert to the settlor if the beneficial shares in that property are not clearly defined. (page 121)

An article called Family Trusts: the Ultimate Estate Planning Vehicle by John H. Askin in the 1994 Prairie Provinces Tax Conference of the Canadian Tax Foundation informs the reader that:

Rather a trust is defined by reference to the relationship between the settlor, trustees and beneficiaries. The nature of this relationship being determined by reference to the written trust indenture (if any), applicable legislation (the Trustee Act, for example) and the common law.

As a matter of law, a trust is created when the three certainties come into existence:

A.Certainty of Intention

A person must transfer property or an interest in property with an intention to create a trust relationship. It must be clear that a trust is intended as opposed to an outright gift of property, creation of an agency relationship, or some other type of relationship other than a trust. Where there is a written trust indenture, this is normally not an issue.

B.Certainty of Property

The property or interest therein which is to be held in trust must be identifiable with certainty. Again, where there is a written indenture which sets forth the settlement property, little difficulty arises. However, where there is no written trust indenture, or a written trust indenture which does not adequately describe the property, questions can arise as to whether or not, as a matter of law, a trust has been validly constituted.

C. Certainty of Objects

In order for a trust to be validly created, not only must there be an intention to create a trust and identifiable property which is to be held in trust, but in addition, beneficiaries must be identified and ascertained.

Failure to satisfy any of the aforementioned certainties will result in something other than a trust relationship being created. (pages 20:3-5)

An article entitled Discretionary Family Trusts From A to Z (A Case Study) by Gary I. Biasini and Robert A. Chong in the 1994 Prairie Provinces Tax Conference of the Canadian Tax Foundation contains this warning:

Often, the essential details of the trust are agreed to, the settlement property is delivered by the settlor to the trustee and, subsequently, a formal trust deed is eventually produced for execution with an effective date coinciding with the physical settlement of the trust property by the settlor.

Presumably, this time gap between the physical settlement and the execution of the trust deed should not offend Revenue Canada provided that the trust deed accurately reflects the terms and conditions of the trust established by the settlor at the time of physical settlement of the trust. On the other hand, Revenue Canada's interest in the timing issue may be elevated if there have been any material trust transactions prior to the execution of the trust deed. This becomes a question of whether or not sufficient evidence can be provided to Revenue Canada to demonstrate that the trust deed merely reflects the trust arrangements made at an earlier time. (page 19:12)

Relevant Jurisprudence

i) Cases

Kingsdale Securities Co. v. M.N.R., [ [1975] C.T.C. 10] 74 D.T.C. 6674 at 6679 (F.C.A.)

None of the settlors evidenced any intention to create a trust and other necessary steps to create trusts were not executed. In view of this, even though trust documents were executed, the court held that the trusts did not exist.

Atinco Paper Products Ltd. v. The Queen, [ [1978] C.T.C. 566] 78 D.T.C. 6387 (F.C.A.)

The court held that trusts were not created and the criteria considered for creating a trust are listed on pages 6392-5. The court could not find evidence that an aunt who made gifts to her nephews intended that those amounts be held in a trust. In addition, she did not transfer any money to the trust's bank account after she signed a trust agreement subsequently drawn up in accordance with her brothers' (i.e., the trustees) instructions. (Previously heard by the F.C.T.D., [[1975] C.T.C. 303] 75 D.T.C. 5203 under the name Gait Paper Products Ltd.)

Ablan Leon (1964) Ltd. v. M.N.R., [ [1976] C.T.C. 506] 76 D.T.C. 6280 (F.C.A.)

Trusts were not created since the evidence disclosed a parody of inconsistencies and irregularities, documentations to support the creation of the alleged trusts were inadequate and the alleged settlor was a mere volunteer.

Fraser, P.M. v. The Queen, [ [1991] 1 C.T.C. 314] 91 D.T.C. 5123 (F.C.T.D.)

