12 September 1997 Internal T.I. 9720777 - EXISTENCE OF 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.

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:

whether estate or beneficiaries should report income prior to property distribution where several years have passed following the death of benefactor

Position:

property has vested in beneficiaries although legal title of property has not been changed - beneficiaries report income

Reasons:

see - 952681 for complete discussion of continuing estate
One of two possible scenarios -- either executor is holding ppty on behalf of beneficiaries as agent or executor has created an inter vivos trust

		September 12, 1997

	Regina Tax Services Office		Trusts Section
L. Holloway
	Attention: G. Rubin	(613) 957-2104
	             Estates & Trusts

		972077

XXXXXXXXXX

This is in reply to your memorandum dated July 29, 1997, requesting our comments on the administration of the XXXXXXXXXX (the "Estate"), and in particular whether a trust was in existence at the time certain payments were received in the name of the Estate.

Facts

XXXXXXXXXX

Regina District Office Position

You have stated that under Saskatchewan law, you cannot have more than four people listed on a title of property and that presumably this is why the title of the property has not been changed to reflect the XXXXXXXXXX beneficially interested parties. You have also concluded that the will indicates there was no intention for the late XXXXXXXXXX to create a testamentary trust.

Taxpayer's Position

The taxpayer's representative has suggested the following three options for dealing with the taxation of the royalty payments:

i)Report the royalty income by the Estate on a T3 return. Any distributions to the beneficiaries from the Estate would be considered to be paid from their residual entitlement and would therefore not be taxable.

ii)Report the royalty income by the Estate on a T3 return, however as all of the income is payable to the beneficiaries, the trust would deduct all amounts paid out and the beneficiaries would be responsible for including the amounts received as part of their taxable income, with taxes withheld and remitted by the Estate on behalf of the foreign beneficiaries.

iii)As the will does not provide for a trust, assume the trust has been wound up on XXXXXXXXXX and that the Estate is holding the property as "agent" for the beneficiaries. As "agent" the Estate would be responsible for remitting foreign tax withheld and the individual beneficiaries would be responsible for including their share of income in their taxable income calculations.

Our Comments

We agree with your opinion that the will did not create a testamentary trust, however we note that a fourth scenario is possible in that the executors may be regarded as setting up an inter vivos trust in order to hold the property.

It is accepted that the beneficiaries of an estate have no claim to the property of the estate until the administration of the estate is completed. We have generally considered this to have occurred when all the duties (other than the actual distribution of the properties) have been completed by the executor. These duties include ascertaining the beneficiaries, gathering all the assets of the estate, paying all debts and specific bequests, ascertaining the value of the residue and preparing, and having approved, the final passing of the estate's accounts.

Even where there has not been an actual distribution or transfer of legal title of property of an estate to the beneficiary, it is a question of law as to whether beneficial ownership of property is considered to have passed to the beneficiary. If beneficial ownership of the property has passed to the beneficiary, the property would be considered to be held a) by the individual (who formerly acted in the capacity as executor) as nominee or trustee for the beneficiary or b) in an inter vivos trust. At the point in time when there is no property held by the executor in that capacity and the estate has been completely administered, the taxation year of the estate would generally be considered to have ended. In the present case it is possible that either the former executors of the Estate are holding the property as agents or nominees as suggested by the representative under option iii) above or the property is being held by an inter vivos trust set up upon administration of the Estate. A formal trust document does not exist confirming any certainty of intention to create an inter vivos trust; therefore, provided there is nothing conflicting under Saskatchewan provincial legislation that would suggest otherwise, the agency argument presented by the taxpayer's representative under option iii) is plausible.

On a final note, you may wish to enquire why payments are being made to XXXXXXXXXX beneficially interested parties when in fact the will only lists XXXXXXXXXX beneficiaries. It may be that one or more of the children of the deceased have also passed away and bequeathed their interest in this land among their own respective children or that one or more beneficiaries has sold or gifted their interest in this land to another. Depending on when and to whom such dispositions were made, there could be withholding tax implications as the land is taxable Canadian property.

T. Murphy
A/Section Chief
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch