The will of the deceased provided for the creation of a testamentary trust for the Beneficiary (the adult son of the deceased who, due to his psychological condition was not able to support himself) which provided that the Beneficiary was, during his lifetime, the sole beneficiary of the such Trust, with the residue to be distributed in accordance with the will, and which qualified as a "lifetime benefit trust."
- Pursuant to the will the Executors will request that the RRSPs of the deceased be wound up and will transfer all RRSP monies to the Trust established pursuant to the Will, which will qualify as a "lifetime benefit trust" in accordance with s. 60.011(1).
- The Executors and Beneficiary will file with the Minister (together with the deceased's final return and the Beneficiary's income tax return), in respect of each of the RRSPs, a joint designation under s. 146(8.1), so that all amounts paid by the RRSPs to the Executors are deemed to have been received by the Beneficiary as a refund of premiums.
- Within the time periods set out in the preamble to s. 60(l), the Trust will acquire an annuity satisfying the conditions in s. 60.011(2)(a).
- The beneficiary will elect in his return to have s. 60.011(3)(b)(ii) apply to the amount paid to acquire the annuity.
The amounts jointly designated per 1 above will be deemed to be refunds of premiums in accordance with s. 146(8.1), and will be included in computing the Beneficiary's income pursuant to s. 146(8).
Such amount may be deducted, to the extent permitted by s. 146(8.9) – and the Executors may request a reassessment of the final return of the deceased if necessary to take these deductions into account.
The amount paid by the Trustees to acquire the annuity will be deductible by the Beneficiary to the extent permitted by s. 60(l), taking into account the provisions of s. 60.011(3).
During the lifetime of the Beneficiary, each payment received under the annuity by the Trust will be included in his income rather than the Trust’s income pursuant to ss. 56(1)(d.2) and 75.2.
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|Tax Topics - Income Tax Act - Section 75.2
|annuity purchased by Hansen trust included in income of beneficiary rather than of Hansen trust
Under the rule against accumulations in Ontario (and other provinces), any trust income after a specified period (“surplus income”) may not be accumulated in the trust and must be distributed to those who would have been entitled to it had the accumulation not been directed. A trust established for a dependent mentally-infirm child (the “Dependent Beneficiary”) in such a province could address the rule by directing the surplus income to be paid to a designated beneficiary (a “designated beneficiary clause”) or stipulate that the surplus income be paid to the person(s) entitled to receive that income (an “accumulation clause”). Such a clause would cause the trust not to be a lifetime benefit trust (“LBT”) if (as might normally the case, due to the mental infirmity of the Dependent Beneficiary) someone other than the Dependent Beneficiary was named in a designated beneficiary clause or the accumulation clause was drafted to have a similar effect.
Absent such a clause, the surplus income becomes part of the residue of the estate and is distributed in accordance with the residuary clause, so that the recipient of the surplus income receives it by operation of law. Would such a distribution accord with the phrase “under which” in s. 60.011(1)(b)? CRA responded:
It is our understanding that pursuant to the rule against accumulations, surplus income has to go to the person(s) legally entitled thereto. A will may contain language directing who is legally entitled to the surplus income and depending on the terms of the will this may be a person other than the Dependent Beneficiary.
… [U]nless the Dependent Beneficiary is the person legally entitled to the surplus income a trust will not qualify as an LBT as there is the possibility that a person other than the Dependent Beneficiary can receive or obtain, during the Dependent Beneficiary’s lifetime, the use of the income of the trust. Whether the surplus income is paid to a person as a result of the operation of law as opposed to the terms of the trust or will does not alter our position.
In response to requested clarification concerning the meaning of “mental infirmity” and the consequences of annual distributions from a lifetime benefit trust that are immediately deposited into a “Henson Trust”, as well as the final distribution of remaining property of the trust following the death of the infirm beneficiary, CRA stated:
The determination of mental infirmity for purposes of the first condition above is a question of fact as this term is not defined in the Act. The provision does not apply to a physically infirm dependant unless there is also a mental infirmity, and it does not require that the infirm individual be eligible for the disability tax credit. In addition, it must be possible to clearly demonstrate a causal connection between the mental infirmity and the dependence of the child or grandchild for support. …
[D]epending on the circumstances surrounding subsequently deposited amounts, these payments could possibly contravene the requirements under paragraph 60.011(1)(b) … .
[T]he general trust rules found in subsections 107(1) and (2) will apply to distributions of a lifetime benefit trust in determining: (i) the adjusted cost base and the proceeds of disposition of the capital interest in the trust disposed of by the beneficiary; and (ii) the cost of the property acquired by the beneficiary in satisfaction of his or her capital interest in the trust.