Several pages from the book Law of Trusts in Canada were cited by the court as a source of information for the characteristics and three certainties of creating a trust. In determining whether a business arrangement constituted a trust or an agency relationship, the court was interested in the intention of the transferor of the property. Page 5128 of the case states: "And, in any event, intention is determined by all of the evidence, including the conduct of the parties and the terms of the written documentation which flowed between them, and not merely on the basis of one person's subjective view." The court held that based on the evidence (i.e., the documentation and the actions taken) and the existence of the three certainties, there was an intention to create a trust. This decision was upheld by the Federal Court of Appeal, 95 D.T.C. 5684.

Fletcher v. M.N.R., [ [1987] 2 C.T.C. 2341] 87 D.T.C. 624 (T.C.C.)

In determining whether an express trust was created either verbally on a specific date or at a later date upon the execution of a trust agreement that was effective retroactively, the court held that:

In the absence, at those times, of any verbal or written words, stating clearly and unequivocally that certain property was to be held in trust it would be difficult to find that Fletcher created a trust. The agreement executed on August 24, 1982 (to be effective as of May 1, 1981) does not, in my view, reflect the arrangement made by Hyman and Fletcher in December 1980 and is not evidence of an express trust.

Harvey v. The Queen, [ [1995] 1 C.T.C. 2507] 94 D.T.C. 1910 (T.C.C.)

A loose arrangement between a taxpayer and his wife in which there was no formal trust agreement signed was not accepted by the court as creating a trust of which the wife was trustee of amounts transferred by her husband to her as guardian of her children. Cole Trusts v. M.N.R., [ [1980] C.T.C. 3027] 81 D.T.C. 8 (T.R.B.)

The court rejected the appellant's argument that the decision of the trustees to treat the income of the trust as the income of the beneficiaries together with the preparation and filing of the T3 returns constituted a declaration and designation to do so. Instead, the court held on page 13 that:

...the Trustees' actions alone must serve to establish that proposition from the appellants. They can not rely upon the filing of the T-3 returns as any proof.... The filing of the T-3 forms alone merely reports on actions taken. It does not initiate or formalize any action. The T-3 forms are a supplement to the records, financial statements and tax returns of the trust. They can only record events and transactions, they do not become the events and transactions in themselves, nor do they certify that the events or transaction referenced did in fact occur.

ii) Comments on the cases

The three certainties, which are the requirements for a trust, have been applied in Kingsdale Securities at page 6679, Gait Paper Products at page 5211, and Atinco Paper Products at pages 6292-3.

In an article entitled Practice Dilemmas by James M. Park which appeared in the 1989 Ontario Tax Conference Report of the Canadian Tax Foundation, the author made the following comments concerning the cases Kingsdale Securities and Ablan Leon:

However, in the context of back-dating, it is relevant to try to determine the criteria that are relevant in identifying whether a trust has been established and if it has, the effective date of its establishment. Two of the leading cases on this point are Kingsdale Securities Co. Ltd. v. MNR and Ablan Leon (1964) Ltd. v. MNR. Both cases dealt with tax-motivated arrangements involving trusts and limited partnerships. In Kingsdale, the Federal Court of Appeal reviewed the law of trusts in order to determine whether trusts had in fact been created at a point in time at which the taxpayers alleged they had been created. The court held that the trusts in question, if created at all, were created only by the execution of the trust indentures and that if the trusts came into being at all, it was only as a result of the execution of the indenture containing a declaration by the settlor of his intention to create the trust, a designation of the beneficiaries and a vesting of the trust property. The taxpayers had argued that the failure to observe the formalities of trust law were not fatal and that the trusts should be regarded as having been established notwithstanding that documents were not signed on the date upon which they purported to be effective. The court rejected the argument, applying a number of principles of trust law. The court stated, for instance, that where a trust is alleged to have been created by an agreement to do something, its validity depends on whether the agreement is one of which courts of equity would decree specific performance. The court went on to state that if it was merely a voluntary promise (or even a covenant under seal but not supported by valuable consideration), no trust will be created since equity will not give assistance to a volunteer.

