1 April 1999 External T.I. 9830415 - NEW TRUSTS CREATED BY COURT ORDER

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 trust returns are required to be filed.

Position: Yes.

Reasons: There is a trust and the income of the trust is subject to tax.

XXXXXXXXXX T. Murphy
983041
April 1, 1999

Dear XXXXXXXXXX:

Re: XXXXXXXXXX (the “Estate”)

The XXXXXXXXXX Tax Services Office forwarded your letter of October 7, 1998, to us and asked that we respond directly to you. We have sent a copy of our response to them, as the local office is responsible for the review of completed transactions.

We understand that pursuant to a court order dated XXXXXXXXXX, the trust was varied to allow for the payment of legacies of $XXXXXXXXXX ($XXXXXXXXXX each) to you and your two brothers. The court order required the trustees of the Estate to retain $XXXXXXXXXX ($XXXXXXXXXX from each of the legacies) to be held in trust (the “Unborn Trust Fund”) for the unascertained and unborn beneficiaries and contingent beneficiaries (the “Unborns”) who might be alive at the time of the death of your late father’s surviving spouse. In the event that there are no such beneficiaries alive at her death, the money will be distributed to you and your brothers in equal shares. You are the trustee of the Unborn Trust Fund.

You have asked whether trust returns are required to be filed with respect to the $XXXXXXXXXX which in February, 1998, was invested in one-year GICs.

In response, we confirm that trust returns are required to be filed. Based on our review of the documents submitted with your request, the Unborn Trust Fund would be an inter vivos trust. Under the Income Tax Act, a trust is treated as a separate person and the income of the trust is generally determined in the same way as any other individual. A trust is not, however, entitled to claim any of the personal tax credits (e.g., basic personal or spousal amount). As there are no Unborns presently living, the Unborn Trust Fund would not be permitted a deduction for amounts that might eventually be paid to them. Instead, the income earned would be subject to tax by the Unborn Trust Fund. Net income remaining after payment of applicable taxes would form part of the capital of the Unborn Trust Fund. Generally, amounts of trust capital can be distributed to Canadian resident beneficiaries on a tax-free basis.

As all the property of the Unborn Trust Fund is invested in GICs, the amount of income to be reported by the Unborn Trust Fund is based on the interest earned during each complete investment year. Given that the investment in the GICs was made in February, 1998, the Unborn Trust Fund would report the amount of interest that accumulated to February, 1999, on its 1999 return. Trust returns are required to be filed no later than 90 days after the end of the trust’s taxation year. As the taxation year end for an inter vivos trust is December 31, the 1999 return is required to be filed by March 30, 2000, at the latest.

We hope our comments are of assistance to you.

Yours truly,

R.S. Biscaro, CA
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Intergovernmental Affairs Branch