16 February 1999 External T.I. 9901435 - STATUS OF SUCCESSIVE TRUSTS

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 ‚mis,

peut ne pas repr‚senter la position actuelle du ministŠre.

Principal Issues: Are successive trusts established

under the terms of a inter vivos trust testamentary trusts?

Position: No.

Reasons: They are not created by the deceased and
property will be contributed to them other than by the
deceased on or after the deceased's death and as a

consequence thereof.

XXXXXXXXXX 990143
T. Murphy
Attention: XXXXXXXXXX

February 16, 1999

Re: Definition of Testamentary Trust in Subsection 108(1) of the Income Tax Act

We are writing in reply to your letter of January 14, 1999, in which you asked whether certain trusts would be testamentary trusts.

In your letter you advise that pursuant to the terms of an inter vivos trust, the settlor is the sole trustee of the trust during her lifetime and upon her death a successor trustee becomes the trustee; the trust may be revoked by the settlor during her lifetime and upon her death the trust becomes incapable of amendment, revocation or termination
except by way of the distributions as permitted by the terms of the trust; the settlor is the only beneficiary under the trust during her lifetime and upon her death the balance of
the trust is to be divided into two equal shares for the settlor's two grandchildren and each share shall be held, administered and distributed as provided for in the trust agreement. The trust agreement also contemplates two separate trusts being established for the grandchildren.

Before her death, the settlor was a citizen and a resident of the U.S. The successor trustee is a resident of Canada.

You submit that there was no trust in existence for Canadian trust law purposes as the settlor and the trustee were one and the same person and the settlor had the ability to
revoke the trust at any time. As there was no trust, it follows in your view that the settlor owned the property and that the trusts for the grandchildren which came into being
on the death of the settlor were established by, and property was contributed to them by, the settlor.

From the description of the trust it would appear that the trust is a so-called "grantor trust." We understand that these trusts are trusts for trust law purposes; however,
for U.S. tax purposes, the assets of the trust are considered owned by the grantor or settlor.

Quoting Underhill and Hayton, Law Relating to Trusts and Trustees, 14th ed. By David J. Hayton (p. 3):

A trust is an equitable obligation binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust), of whom he himself may be one and any one of whom may enforce the obligation.

Quoting Law of Trusts in Canada, by Donovan Waters:

The principles applicable to [gifts by declaration of trust] are perfectly clear. The owner of the legal or equitable interest in the property in question must make it evident that he intends to constitute himself as a trustee, he must leave no doubt as to what property interest of his is to be the subject of the trust, and he similarly leaves no doubt as to who is
to be the trust beneficiary. In other words, the three certainties must be established as in the creation of all trusts. (pp. 150-151)

...a voluntary trust subject to a power of revocation is a completely constituted trust.... (p. 154)

Additionally, there can be successive interests in trusts and all persons who have interests (contingent or otherwise) are beneficiaries.

We acknowledge the reference in your letter to file no. 961375. That interpretation is superceded by a recent legal opinion we obtained in connection with another file.

Therefore, it is our view that trusts established after the death of the settlor of an inter vivos trust pursuant to provisions contained in the inter vivos trust indenture are inter vivos trusts. They are not created by the deceased and property will not be contributed to them by the deceased on or after the deceased's death and as a consequence thereof.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R3.

Yours truly,

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