In Leon, a similar result occurred. The trial judge found that the trust documents were not signed until a considerable and significant period of time after the date upon which they were alleged to have created the trusts and that no trusts existed during the relevant period and no trustees had been appointed. It was also held by the trial judge that the documentation to support the existence of the trusts was inadequate and that the elaborate planning of the trust documents was inconsistent with an intention on the part of anyone involved to establish trusts by any means other than the execution of written documents. As a result, it was held that since the documents were not properly executed at the appropriate times, and for other reasons, the trusts never came into existence.

These principles are of critical importance in the tax context. If trusts are to be established, it is extremely important that the formalities of trust law be observed. If the trust is to be established on the basis of an intention evidenced by a settlor, the designation of beneficiaries and the passage of title of trust property, the failure to evidence that intention at the appropriate time by execution of appropriate documents could be fatal.

Our Comments

As indicated in the above-noted literature, subject to certain exceptions, an expressinter vivostrust can be created orally provided that the three certainties for creating a trust have been satisfied and there is sufficient evidence to that effect. However, several of the authors strongly recommend that the terms of a trust be in writing due to the uncertainty that can otherwise result.

It is our opinion, based on the literature and jurisprudence noted above, that where there is no trust indenture or deed available to support a client's claim that an express inter vivos trust of the type that can be created orally exists, the onus of proof that: 1) the three certainties for creating a trust have been satisfied; and

2) the terms of the verbal agreement communicated by the settlor to the trustee have been adhered to

clearly rests with both the settlor and the trustee of such a trust. Should the settlor and trustee be unwilling or be unable to provide Revenue Canada with both i) a document stating the terms of the trust and ii) the concrete evidence described below substantiating those terms, it is our opinion that the alleged trust should not be accepted or recognized by the department. A client that disagrees with our position has the option of following the normal channels of appeal including having the matter resolved by the courts.

In order that Revenue Canada can be apprised of the terms and conditions of an express trust where there is no trust indenture, it is our opinion that the settlor and the trustee must, when requested to do so, provide those terms to Revenue Canada in a written document signed by both parties. This document could either be in the form a trust deed or indenture which has an effective date as of the date the trust was created or an affidavit, which among other things, confirms the date the trust was created. The document must also indicate all the terms and conditions of the trust as at the date of the trust's creation including the following:

1. expression of the settlor's intention to transfer the property, i.e., the initial corpus, to a trust and the date of the transfer;

2. the name(s) of the trustee(s) and their powers, duties and responsibilities;

3. the income and capital beneficiaries and their entitlement to the income and capital of the trust; and

4. the period during which the trust will remain in existence.

As previously stated, it is also essential that concrete evidence exists which substantiates the terms indicated in the above-mentioned document. In this regard, a client must provide, when requested to do so, all of the evidence listed below:

1. 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;

2. 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; and

3. Indications that the trustee has carried out his or her duties in accordance with the terms of the trust and relevant provincial legislation (e.g., the Trustees Act). Discussions of the duties and responsibilities of a trustee are provided in the books Law of Trusts in Canada and Text, Commentary and Cases on Trusts as well as in an article entitled Legal Influences over Trustees of Family Trusts by Richard B. Kuzyk in the 1992 Conference Report of the Canadian Tax Foundation. 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, the filing of a T3 trust return does not by itself initiate or formalize actions taken by a trustee.

Other ancillary, but non-essential, evidence of the existence of a trust which may be available includes:

a) correspondence sent by the settlor of the trust,

b) notes to file kept by the lawyer or accountant involved in creating the trust, or

c) a draft unsigned trust agreement

indicating terms and conditions which are substantiated by the concrete evidence listed above.

We trust that our comments will be of assistance.

for Director Resources, Partnerships and Trusts Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch