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Chapter 17.0 Estates and Trusts – Under Review

Table of Contents

• 17.2.0 Estates and Trusts Program
  • 17.2.1 Introduction
  • 17.2.2 Estate of a deceased person
  • 17.2.3 Income allocated and designated to beneficiaries
  • 17.2.4 Preferred beneficiaries
  • 17.2.5 Bare trusts- Under review
  • 17.2.6 Mutual fund trusts
  • 17.2.7 Real estate investment trust
  • 17.2.8 Designation under subsection 104(2) of the ITA
• Appendix 17.2.0 Forms, templates, checklists, etc.
  • A-17.2.1 Forms of wills
  • A-17.2.2 Contents of a will
  • A-17.2.3 For future use
  • A-17.2.4 Checklist – Estates
  • A-17.2.5 Checklist – Trusts
  • A-17.2.6 Glossary – Estate of deceased taxpayers
  • A-17.2.7 Additional legislative authority – ITA

17.2.0 Estates and Trusts Program

In this chapter:

• executor refers to both the executor and the executrix; and
• representative refers to the legal representative who may be the executor/executrix, administrator, or in Quebec, the liquidator of the estate of the deceased taxpayer.

17.2.1 Introduction

Whether a person dies testate (with a will) or intestate (without a will), the deceased is deemed to have disposed of all assets immediately before death. The ITA includes provisions that apply to:

• the deceased taxpayer and the deceased’s estate created on death;
• any testamentary trust created under the deceased’s will; and
• the executor or other person administering the deceased’s affairs.

For more information, go to:

• Appendix A-17.2.1, Forms of wills; and
• Appendix A-17.2.2, Contents of a will.

When a person dies intestate, estate assets are distributed under provincial intestacy laws. Provincial laws may affect the distribution of the deceased’s property and income taxes payable must be determined.

The representative of the deceased is responsible for the administration of the deceased’s affairs, including the distribution of the deceased’s remaining property to the beneficiaries after payment of all debts, including income tax. The representative is required to obtain a clearance certificate from the minister certifying that all taxes have been paid or properly secured before the property is distributed to the beneficiaries. For more information, go to 16.1.0, Clearance Certificate Program.

Definition

The ITA does not provide a definition of a trust. Tax Guide T4013, T3 Trust Guide, defines trust as a binding obligation enforceable by law when undertaken. A trust may be created by one of the following:

• a person (either verbally or in writing;
• a court order; or
• a statute.

Generally, a trust is created when it is properly established and there is certainty of:

1. the intent to create a trust;
2. the property to be placed in trust; and
3. who the beneficiaries of the trust are.

Deemed disposition (realization) by a trust

Under subsections 104(4) and 104(5) of the ITA, a trust is deemed to have disposed of its capital property (except excluded property) every 21 years at fair market value (FMV), and must report the income, losses, and gains on the trust return for that tax year on Form T1055, Summary of Deemed Dispositions – 2002 and later taxation years. The trust is liable for taxes owed on any gains. Some exceptions to the deemed disposition rule apply.

Referrals to Audit – Trusts

These issues may indicate the need for an audit of a trust:

• rollovers including estate freezes and butterflies;
• beneficiaries of a trust reaching the age of majority;
• trusts where the 21-year rule applies;
• residency issues;
• capital and income distributions of trust property;
• contributions to the trust;
• control issues (for example, between the settlor and the trustee);
• preferred beneficiaries;
• income attribution problems;
• existence of offshore trusts;
• whether a valid trust was set up by the settlor;
• commercial activity of a trust;
• loss issues;
• multi-layered trusts; and
• indications of income splitting.

17.2.2 Estate of a deceased person

Income tax implications

Frequently noted issues

These issues often occur when dealing with the income tax implications of the estate of a deceased person:

• How the estate income is to be taxed in the period during which the estate is being settled and wound up.
• The tax consequences of estate income allocated to beneficiaries during the executor's year.
• The tax consequences of property dispositions when assets are transferred under the terms of the deceased's will.

For a list of relevant legislation and administrative materials, go to Appendix A-17.2.7, Additional legislative authority – ITA.

Confidentiality

The representative for an estate is the executor or administrator and is not acting as an agent for other parties. Section 241 of the ITA authorizes the CRA to discuss the deceased's affairs with the executor and prevents the CRA from discussing the tax related matters of the estate with the beneficiaries.

Administration of the estate – General practices

To ensure uniformity of treatment, the following practice will be adopted for income earned by the estate during the executor's year (under common law, the executor generally has one year to administer the assets of an estate):

• While beneficiaries cannot enforce payment or distribution of estate income, any amounts allocated to them by the representative will be included in the income of the beneficiary.
• Under Quebec law:
  • The beneficiaries of estates have six months to accept or renounce their succession from the opening of succession procedures for the family patrimony. Both spouses share family patrimony equally and the value of the family patrimony is partitioned.
  • A person may distribute personal effects, if the successors agree.
  • The executor does not need a clearance certificate to distribute amounts of less than $6,000 to the beneficiaries.
  • Once the succession has been liquidated, the liquidator submits the final account showing the net assets or deficit of the estate.
  • The heirs receive the property after liquidation.
  • Any distributions of income or property will be taxed in the beneficiaries' hands for tax years ending after March 31, 1998.
• If an amount arising from the will is taxable income and capital for the trust, such as taxable capital gains on the sale of company shares by the executor in the executor's year, it is taxable in the hands of the executor except if it has been distributed to the beneficiary or if a preferred beneficiary election has been made under subsection 104(14). In the latter cases, the amounts are taxable in the hands of the beneficiary.
• If the final T3 of an estate is filed for a period that terminates before the end of the executor's year, the income and taxable capital gains earned in that period by the estate are considered to have been paid to the beneficiary on or before the final date, unless the trustee has disbursed these items in some other manner under the terms of the will or with the law. This provides for payment of debts out of income.

The legal representative of the deceased person can file up to four T1 returns for the deceased for the year of death:

1. A final return for assets disposed of just prior to death (in the identification area of the return, write "The estate of the late" before the name of the deceased).
2. A return for rights and things under subsection 70(2) (for example, unpaid dividends that were declared but not paid; work in progress for professional income, if the taxpayer had elected to exclude work in progress when calculating total income).
3. A return for a partner or proprietor for income from business under subsection 150(4).
4. A return under paragraph 104(23)(d) for income from a testamentary trust from the trust's year-end to the date of death (this trust arises from another person's death).

The deductions and tax credits that may be claimed on the deceased's income tax returns fall into these categories:

• Amounts that can be claimed in full on all of the returns, such as the basic amounts.
• Amounts that are divided, so that a portion of the amount is claimed on each of the returns that are filed (for example, medical expenses, charitable donations, and other gifts).
• Amounts that can only be claimed on the return that includes the related income (for example, employment insurance (EI) premiums, contributions to QPP or CPP, union or professional dues).
• Amounts that can only be claimed on the principal return (for example, losses from other years, refund of income tax paid prior to death, and carry-forward of alternative minimum tax).

For more information, go to Tax Guide T4011, Preparing Returns for Deceased Persons.

A testamentary trust is created on the day immediately after a person dies. Income earned or received after the date of death is reported on Form T3RET, T3 Trust Income Tax and Information Return. The testamentary trust continues until the executor has fulfilled all obligations related to the property and distributed the property to the beneficiaries or until separate testamentary trusts are created through the will for the beneficiaries. The executor must apply for a final clearance certificate for the deceased's affairs and a certificate for the wind-up of the testamentary trust if no further trusts are created through the will. In addition to income from property earned by the trust, the trust will also include in income:

• salary or wages paid for the period after death, usually to the end of the month, or payment for the full month of death if the deceased was not receiving pay, but was on authorized leave;
• death benefits – amounts up to $10,000 are not taxable;
• future adjustments to severance pay, regardless of when the collective agreement was signed;
• refund of pension contributions payable because of death;
• guaranteed minimum pension payments;
• DPSPs; and
• CPP/QPP death benefits, if not reported by the recipient.

The representative may continue to look after the deceased's affairs in testamentary trusts created by the will, if appointed to do so.

The testamentary trust acquires property from the deceased at FMV, unless there has been a rollover of property or farm property to a spouse or common-law partner or spousal or common-law partner trust at the deceased's adjusted cost base (ACB). This is subject to elections that may be filed by the representative, who may or may not be the same person as the representative who deals with the estate.

If the testamentary trust later disposes of capital property, there may be capital gains or capital losses in the trust. Recapture or terminal losses may result if the trust disposes of depreciable property.

Effect of dependant's relief or other measures

Although the deceased may have done tax planning regarding the disposition of assets, it is up to the executor or the taxpayer's representative to minimize income tax payable. Consequently, the auditor may encounter issues that relate to:

• dependant's relief provisions;
• spousal or common-law partner transfers;
• variations to wills;
• declarations by the beneficiaries to allocate funds elsewhere; and
• allowable deductions against taxable income on the special returns.

Any disclaimers, releases or surrenders must not be in favour of a particular person and must be completed within 36 months of the deceased's death, so that the beneficiary will not be deemed to have disposed of property allocated by the will. In these cases, the auditor should obtain the necessary documents and verify the effect on income tax.

Terms of a will can be varied or changed by the dependant's relief provided under provincial law. The beneficiaries, such as adult children, can reallocate property to other beneficiaries, such as the spouse or common-law partner of the deceased, provided that the provincial conditions are met. Tax planners will use this provision to minimize income tax applicable to the deceased's estate. Similar results can be achieved through variation of the will, declarations, disclaimers, and releases or surrenders. For definitions, go to Appendix A-17.2.6, Glossary – Estate of deceased taxpayers.

Vested indefeasibly

While the estate is being administered, no beneficiary has the right to demand payment of income or capital. Only amounts paid to the beneficiary can be included in the beneficiary's income. For reasons such as legal disputes, estates may continue to be administered beyond the normal executor's year.

Vesting indefeasibly is not defined in the ITA, but the conditions are noted in subsection 248(9.2) and Interpretation Bulletin IT305R4, Testamentary Spouse Trusts. Property must be vested before any rollover provisions can be utilized. Vesting indefeasibly refers to an enforceable right to enforce payment or to obtain the right of absolute ownership of the property within 36 months of the deceased's death or some other reasonable period of time, and may occur as the result of disputes (go to Hillis v The Queen (1983) CTC 348, 83 DTC 5365 (FCA)).

This right can occur even if the title has not been transferred through a legal conveyance or by registration if there are specific bequests to the spouse, spousal trust, or the child after the death of the deceased. If the bequests are not specific, the properties will only vest when they have been specifically identified and the beneficiaries have the enforceable right to the property. There must be no ambiguity that the property did vest. Otherwise, any rollovers to a spouse or spousal trust may be tainted.

Computing trust income

It is important to determine what income is considered to be taxable income of the trust. Various sources of income and expenses have to be reviewed to determine if income is taxable or if a loss or expense is deductible. Income from operations of the trust must be distinguished from capital gains and/or losses.

GST/HST credit

A deceased taxpayer may have been eligible and receiving quarterly GST/HST credit payments. If the recipient died before the scheduled month the GST/HST credit is issued, no more payments can be issued in that person’s name or to that person’s estate. If the recipient died during or after the scheduled month the credit is issued and the payment has not been cashed, the payment is to be returned to be reissued to the person’s estate. If the deceased had a spouse or common-law partner, that person may now be eligible to receive the GST/HST credit payments based on their net income alone.

For more information, go to Tax Guide T4011, Preparing Returns for Deceased Persons.

Non-residents

A deceased taxpayer that may be deemed non-resident includes:

• a non-resident deceased taxpayer who has non-resident beneficiaries and also has taxable Canadian property;
• a non-resident deceased taxpayer who has resident beneficiaries and taxable Canadian property;
• a non-resident deceased taxpayer who has resident beneficiaries and no taxable Canadian property; and
• a resident deceased taxpayer who has non-resident beneficiaries and taxable Canadian property for distribution.

Non-resident deceased taxpayers that have property in Canada will be deemed to have disposed of taxable Canadian property upon death. A clearance certificate is not required under section 116, since the executor must file an income tax return for the year of death under paragraph 150(1)(b), pay income tax due, and request an estate clearance certificate. If the estate clearance certificate has not been requested in time, the executor may have filed the request under section 116.

If non-resident beneficiaries receive taxable Canadian property and subsequently dispose of it, they are subject to the provisions of section 116.

The rollovers permitted to Canadian residents do not apply to non-residents, unless specifically allowed by tax treaty, as is the case under Article XXIX B of the Canada–U.S. Income Tax Convention (1980). Capital gains arising from a deemed disposition are taxable in Canada, unless exempt under a specific tax treaty.

There are no credits for foreign estate or inheritance taxes, unless provided for in a tax treaty. Income paid or credited by an estate to a non-resident beneficiary is subject to Part XIII tax under paragraph 212(1)(c), unless the income was designated under subsection 104(21) as a taxable capital gain of a non-resident person who is the beneficiary of a mutual fund trust.

For more information, go to:

• Information Circular IC77-16R4, Non-Resident Income Tax paragraphs 34 through 37;
• Interpretation Bulletin IT465R, Non-Resident Beneficiaries of Trusts; and
• Interpretation Bulletin IT420R3, Non-Residents – Income Earned in Canada.

Under the ITA, any income a Canadian resident receives from a non-resident estate is taxable in Canada.

If complex non-resident issues are encountered, the auditor should consult with the International Audit Section in the TSO. For more information, go to 10.11.13, Consultation and referrals on non-residents.

Audit considerations

The decision to audit the returns of a deceased taxpayer will depend on materiality and assessed risk as determined by Business Intelligence and Quality Assurance (BIQA). The auditor must ensure that the applicable income tax returns have been filed and that all taxes have been paid on behalf of the deceased. The auditor must look to the will and any other relevant documents to determine the nature and extent of the deceased’s property. The auditor also determines if adequate books and records have been kept and if a clearance request is required. Audit procedures should include:

• Determine the possibility of additional distributions of property or money related to other clearance certificate requests and valuations of property upon distribution.
• Ensure that elections, such as the election to transfer a reserve to a spouse or common-law partner, have been properly filed.
• Determine if there are any spousal or common-law partner rollovers.
• Establish the FMV of real estate and shares.
• Determine if any releases, disclaimers, surrenders or dependant's relief provisions alter the will.
• Find out if there have been gifts or donations of the deceased's property and ensure that the value assigned is according to requirements.
• Verify that deductions have been correctly claimed on the various returns filed on behalf of the deceased.
• Determine if there is a buy/sell agreement that affects the valuation of estate property.
• Determine if the valuation of the deceased's property is affected by a life insurance policy.
• Determine the potential income tax consequences to beneficiaries and follow up to ensure that the transactions have been properly reported (for example, the ACB used in calculating the capital gain on the disposition of inherited property).
• Determine if legal fees can be deducted by the estate.
• Determine if the will creates one or several trusts.
• Find out if there are non-resident beneficiaries, since the estate may be required to pay income tax on taxable capital gains.
• Determine the residence of the estate with respect to the disposition of taxable Canadian property.
• Determine if the deceased had transactions with a corporation, including loans, receipt of benefits subject to subsection 15(1), and/or personal use of corporate assets such as automobiles, homes, and airplanes.
• Ensure that donations are within prescribed limits.
• Determine if there are transactions where valuation at the time of disposition may require review (for example, the sale of a proprietorship business to a partnership or a corporation or the sale of a partnership to a corporation).
• Determine if there is a loss carry-back to prior years.
• Ensure that capital gains are not taxed twice if the taxpayer claimed a capital gains exemption relating to property owned on February 22, 1994, and held until the date of death.
• Determine the income tax treatment of depreciable property, buildings with contiguous land, and replacement property.

For a sample checklist/working paper, go to Appendix A-17.2.4, Checklist – Estates.

Example 1

Adrian died on May 10, 1999. Adrian is survived by a spouse and two adult children. The estate assets are:

Situation 1 – The relevant clause in the will reads as follows:

"To my spouse, Blair, providing Blair survives me for a period of 30 days, my entire estate for Blair’s own use absolutely."

Provided Blair survives the 30 days, the entire estate goes to Blair under subsection 70(6) of the ITA. Note that the joint property passes by operation of common law, the insurance (where Blair is the beneficiary), under the terms of the insurance policy, and the remaining assets by the terms of the will.

Situation 2 – The relevant clause in the will reads as follows:

"To hold my entire estate in trust for the benefit of my spouse, Cameron, and to pay the income to, or for the benefit of my said spouse until my said spouse’s death or remarriage. I further provide that my executor and trustee may, at their sole discretion, pay to or for the benefit of my children, such amounts as they deem necessary, out of the capital of my estate to advance them in life. Such payments may be made during the life of my spouse, subject only to there being sufficient income earned to provide for my spouse. On the death or remarriage of my spouse, the remainder of my estate is to be divided equally between my children."

The will fails to meet the exclusive trust requirements of the ITA as the result of the remarriage clause and the clauses that provide for the children during the spouse's lifetime. The spouse is entitled to the joint property, the bank account, and the life insurance under subsection 70(6), but the remainder of the estate that transfers to the trust is subject to subsection 70(5).

Situation 3 – Dylan died intestate.

Elliot is entitled to the joint assets, as the deed and agreements indicate that Dylan and Elliot are joint tenants (in this case, the property passes to the last survivor in the event of death), and the insurance policy names Elliot as the beneficiary.

The provincial statute for intestate succession determines the remaining distribution. It will usually be pro-rated between the spouse and children after an initial provision of a certain amount for the spouse.

Example 2

Frankie died on May 10, 1999. Frankie left artwork worth $300,000 (the original cost was $50,000) to a museum. In addition, Frankie left public company shares in XYZ Company worth $50,000 (the original cost was $150,000) to the museum. Frankie’s executor can elect to transfer the property to the museum at a value between the cost and the FMV to offset the losses on the shares. In addition, a non-refundable tax credit equal to the amount of the art is available. The donation credit may also be carried back to the prior year to the extent it was not used on the final return.

Example 3

On July 1, 1999, Gale died. Gale had an adult child and left a rental building to this adult child. The FMV of the land and building was $500,000. The original cost of the building was $1,000,000 with $800,000 of capital cost allowance (CCA) claimed to December 31, 1998. The original cost of the land was $200,000. There is no V-day value to take into consideration. The adult child continued to rent the property after it was received from the estate.

The income tax implications to the deceased under the ordinary rules for depreciable property would be:

In this case, the normal rules for depreciable property transferred at FMV upon the deemed disposition by the deceased do not apply because there is land contiguous to the building. The deceased's proceeds of disposition are re-determined to reduce the terminal loss to nil.

The tax implications to the adult child for the land and building under subsections 13(21.1) and 13(21.2) and paragraph 70(5)(d) of the ITA are:

Note: Subsections 13(4) and 44(1) do not apply to deceased taxpayers if replacement property was involved. For more information, go to Income Tax Folio S3-F3-C1, Replacement Property.

References

Jurisprudence

Rights or things

• Lamash (L.) Estate v MNR 1990 2 CTC 2534 (TCC)
• P. Dushinsky Estate v MNR 1990 2 CTC 2012 (TCC)
• Montreal Trust Co. (Tory Estate) v MNR 1973 CTC 434 (FCA)

Fair market value

• Mastronardi Estate v R (1976) CTC 572, 576, DTC 6306 (FCTD)

Spousal rollover

• Husel Estate v The Queen, 94 DTC 1765 (TCC)
• Hillis Estate v The Queen, 83 DTC 5365 (FCA) reversing in part 82 DTC 6249

Property transferred to spouse: Vesting

• Parkes v MNR 86 DTC 1214 (TCC)
• Boger Estate v MNR (1993) CTC 81 (FCA)
• Greenwood Estate v Canada (1994) 1 CTC 310 (FCA)

Farming

• Bouchard Estate v MNR 93 DTC 1163 (TCC)

Reserves

• Fontaine v MNR 95 DTC 5580 (FCA), 88 DTC 1656 (TCC)

Taxation of an estate

• Pappas Estate v MNR 90 DTC 1646 (TCC) (also includes valuation issues)
• Evans Estate v MNR 1960 SCR 391

Disclaimers, releases, and surrenders

• Herman v MNR 61 DTC 700

Allocation of income

• Roy v MNR 78 DTC 1123 TRB
• Ida Brown v MNR 50 DTC 218

Direction to maintain others

• Wilson v MNR 55 DTC 1065
• Saunders v MNR 51 DTC 292

Legal fees

• Akenhead Estate et al v MNR, 83 DTC 105

Non-resident

• Gladden Estate v The Queen, 85 DTC 5188 (FCTD), 84 DTC 1242 (TCC)

Training material

• Learning product TD1160-000, Estates and Trusts – Audit of a Deceased Person’s Returns
• Learning product TD1161-000, Estates and Trusts – Auditing Trusts
• Estate and Trust Manual, 1989

Income Tax Folio

• S1-F4-C1, Basic Personal and Dependant Tax Credits

Interpretation Bulletins

• IT381R3, Trusts – Capital Gains and Losses and the Flow-Through of Taxable Capital Gains to Beneficiaries
• IT394R2, Preferred Beneficiary Election
• IT500R, Registered Retirement Savings Plans – Death of an Annuitant
• IT524, Trusts – Flow-through of taxable dividends to a beneficiary – After 1987

Other references

• Tax Guide T4013, T3 Trust Guide
• Form T3RET, T3 Trust Income Tax and Information Return
• Form T3 (slip), Statement of Trust Income Allocations and Designations
• ministère du Revenu du Québec, Guide to Filing the Income Tax Return of a Deceased Person
• ministère de la Justice du Québec, Successions
• Tax Topic 1317, Planning for the Terminally Ill
• Taxation and Estate Planning, third edition, Cullity and Brown

17.2.3 Income allocated and designated to beneficiaries

A key factor in computing a trust’s taxable income is the allocating and designating of income to beneficiaries. Income is allocated and designated either to fulfill the terms of the trust agreement or will or because the trustee may be entitled to allocate or designate income to beneficiaries. Therefore, the trust, the beneficiaries, or a combination of the trust and the beneficiaries may report the income earned by the trust.

Reporting requirements are based on various rules, elections and designations. Amounts payable to the beneficiaries are generally deductible to the trust and must be included in the income of the beneficiary (subsections 104(6) and 104(13) of the ITA).

The trustee must provide a Form T3 (slip), Statement of Trust Income Allocations and Designations, to each beneficiary who has received income from the trust, and has to file Form T3SUM, Summary of Trust Income Allocations and Designations, to ensure that all income allocated and designated by the trust is reported accurately by beneficiaries.

It is important to be able to match the amounts deducted by the trust and those reported by the beneficiaries.

Types of income that may be designated to a beneficiary

These types of income may be designated to a beneficiary:

• net taxable capital gains;
• certain lump-sum pension benefits;
• dividends from taxable Canadian corporations;
• foreign business income;
• foreign non-business income;
• pension income that qualifies for acquiring an annuity for a minor beneficiary;
• retiring allowance that qualifies for a transfer to an RPP or an RRSP; and
• pension income that qualifies for the pension income amount.

Amounts allocated and designated to beneficiaries are reported on Form T3SCH9, Schedule 9, Income Allocations and Designations to Beneficiaries, of Form T3RET, T3 Trust Income Tax and Information Return.

Election designating trust income

An election to designate trust income to the beneficiaries must apply to all beneficiaries and be proportional to their share of reported trust income.

In the past, the election to designate income of the trust had to be filed with the T3 return for the tax year to which it pertained. However, as a result of the Tax Court of Canada decision in Jeannette Lussier v The Queen, 99 DTC 1029, (1999), the CRA has taken the view that a designation under subsections 104(13.1) or (13.2) may be amended, late-filed, or revoked in certain circumstances.

17.2.4 Preferred beneficiaries

Income tax implications

General discussion

Under subsection 104(14) of the ITA, the preferred beneficiary election, certain income of the trust can be allocated to a preferred beneficiary.

The rules relating to preferred beneficiaries of trusts were amended for tax years ending after 1996 as the result of income-splitting problems that resulted from tax planning using the preferred beneficiary election provisions in the ITA.

For more information, go to Interpretation Bulletin IT394R2, Preferred Beneficiary Election.

The major issues pertaining to preferred beneficiary elections include:

• who can make the election;
• eligibility of the trust;
• terms of the trust;
• procedure for filing the election (Regulation 2800);
• trusts excluded from the preferred beneficiary election;
• income of the preferred beneficiary; and
• attribution of income.

Who can make the election

The trustee has the authority to bind the trust and the preferred beneficiary and makes the preferred beneficiary election. If the preferred beneficiary is not capable of signing the election, the legal guardian can sign the election. If there is more than one preferred beneficiary, not all of the preferred beneficiaries are required to sign the election.

If more than one trustee governs the trust, the trustee who signs the election must have the consent of the other trustees.

Eligibility of the trust

Prior to the amendments, the ITA allowed trusts to use the preferred beneficiary election to allocate accumulating trust income to certain individuals in the family, such as:

• the settlor of the trust;
• a spouse or common-law partner or former spouse or former common-law partner of the settlor of the trust; and
• a child, grandchild, or great-grandchild of the settlor of the trust, or the spouse or common-law partner (but not the former spouse or former common-law partner) of any such person.

For trusts whose tax year ends after 1996, the ITA restricts the preferred beneficiary election to an individual who is one of the above and is also:

• eligible for a disability tax credit under subsection 118.3(1); or
• 18 years of age or older, for whom a dependant tax credit under subsection 118(1) can be claimed by another individual that is a close family member.

This qualification results in a very limited number of eligible preferred beneficiaries. The disability status of the beneficiary can be verified on page two of RAPID Option L, by placing an X beside “Disability.”

In addition, trusts that are exempt from the 21-year deemed disposition rules cannot make a preferred beneficiary election. This also applies to certain inter vivos trusts that do not have a settlor.

Terms of the trust

The term settlor is defined in subsection 108(1). An inter vivos trust created by more than one individual (other than a married couple) does not have a settlor. As a result, such a trust cannot make a preferred beneficiary election since it does not have a preferred beneficiary as defined in the ITA.

Procedure for filing the election

The preferred beneficiary election is made under the rules outlined in Regulation 2800. For a list of documents to be included in the election, go to Interpretation Bulletin IT394R2, Preferred Beneficiary Election.

Trusts that have made the preferred beneficiary election for federal income tax purposes are now deemed to have made the election for Quebec income tax purposes. Trusts will have to enclose the election with their Quebec income tax return. The restricted federal rules are applicable in Quebec for tax years ending after March 31, 1998.

A preferred beneficiary election must either be filed with the return or may be filed separately but no later than 90 days after the end of the trust’s tax year for which the election is made. An election filed on time is valid even if the trust late-filed the T3. If any elections are late-filed, the trust is taxed on the accumulating income. However, taxpayer relief provisions may apply in certain circumstances. For more information, go to 3.2.0, Taxpayer relief provisions.

Trusts excluded from the preferred beneficiary election

The preferred beneficiary election applies to 1988 and subsequent tax years and is not available to these trusts:

• a non-resident trust;
• a trust exempt from tax;
• an amateur athlete trust;
• an employee trust;
• a master trust;
• trusts governed by:
  • a DPSP;
  • an employee benefit plan;
  • an employee profit sharing plan;
  • a foreign retirement arrangement;
  • a registered education savings plan (RESP);
  • an RPP;
  • an RRIF;
  • an RRSP; and
  • a registered supplementary unemployment benefit plan.
• a related segregated fund trust;
• a retirement compensation arrangement trust;
• a trust whose direct beneficiaries are one of the above-mentioned trusts;
• a trust governed by an eligible funeral arrangement or a cemetery care trust;
• a communal organization; and
• for 1999 and subsequent years, a trust where all or substantially all of the trust’s property is held for the purpose of providing benefits to individuals for employment or former employment.

Any income arising from the deemed disposition of trust property is excluded from the trust’s accumulating income for the year and is not eligible for the preferred beneficiary election if it comes from one of the following:

• a post-1971 spousal or common-law partner trust;
• a pre-1972 spousal or common-law partner trust; or
• a trust that elected to defer the 21-year deemed disposition date.

Accumulating income of a trust does not include amounts paid or deemed paid from Net Income Stabilization Account (NISA) Fund No. 2. However, the preferred beneficiary election can include these amounts paid to a testamentary trust while the beneficiary spouse or common-law partner is alive.

Income of the preferred beneficiary

These types of accumulating income of the trust can be allocated under the terms of the trust or will and be designated in total or in part to the preferred beneficiary:

• taxable capital gains;
• actual amount of dividends from taxable Canadian corporations;
• foreign business income; and
• foreign non-business income.

Attribution of income

There may be instances where some of the elected income is attributed to the settlor or to another person under sections 74.1 to 74.5 or subsection 56(4.1), if the preferred beneficiary is the spouse or common-law partner or a minor child of the settlor. There may also be situations where subsection 75(2) applies. This provision provides for the attribution of income from a trust property to a person who transferred the property to the trust and continues to maintain certain rights over the property.

An amount designated under subsections 104(13.1) or 104(13.2) reduces the ACB of the beneficiary’s capital interest in the trust, unless the interest was acquired for no consideration and the trust is a personal trust.

For more information, go to Interpretation Bulletins:

• IT369RSR, Special Release: Attribution of Trust Income to Settlor
• IT510, Transfers and loans of property made after May 22, 1985 to a related minor
• IT511R, Interspousal and Certain Other Transfers and Loans of Property

Non-resident beneficiaries

If there are non-resident beneficiaries of a trust, Part XII.2 and Part XIII taxes may be applicable.

Audit considerations

These steps should be considered with respect to preferred beneficiary issues:

• Determine if the income allocated to the preferred beneficiary has been correctly reported.
• Ascertain how the trustee keeps track of income allocated to the preferred beneficiary.
• Verify that the beneficiary has a valid Disability Status on RAPID Option E, for tax years ending after 1996.
• Review the relevant T1 returns to ensure the beneficiary meets the conditions for making a preferred beneficiary election.
• Ensure that the election was filed on time.
• Review any changes in the trust arrangement to determine if retroactive tax planning has taken place.
• Determine from discussions with the taxpayer if an advance income tax ruling was obtained. If so, ensure that the transaction was carried out according to the ruling.

Example 1

Kim’s grandchild, Riley, was born blind. In 2010, Kim set up a trust for Riley. At that time, Riley was 10 years old. The trustee is Riley’s parent, Blake. The trust document indicates that income earned from the trust is retained in the trust until Riley is 21 years old.

In 2019, the trust realized capital gains of $6,500. Riley is now a university student. Due to Riley’s disability, Riley qualifies as a preferred beneficiary. Riley and Blake may jointly elect to allocate $6,500 to Riley. It is beneficial to have the gains taxed in Riley’s hands rather than in the trust, as the trust is subject to a higher rate of tax. The trust will claim $6,500 as a deduction regarding the allocation of the accumulating income for the year. Riley will receive a T3 slip; the income will be reported on Riley’s T1 return, although the income will be retained in the trust.

Example 2

Jordan is the trustee of an inter vivos trust that earned foreign non-business income in 2018. Jordan made a preferred beneficiary election (joint with the beneficiary, who is not an infirm dependent, but is the 15-year-old grandchild of the settlor), and then designated the income to retain its identity. The preferred beneficiary election is not allowable in this case. The trust is required to report the income on the T3 return and to pay the applicable income tax.

If the beneficiary was an infirm grandchild, the designation of income as non-foreign business income would be valid and the funds would be taxed in the grandchild’s hands.

Example 3

Sasha is 10 years old. Because of a severe disability, Sasha qualifies for the disability tax credit under section 118.3 of the ITA. Through Sasha’s parents, Sasha sued a grandparent to recover insurance damages with respect to a severe brain injury that left Sasha disabled. The injury was incurred in a car accident while Sasha was a passenger in the grandparent’s car. After several years of litigation, a settlement was reached whereby a trust was set up with Sasha as the settlor and the sole beneficiary. The trust terminates upon Sasha’s death.

Sasha’s parents are the trustees of the trust and they have full discretion to use the income of the trust for Sasha’s benefit. The trustees can only encroach on the capital with the express consent of the courts. The trust is allowed to accept contributions if the total of these contributions is less than the amount of the insurance settlement. The extra contributions are segregated from the settlement amount in order to keep track of income earned from the various sources.

The income tax consequences are:

• The trust is a personal trust as defined in subsection 248(1).
• Sasha is the settlor of the trust if the total FMV of any other capital contributions to the trust is less than the insurance settlement.
• The insurance settlement is non-taxable.
• Any income or loss from property acquired as a result of the settlement held in trust is deemed under subparagraph 75(2)(a)(i) to be Sasha’s income. However, under paragraph 81(1)(g.1), it is excluded from Sasha’s computed income until the end of the year in which Sasha reaches the age of 21 and is included in the trust’s income.
• Any income earned by the trust that is paid or payable to Sasha under subsection 104(13) or subject to a preferred beneficiary election under subsection 104(14) is exempt from income tax under paragraph 81(1)(g.1).
• When Sasha turns 21, the trust can elect, under subsection 81(5), deeming it to have disposed of any capital property relating to the insurance settlement for proceeds of disposition equal to the FMV of the property immediately before Sasha’s birthday and to have reacquired the property at a cost equal to the proceeds.
• Sasha is a preferred beneficiary because of the disability and is entitled to the credit under section 118.3.
• The attribution rules in sections 74.1, 74.2, and 74.3 do not apply to income earned or gains realized with respect to property acquired under the insurance settlement or any substituted property.

References

Income Tax Act

• Subsection 104(12), Deduction of amounts included in preferred beneficiaries’ incomes
• Subsection 104(13), Income of beneficiary
• Subsection 104(14), Election by trust and preferred beneficiary
• Subsection 104(14.01), Late, amended or revoked election
• Subsection 104(14.02), Late, amended or revoked election
• Subsection 104(15), Allocable amount for preferred beneficiary
• Subsection 108(1), Definition of preferred beneficiary
• Subsection 248(25), Definition of beneficially interested
• Subsection 251(1), Arm’s length
• Subsection 251(4), Definitions concerning groups
• Section 118.3, Credit for mental or physical impairment

Income Tax Regulation

• 2800, Elections in respect of accumulating incomes of trusts

Income Tax Folio

• S1-F4-C1, Basic Personal and Dependant Tax Credits

Interpretation Bulletins

• IT381R3, Trusts – Capital Gains and Losses and the Flow-Through of Taxable Capital Gains to Beneficiaries
• IT394R2, Preferred Beneficiary Election
• IT465R, Non-Resident Beneficiaries of Trusts
• IT500R, Registered Retirement Savings Plans – Death of an Annuitant
• IT524, Trusts – Flow-through of taxable dividends to a beneficiary – After 1987

Other references

• Tax Guide T4013, T3 Trust Guide
• Form T3RET, T3 Trust Income Tax and Information Return
• Form T3 (slip), Statement of Trust Income Allocations and Designations

17.2.5 Bare trusts - Under review

General comments

A bare trust is a form of inter vivos trust and is not defined in the ITA. Auditors must rely on CRA policy to determine the tax treatment of these trusts. The CRA generally considers the trust to be a bare trust when:

• the trustee has no significant powers or responsibilities and can take no action without instructions from the settlor regarding any aspect of the trust;
• the trustee’s only function is to hold legal title to the property; and
• the settlor is the sole beneficiary and can cause the property to revert to them at any time.

Under a bare trust, the settlor and the beneficiary are usually the same person. The trustee appointed by the settlor plays a passive role with respect to the property; the trustee only holds the property and performs minimal administrative functions to protect the trust assets. The trust is not considered a bare trust if the trustee has other duties that involve independent or discretionary powers.

A bare trust corporation may be viewed as a passive agent for another person. The other person is considered to be the beneficial owner of the property and all dealings related to the property are attributed to that person or, in some arrangements, to the shareholders of the other corporation that is the beneficial owner.

For example, the trustee of a bare trust could be a nominee corporation that holds legal title to property in trust for third parties under a trust agreement (or other documents establishing a trust), and has limited powers, duties, and responsibilities. The third parties could be the shareholders provided they exercise all of their discretionary powers over the property outside the trustee corporation. For instance, the third parties should provide instructions to the corporation or the directors, through whom the corporation acts, regarding management of the bare trust property. However, if the directors are also the beneficial owners and if they cause the corporation to perform management functions without clear written instructions from the shareholders, the CRA will consider this a true trust relationship and not an agency relationship as exists in a bare trust.

It is the view of the CRA that there should be a written agreement that includes the three parties for a trust, including a bare trust, to exist. A written agreement must address the three certainties previously mentioned and identify the terms. The written agreement must contain the name and address of the beneficiary, a description of the property, and the object of the trust. The agreement must also take effect before the creation of the trust, not after the fact.

Bare trusts are used for a variety of purposes, including:

• to avoid transfer fees in real estate transactions by arranging for changes in beneficiaries with no change in a nominee corporation;
• to hold securities or funds in trust, such as NISA funds, publicly traded shares, bonds, or warrants registered in a broker’s name;
• to administer partnerships or joint ventures if a nominee corporation holds title to the property for a group of co-owners;
• to handle reorganizations of ongoing commercial enterprises involving multiple steps and transfers of ownership; and
• in the oil and gas industry, to allow a vendor to hold assets in a bare trust until completion of the sale after the effective date (the effective date can be different from the date of sale).

Quebec civil law

Under civil law in Quebec, the bare trustee is the mandatory (agent) and the beneficial owner is the mandator (principal). A trust in Quebec is a patrimony by appropriation, if the property is transferred to the trust, and the possession and administration of the property are given to one or more trustees. The concepts may differ in law, but the intent is that the concept of trust in civil law is the same as in common law.

Existence and nature of the trust

The general view is that if a person holds property in trust as an agent for a beneficial owner and not as the trustee, all dealings related to the property are attributed to the beneficial owner. If a trustee performs functions in addition to holding bare legal title, but does so on the instructions of the beneficial owner, the trust may still be a bare trust. If the trustee has independent powers and discretion with respect to the property, a true trust relationship exists.

It is possible that an agency relationship and a trust relationship can co-exist. The auditor will have to examine the facts and the trust documents to determine the nature of the relationship.

While the CRA’s view is that there should be a written agreement (go to General comments), there may be situations when a written trust agreement does not exist. Consequently, the auditor will have to look at secondary factors and it will be a question of fact if a bare trust exists. The auditor may ask the taxpayer to provide documents that describe the intentions of the bare trust. In this case, the auditor should be aware of the possibility for retroactive tax planning.

Income tax implications

The general view is that if a person holds property in trust as an agent for a beneficial owner and not as a trustee, all dealings with the property are attributed to the beneficial owner.

If property is held by a bare trust, the trust is ignored for income tax purposes. The settlor is considered to be the owner of the property held by the trustee, who is the agent of the settlor. As a result, all income, losses, terminal losses, recapture, gains, etc. arising in respect of the property are attributed to the settlor.

Under subsection 104(1), trusts do not include arrangements where a trust can reasonably be considered to act as an agent for its beneficiaries with respect to all dealings in all of the trust’s property. Paragraph 248(1) provides that there is no disposition of property where the transfer does not involve a trust and does not result in a change in the beneficial ownership. Therefore, transfers of property into and out of a bare trust are not considered dispositions for purposes of the ITA.

If a Canadian resident transfers property to a non-resident bare trust, the transfer will be a disposition and the bare trust is treated as an ordinary trust under the ITA. Any complex issues involving non-resident bare trusts should be referred to the International Audit section in the TSO. For more information, go to 10.11.13, Consultation and referrals on non-residents.

Audit considerations

These audit procedures should be considered:

• Review the trust documents to determine if a trust exists.
• If an income tax ruling was obtained with respect to a bare trust, verify that the applicable transactions have been carried out according to the ruling.
• Determine if a bare trust exists under the trust agreement by reviewing the trustee’s duties outlined in the trust deed and by observing the actions of the trustee regarding the trust property.
• Review any written instructions from the beneficiary to the trustee to determine if the trust is a bare trust.
• Review income tax mainframe information relating to the trustee and others involved with the trust to assist in determining if the appropriate person is reporting taxable transactions.
• Examine the income tax returns (T1, T2, and T3) of all taxpayers involved in the transactions to determine the treatment of the trust assets for income tax purposes.

Example 1

In 1999, a Canadian resident transfers resort property in Florida to a non-resident bare trust. The trustee is a lawyer who is resident in Florida. The transfer is a disposition for proceeds not less than FMV of the net trust assets associated with the interest. The rules in subsection 107.4(3) of the ITA may apply. The trust will be treated as an ordinary trust for income tax purposes and not as a bare trust.

Example 2

This example shows that auditors must examine the circumstances and the facts to determine if a bare trust exists.

Harper, who receives a disability pension, purchased real property registered in their name for the use and benefit of Indiana. The purchase was financed partly by a mortgage from a financial institution. Harper paid the closing costs for the property before the purchase. Indiana then got the keys and moved into the property. Harper has no right to enter, inspect, or view the property without the express written agreement of Indiana. There is no trust agreement between Harper and Indiana, but there is a written agreement with these terms:

1. Indiana is responsible for all property expenses such as insurance, repairs, taxes, utilities and services.
2. Indiana will pay Harper a monthly payment until the closing costs and mortgage payments have been repaid.
3. Harper is responsible for making the mortgage payments until the property is transferred to Indiana.

In 1999, Indiana sold the property and directed Harper to deal with the real estate agents to close the sale. Indiana received the net proceeds of the sale after paying the real estate commission, mortgage, closing and legal costs related to the sale.

In this case, the written agreement does not constitute a trust or a bare trust, as Indiana is not the settlor. Indiana is not the sole beneficiary, as Indiana cannot cause the property to revert to themself at any time until they have repaid Harper. Harper does not hold the property as a bare trust for Indiana because one of the conditions for a trust is not present. Harper is not the sole beneficiary and cannot cause the property to revert to themself at any time.

However, based on the facts, Indiana is the beneficial owner of the property subject to a conditional sales agreement, as Indiana has the right of possession, the obligation to repair, and the obligation to pay all the expenses related to the property. For more information, go to Income Tax Folio S1-F3-C2, Principal Residence.

Consequently, Indiana will have to report the transaction if there are any income tax consequences. Indiana will be able to claim the principal residence exemption to reduce or eliminate any income tax arising from the sale of the property. Harper, who receives a disability pension, will not have to report the transaction and Harper’s disability pension will not be adversely affected.

References

Income Tax Act

• Subsection 248(1), Definitions of individual, person, trust, taxpayer, and disposition
• Subsection 104(1), Reference to trust or estate
• Subsection 104(2), Taxed as individual
• Subsection 108(1), Definition of trust
• Subsection 248(25.1), Trust to trust transfers
• Subsection 107.4(1), Qualifying disposition
• Subsection 107.4(3), Tax consequences of qualifying dispositions

Income Tax Folio

• S1-F3-C2, Principal Residence

Jurisprudence

In these cases, the establishment of if there was a bare trust depended on the facts in each case:

• Brookview Investments Ltd. et al. vs. MNR (1963) CTC 316
• Trident Holdings Ltd. v Danand Investments Ltd., (1988) 64 O.R. (2nd) 65 (Ont. C.A.)
• Demond Jr., 99 DTC 893
• Patricia M. Fraser v Her Majesty, The Queen, 95 DTC 5684
• Pan American Trust Co. v MNR (1949) CTC 229
• Chrustie v MNR (1984) CTC 2533
• J. N. Laxton v The Queen, (1988) 1 CTC 19
• Bibby v R. (1983) CTC 121 83 DTC 5148 FTD
• Ferrel v R. (1999) CTC 101 FCA from CTC 2269 (1998) TCC (precedent case discussing the trust terms)

17.2.6 Mutual fund trusts

Mutual fund trusts are a type of unit trust that resides in Canada, whose only undertaking is the investment of its funds in property (other than real property or an interest in real property) or acquiring, maintaining, leasing, or managing real property or an interest in real property that is capital property of the trust. There are prescribed conditions relating to its units and unit-holders.

Mutual fund trusts are entitled to a refund of capital gain for distributions paid to the trust’s unit-holders. As a result, the double taxation of capital gains is prevented. Mutual fund trusts are required to distribute substantially all of their taxable income and capital gains to its unit-holders, resulting in the trust paying virtually no income tax.

Section 132.2 of the ITA provides for an election whereby a mutual fund corporation or trust transfers its property to a mutual fund trust without realizing any accrued gains on the property. The transfer also allows the investors to trade their units with no immediate tax effect applicable to transfers after June 1994.

Mutual fund trusts can elect to have a fiscal period end of December 15, under subsection 132.11. Effective 2000 and subsequent years, the election can be revoked.

References

Income Tax Act

• Subsection 108(2), When a trust is a Unit Trust
• Subsection 132(6), Meaning of mutual funds
• Section 132.11, Taxation year of mutual funds trust

17.2.7 Real estate investment trust

The real estate investment trust (REIT) is a type of mutual fund trust. A REIT is an inter vivos commercial trust where units or interests in a commercial trust can be bought and sold (subsection 132(6) of the ITA).

REITs are used primarily in the syndication of real estate deals or as an alternative to other tax shelter and investment vehicles. These other investment vehicles have had problems related to valuation and redemption of mutual fund trusts and to the experience of investors in limited partnerships.

The REIT investor is concerned about the liquidity and yield of the investment. REITs have a long history in the United States. A considerable body of income tax law relates to REITs that are specifically defined for income tax purposes both in Canada and in the United States. In Canada, REITs have begun to be privately placed and publicly listed.

There are various types of REITs:

• mortgage REIT – invests in mortgage loans secured by real estate;
• equity REIT – formed to acquire an interest in real property, real estate, or a particular investment, such as health care facilities;
• hybrid REIT – a combination of a mortgage REIT and an equity REIT; and
• specialty REIT – formed to own and operate nursing homes or hotels.

A REIT is usually a closed-end investment trust; the units are traded on Canadian stock exchanges and the trust’s activity is passive investment. REITs are closed-end trusts because the holder cannot redeem the units on demand, but they can be redeemed under limited circumstances.

REITs are of interest to various investors, including:

• tax-exempt entities looking for a good return on investment;
• owners of property seeking capital to upgrade or refinance capital real property; and
• financial institutions wishing to realize real estate portfolio investments.

REITs are not mutual funds under the Securities Act, but under the ITA they can be treated as mutual fund trusts. They are usually set up by large corporations and have these characteristics:

• The REIT must be a Canadian resident.
• The trust issues units to investors called unit-holders.
• Each unit is entitled to one voting right.
• Unit-holders do not have precedence over one another.
• Non-residents cannot own more than 49% of the units.
• A prospectus must be available to investors if the REIT is publicly listed.
• Private placements can be made.
• Any income earned in the trust is distributed to the investors who report the income, capital gains, recapture, etc. allocated to them on a unit basis.
• The income is not taxed at the trust level and any distribution from the REIT is not a taxable dividend.

The REIT invests passively in real property using these methods:

• Investing through a holding corporation that acquires hotels, nursing homes, or commercial properties that are leased to an operating corporation that may also be related to the holding company.
• The REIT may own shares of a real estate corporation or have a partnership interest in real property.
• The REIT may be involved in leasing or managing real capital property.
• The operating company may operate the hotels through a joint venture or management agreement with the original owner of the hotels, who may act as an advisor to the REIT with respect to the property.

Advantages of REITs include:

• Small investors can acquire REIT units.
• REITs are generally sponsored by well-known financial institutions.
• The REIT is not subject to tax under Part I.3 (tax on large corporations) because it is not a corporation.
• REITs are qualified investments under Regulations 4900(1)(d) and 4900(1)(d.1) for RRSPs, RRIFs, and DPSPs.
• Section 210.1 exempts mutual fund trusts (REITs qualify as a mutual fund trust) from Part XII.2 tax on distributions to non-resident and tax-exempt beneficiaries.
• The 21-year rule does not apply to REITs.
• REITs are good investments for non-resident investors; the capital gains that are realized on the disposition of the investor’s units are not taxable subject to the following:
  • The non-resident unit holder must not own more than 25% of the units at any time in the five-year period ending on the date of sale.
• Tax is levied at the investor level, therefore minimizing income tax of the operating entity.
• Cash flow and distributions to investors are relatively stable because there is minimal or restricted reinvestment in the underlying business.
• The investment has a high degree of liquidity since the units can be traded on public markets.
• Growth of the underlying business may increase cash flow and potential capital gains to the investors.

Disadvantages of REITs include:

• The unit-holder is personally liable for the REIT’s obligations, such as environmental liabilities, if the REIT does not satisfy those obligations.
• REITs cannot speculate in real estate.
• Income tax rollovers are unavailable to REITs regarding the transfer of assets to the trust.
• Losses incurred cannot exceed the REIT’s rental income and cannot be allocated to the unit-holders.
• There may be a conflict of interest when trustees also manage the property.
• The REIT may not have sufficient cash flow to distribute to the unit-holders.

Income tax implications

General discussion

A trust must meet the conditions of paragraph 108(2)(b) and subsection 132(6) and follow the requirements of Regulation 4801 in order to qualify as a REIT.

The REIT must be resident in Canada. In addition, since it must not be established for the benefit of non-residents, foreign ownership cannot exceed 49%. Transfer agents have to be advised of the foreign ownership content. For more information, go to Income Tax Folio S6-F1-C1, Residence of a Trust or Estate.

Eligible activities of a REIT are listed in paragraph 132(6)(b). The development of real estate is an eligible activity as long as it relates to the earning of passive income from capital property of the trust. For more information, see Technical Interpretation 9714095, November 4, 1997.

As long as the REIT is a mutual fund trust on March 31 of the year following its creation, it will be deemed under subsection 132(6.1) to be a mutual fund trust from its inception. However, the REIT must meet the prescribed conditions relating to the number of unit-holders, dispersal of ownership, and public trading of its units.

REITs are not normally subject to income tax because the declaration of trust provides for payment of taxable income to the unit-holders. However, income tax applies to the trust’s taxable income and net realized capital gains in each tax year if it did not pay out all of the income and gains to the beneficiaries. The actual cash paid to the unit-holders may exceed the allocated taxable income because the declaration of trust allows for distribution of at least 85% of the cash flow before depreciation. REITs are allowed to claim permissible deductions such as CCA.

REITs are entitled to elect to determine the distributions for the tax year within one month of the end of the trust’s year. This distribution is deemed to have been made before year-end.

Transfers of property into the REIT are taxable at FMV; rollovers are not permitted. However, REITs may take certain measures to defer income tax, including:

• entering into partnerships;
• transferring less than 100% of the property to defer recapture; and
• acquiring long-term leases with prepaid rental agreements.

REITs are allowed to amalgamate tax-free under section 132.2 by making a qualified exchange with another REIT. The assets are transferred on a rollover basis and the investors in the transferor receive units of the transferee on the same rollover basis. The transactions have to occur within 60 days of each other. Within six months after the transfer, both funds have to jointly elect, using Form T1169, Election on Disposition of Property by a Mutual Fund Corporation (or a Mutual Fund Trust) to a Mutual Fund Trust, to have this section apply. These transactions are usually supported by advance income tax rulings that should be reviewed during the audit.

Unit-holders are required to report their portion of the taxable income of the REIT, including net capital gains and recapture. Any excess cash distributed to unit-holders according to the trust documents is not taxed. Instead, the ACB of the units is reduced by the excess amount. A negative ACB will result in a taxable capital gain. Until a capital gain occurs, tax on the excess distribution is deferred, unless the units are sold triggering a capital gain or loss.

Losses incurred by the REIT cannot be allocated to the unit-holders. Unit-holders cannot claim rental losses, as the claim for CCA is restricted to the amount of rental income.

If a non-resident unit-holder and related parties do not own at least 25% of the issued units of a REIT at any time during the 60 month period before the disposition of units, the capital gain on the sale is not taxable since the units are not considered taxable Canadian property as defined in subsection 248(1). However, property held in the REIT is subject to the capital gains rules when sold.

If a non-resident receives taxable income from a REIT, the income is subject to withholding tax at a rate of 25% under paragraph 212(1)(c) and not subject to relief under tax treaty. Part XII.2 tax that imposes a 36% tax on income from real property earned by non-residents who own an interest in certain Canadian trusts, is not applicable to a REIT under section 210.1.

Employees of a REIT who acquire units under an employee option agreement are deemed to have received a benefit equal to amount of the FMV less the amount paid to acquire them. In most cases, the benefit is recognized in the year the units are acquired; however, an election is available under subsection 7(10) to defer recognition of the benefit to the year when the units are sold.

Debentures issued by a REIT, as well as units in a REIT, are qualified investments for RRSPs, RRIFs, and DPSPs under Regulation 4900(1).

Audit considerations

These audit procedures should be considered:

• Verify that the REIT qualifies as a mutual fund trust.
• Determine if a bare trust arrangement exists whereby a related party holds legal title to the property while the REIT maintains beneficial interest.
• Verify that the activities of the REIT are passive (that is, the operations are managed outside the trust by professional managers and trustees are not involved in day-to-day business).
• Verify that not more than 49% of the unit-holders are non-residents (the number of nonresident trustees must also be restricted),
• Review the prospectus for public offerings and all agreements that relate to the operation of the trust to identify potential income tax issues.
• Determine if a referral to Valuations is required where property transferred into the trust from related parties may not be transferred at FMV.
• Determine if a referral is required regarding GST/HST issues.
• Review advance tax rulings or opinions relating to the trust.
• Verify that benefits relating to the acquisition of units under an employee option agreement are correctly reported.
• Determine if any capital vs. income issues exist with respect to expenditures for property beneficially held by the REIT.
• Verify distributable income to ensure these have been excluded:
  • CCA;
  • capital gains and losses;
  • terminal losses;
  • net recapture income;
  • amortization of cumulative eligible capital; and
  • issue costs.
• Verify designations of taxable income or net taxable capital gains to the unit-holders.
• Verify the calculation of reserves included in deductions from taxable income that is distributed to unit-holders.
• Determine if there are capital vs. income implications and if the trust has hedged any investments. Ensure that the trust’s investment restrictions and operating policies permit hedging.
• Verify that income tax has been withheld on any payments to non-residents.
• Verify that rental losses are properly calculated.
• Verify that losses are not allocated to the unit-holders.
• Verify that any incidental income left in the trust is reported on a T3 return.
• Examine and verify reports such as tax receipts issued to unit-holders.
• Verify that any revisions to taxable income in the REIT are reassessed and taxed in the hands of the trust on the basis that any corrections would not have been paid or payable at the end of the tax year.

These audit procedures should be considered with respect to the unit-holders:

• Verify that the taxpayer received a T3 slip.
• Examine the taxpayer’s return to ensure that the amounts reported are supported by proper documents.
• Ensure that the ACB of the units has been reduced as a result of excess distributions to unit-holders.
• Verify the ACB calculated when the unit-holder reinvests distributions to acquire more units.
• Verify the capital gain calculated on the disposition of units or when the ACB of the units is a negative amount.
• Ensure that rental income earned in the REIT does not flow to the unit-holder and is not being used in calculating income for RRSP purposes.
• Determine if the REIT is under audit and if there are any income tax implications to the unit-holder.

Contact Aggressive Tax Planning Division or Large Business Audit Division, Large File Cases, when a corporate group that is part of a REIT structure is under audit to determine if the REIT is under audit and if there are any income tax issues that would affect the taxpayer.

Examples

These excerpts are taken from prospectuses issued by REITs:

Example 1 – Hotel REIT

On October 29, 1999, ABC REIT issued a prospectus for units in the REIT to finance the purchase of a hotel portfolio and capital expenditures to update the hotels. The offering consisted of 59,244,492 units, of which:

• 30,496,328 units were sold on an installment basis of $10.00 per unit;
• 19,748,164 units were sold on a fully paid basis of $9.80 per unit ($0.20 represents underwriter fees); and
• 9,000,000 units were sold on a fully paid basis of $9.80.

The taxation of the trust was described as follows:

“The trust will generally be subject to tax under the ITA in respect of its taxable income, including net realized capital gains in each tax year, except to the extent that such taxable income including net realized capital gains is paid or payable or deemed to be paid or payable in such year to unit-holders.

The declaration of trust provides that, as of the last distribution date for a tax year, all the income (other than realized taxable capital gains and net recapture income) of the trust (computed without regard to subsection 104(6) of the ITA), less distributions of the trust’s income for that year previously made by the trust, shall be paid or payable to unit-holders and its net realized capital gains and net recapture income shall be paid or payable to unit-holders on the last distribution date in the tax year. Under the declaration of trust, the trust is required to deduct for tax purposes, such amount of its income (computed without regard to subsection 104(6) of the ITA), including net realized taxable capital gains and net recapture income, as are paid or payable to unit-holders under Part I of the ITA on its income, including net realized capital gains.

Losses incurred by the trust, if any, cannot be allocated to unit-holders, but may be deducted by the trust in future years according to the ITA.

The trust will be subject to the rental property rules that may restrict the amount of CCA available to the trust in any particular year.

Trusts are subject to a special tax on their designated income under Part XII.2 of the ITA. However, this special tax does not apply to a trust that qualifies as a mutual fund trust throughout the year. Therefore, provided the trust qualifies at all times as a mutual fund trust, it will not be liable to pay such tax.”

Example 2

A hotel real estate investment trust (REIT) issues units in the trust and debentures on the open market to obtain financing for its plans. The REIT invests the money at FMV in a large hotel portfolio that includes 12 hotels. The REIT receives the beneficial ownership of hotel property. ABC Ltd., a wholly owned subsidiary of the trust, holds the legal title to the hotels, operates them, hires staff, and leases hotel property from the trust. The REIT receives interest and rental income from ABC Ltd. The REIT’s operation is passive and complies with the income tax requirements for REITs. Taxable income in the REIT can flow to the unit-holders and be taxed in their hands.

Example 3 – Commercial property debenture REIT

On October 1, 1999, XYZ REIT floated a debenture issue to finance its expansion into 60 business properties. The REIT had issued the units through another public offering in 1999 for an initial installment of $6.00 per unit payable on October 21, 1999, with the final installment of $4.00 per unit payable upon closing. Underwriter fees were deducted from the proceeds received from the unit-holders.

This is an extract about the Canadian federal income tax considerations noted in the prospectus issued for the REIT in relation to the debenture:

“A debenture holder that is a corporation, partnership, unit trust, or trust, of which a corporation or partnership is a beneficiary, will be required to include in its income for a tax year any interest on a Series 2 debenture that accrues to the debenture holder to the end of the tax year or becomes receivable or is received by it before the end of that year, except to the extent that such interest was included in the income of the debenture holder for a preceding tax year.

Any other debenture holder will be required to include in income for a tax year, any amount received or receivable in that year as interest, depending on the method regularly followed by the debenture holder in computing income.

Upon an actual or deemed disposition of a Series 2 debenture by the debenture holder at any time, the debenture holder will be required to include in income, an amount equal to the amount of interest that has accrued to the date of disposition.

An actual or deemed disposition of a Series 2 debenture will also result in the recognition by the debenture holder of a capital gain (or a capital loss) to the extent that the proceeds of a disposition of the Series 2 debenture, net of the amount included in the debenture holder’s income as interest and any reasonable costs of disposition, exceed (or are exceeded by) the ACB of the Series 2 debenture to the debenture holder.

A debenture holder that is a Canadian-controlled private corporation, as defined by the ITA, may be liable to pay an additional refundable tax of 6-2/3% on certain investment income, including interest and taxable capital gains.

A debenture holder that is a corporation will not be entitled to include any amount in respect of the Series 2 debentures in computing its investment allowance for the purposes of computing taxable capital (both as defined in the ITA) under Part I.3 (tax on large corporations) of the ITA.

Debentures issued by a mutual fund trust, for the purposes of the ITA, the units of which are listed on a prescribed stock exchange in Canada, will be qualified investments for a trust governed by a deferred income plan. Based on information provided to the tax advisors by the trust, at the date hereof, the trust is a mutual fund trust for the purposes of the ITA and the units are listed on a prescribed stock exchange in Canada. Accordingly, as long as the trust continues to be a mutual fund trust for the purposes of the ITA and the units continue to be listed on a prescribed stock exchange in Canada, the Series 2 debentures will be qualified investments for deferred income plans.”

References

Income Tax Act

• Subsection 108(1), Definitions inter vivos trust and testamentary trust
• Subsection 108(2), When trust is a unit trust
• Subsection 132(6), Meaning of mutual fund trust
• Subsection 132(6.1), Election to be a mutual fund
• Subsection 132(7), Where trust established for the benefit of non-residents
• Section 132.2, Mutual funds-qualifying exchange
• Subsection 132.2(2), Definitions
• Paragraph 110(1)(d), Employee options

Income Tax Regulations

• 4801, Prescribed conditions for purposes of paragraph 132(6)(c)
• 4900(1)(d), Qualified investments for RRSPs, RRIFs and DPSPs

17.2.8 Designation under subsection 104(2) of the ITA

General discussion

Subsection 104(2) deems a trust to be an individual and is therefore required to file a return and pay tax as a separate person for income tax purposes. However, if there is more than one trust and substantially all, 90% or more, of the property of the various trusts has been received from one person and the various trusts are conditioned so that the income accrues to the same beneficiary or group or class of beneficiaries, such of the trustees as the minister may designate, shall be deemed to be, in respect of all the trusts, an individual whose property is the property of all the trusts and whose income is the income of all the trusts. While the CRA's position is that the phrase substantially all means at least 90%, the courts have held that the interpretation of the phrase is a question of fact depending on the circumstances of each case and have found the threshold to be lower. For example, refer to Keefe v the Queen, (TCC) 2003 DTC 1526, and McDonald v the Queen, (TCC) 1998 DTC 2151.

It is the CRA's view that the word property in paragraph 104(2)(a) includes the settlement property and any property subsequently gifted to the trust by the settlor or any other person. Since the definition of the word property in subsection 248(1) includes money, the question arises whether property, as used in paragraph 104(2)(a), is meant to include money received by the trust as income and property purchased by the trust out of the income of the trust. The CRA is of the view that the word is not meant to encompass income, as paragraph 104(2)(b) refers to income. Also, the words property and income are used throughout the ITA and generally, the word property is not interpreted to include income.

The term class of beneficiaries is not defined in the ITA, so its common meaning should be used. The word class is defined in the Oxford Dictionary as a "group of persons or things having some characteristics in common." Any definition that may exist in legislation governing trusts that would apply to a particular case should be taken into account.

It is the CRA's position that members of the same family could be considered one class of beneficiaries. As indicated in technical interpretation 2004-0090941E5(E):

"…one of the criteria that would be examined in making such a determination is whether the trusts have common beneficiaries. The number of common beneficiaries and the nature of their respective interests in each of the trusts are factors that might have some bearing in determining whether the income of those trusts accrues to the same group or class of beneficiaries. In this regard, it is not necessary that each trust have the same beneficiaries in each trust; it is sufficient that the beneficiaries of each trust be of the same group or class of beneficiaries. …"

However, ministerial discretion would not normally be exercised to designate multiple trusts as a single trust when a settlor or testator has established a separate trust for each of their children.

Application of subsection 104(2) of the ITA

For federal income tax purposes, a testamentary trust is subject to the graduated tax rates in subsection 117(2). Inter vivos trusts are taxed at the highest rate under subsection 122(1). The provinces and territories, except for Alberta, which imposes a flat rate of tax, impose basic tax at graduated rates for testamentary trusts and at the highest rates for inter vivos trusts. Ontario also imposes a surtax on basic tax at graduated rates (Ontario has two thresholds). Nova Scotia, Prince Edward Island, and Yukon impose a surtax, but have only one threshold. The tax savings from using inter vivos trusts in Ontario can be significant, as the current basic tax thresholds are low and the surtax rates are high. Therefore, affluent residents of Ontario may use multiple inter vivos trusts resident in Ontario to obtain a lower overall rate of provincial tax by taking advantage of the graduated surtax rates.

Subsection 104(2) is an anti-avoidance provision which grants the minister the discretionary power to designate multiple trusts as a single taxpayer when certain conditions are met. For example, the designation may be used to prevent a taxpayer from splitting income by using multiple testamentary trusts for the same beneficiary or group or class of beneficiaries, to take advantage of the graduated rates of federal and provincial taxes. In the case of inter vivos trusts, the designation may be used to prevent a taxpayer from using tiered trusts resident in different provinces to shift business income from the province in which the taxpayer resides and the business is carried on to a different province (for example, Alberta) to take advantage of its lower provincial tax rates by avoiding the provincial income allocation rules. If an auditor comes across a situation where multiple trusts have been set up, this may be an indicator of a potential tax avoidance arrangement. As such, the auditor should consult with the local Aggressive Tax Planning section for guidance.

If the provisions of the will or trust deed are unclear that the settlor intended to create separate trusts and the assets of each trust are not administered separately (for example, separate bank accounts, no undivided interests in property, separate accounting records) and the conduct of the trustees is such that the trusts are treated as one trust, it may be that there is only one trust at law. In such a case, a designation by the minister under subsection 104(2) may not be required; if the auditor can establish the fact that there is only one trust at law, then the trust will be taxed as such. The usefulness of a designation under subsection 104(2) is best illustrated if there clearly are two trusts at law – if the conduct of the trustees, the accounting of the trust property, and the intent of the settlor all support a finding that there are more than one trust. In such a case, the minister may treat one or more trusts as a single trust once the minister has made the designation in writing where the two statutory conditions are met. This is where the guidance of the local Aggressive Tax Planning area will be of assistance.

When dealing with specific files, auditors may come across application and interpretive issues for which general guidelines do not exist and, consequently, depending on the facts in the case, the auditor will need to consider one or more of these questions in determining if the criteria for deeming the trusts as one are met. Some of the issues relating to the application of subsection 104(2) that may be encountered include:

• if the historical cost of the property or the FMV of the property at the time the designation is made should be considered in determining if the substantially all test is met in paragraph 104(2)(a);
• if the property received from the person includes both direct and indirect contributions;
• if the income of the trust accrues to the same group or class of beneficiaries, if the class of beneficiaries of each trust is the same for each trust, except that one trust has an additional beneficiary (for example, a registered charity) who is not a member of the same class - the trust is discretionary and no distributions have ever been made to the registered charity; and
• if the condition in paragraph 104(2)(b) is met if two trusts are set up with the same beneficiaries, but the terms of the trust contain a general power of appointment (under a general power of appointment, the person entitled to exercise the power (the donee of the power) can add someone outside the class).

Auditors must inform the Aggressive Tax Planning Division in Headquarters of the issues relating to designations under subsection 104(2) and consultations with both the Income Tax Rulings Directorate and Legal Services should be carried out as necessary.

Examples of specific situations

Designation was recommended under subsection 104(2) of the ITA

1. A trust is settled for the benefit of Jesse and Jesse’s family by another family member with a gold coin valued at $227. Through a series of transactions, the trust acquired the shares of Holdco indirectly from Jesse. The shares of Holdco represented the majority of the trust's assets. Several years later, a second trust was created with a nominal amount by another family member with different trustees. The beneficiaries of the trust were Jesse’s children. Through a series of transactions, the principal assets of the second trust were shares of a numbered company that were acquired by the trust indirectly from Jesse. The shares of the numbered company were sold by the second trust to the first trust at FMV, resulting in a substantial loss ($11M). The conditions in subsection 104(2) were met and it was recommended to designate the two trusts as one. If the two trusts are deemed to be the same trust, no disposition arises as a result of the transfer from the second set of trustees to the first set of trustees and no capital loss is incurred.
2. The taxpayers use tiered trusts to reduce their provincial taxes, where one trust resides in its home province and another trust resides in Alberta and is a beneficiary of the first trust. Their companies pay management fees to the first trust, which then distributes the income to the Alberta trust, so that it is taxed in its hands under subsection 104(13) and thereby loses its character as business income. There would be no tax savings if the companies paid the management fees directly to the Alberta trust, as the income would be taxed under subsection 9(1) and the provincial income allocation rules would apply. There would be no tax savings if both trusts resided in the taxpayer's home province (except for in Ontario, where inter vivos trusts can be used to reduce surtaxes). The tax savings are generated by the shifting of income from one trust to another.

Designation was not recommended under subsection 104(2) of the ITA

1. A representative requested, on behalf of his clients, that a designation be made under subsection 104(2) to be able to deduct non-capital losses of prior years. In response to this request, the Income Tax Rulings Directorate stated in Internal Technical Interpretation 9238787(E):

The intent of the subsection 104(2) of the ITA is to prevent tax avoidance. This is evidenced by the precise wording of the provision which states in part:

"(...) such of the trustees as the Minister may designate shall, for the purposes of this Act, be deemed to be in respect of all the trusts an individual whose property is the property of all the trusts and whose income is the income of all the trusts."

Therefore, any designation by the minister under subsection 104(2) would only be applicable in respect of property of all the trusts and income of all the trusts (including gains on trust property), and, as such, this provision would not be applicable with respect to losses incurred by the trusts. The word income does not normally include the word loss, unless a contrary intention is evident. This is evidenced, for example, by the wording of sections 3 and 4 and subsection 9(2) of the Act.

As a result, it is our opinion that the prior years’ non-capital losses that may be deductible in computing taxable income are not subject to the minister's discretion under subsection 104(2).

Procedure for making a designation

Subsection 220(2.01) provides that the minister of national revenue may administratively delegate the minister's powers and duties under the Income Tax Act or Income Tax Regulations to an officer or class of officers in the CRA. For a list of CRA officials authorized to make a designation under subsection 104(2), go to Income Tax Act – Authorization to exercise powers or perform duties of the Minister of National Revenue.

The decision to make a designation must be in writing.

Reassessment procedures following a designation under subsection 104(2) of the ITA

If Audit makes a designation under subsection 104(2) to reassess multiple trusts as a single taxpayer, the auditor must provide Data Assessment and Evaluation Program at the Ottawa Technology Centre with the names and trust account numbers of the trusts involved, the years to be reassessed, and the reason for the reassessment (subsection 104(2) designation). The auditor will prepare Form T99, T1 and T3 tax calculation information, in the following manner:

• Form T99 is prepared for the trust that is to be designated and which should have reported all the income from the other trusts, based on the results of the audit. The pertinent information should be clearly noted on Form T99 (for example, keypunch fields that require a change and any applicable explanation codes that are required on the reassessment). All amounts should be clearly identified as an increase and should include all amounts reported by the other trusts in order to combine the taxable income of the trusts.
• Form T99 is prepared for each remaining trust to reduce the income of each trust to nil. Each field to be reduced should be clearly identified and the applicable explanation verses should be included.

Data Assessment and Evaluation Program will reassess the trusts based on the completed T99 forms. They will also ensure that each trust account in the Automated Trust System (ATS) is coded as Combined and cross-referenced to the valid trust account number which is that of the designated trust. An explanation code will be entered in each account indicating that the trusts have been designated under subsection 104(2). Any returns subsequently filed by the trusts will be assessed as one under the valid trust account number.

• Letters will be issued automatically by the system to each of the trusts to inform them that their accounts have been combined and that any subsequent returns they file will be assessed as one under the account number of the designated trust.
• The ATS will automatically issue a notice of reassessment to each of the trusts to increase the income of the designated trust by the amount of income of the secondary trusts, to reduce the income of the secondary trusts to nil, and to reassess their taxes accordingly.
• Taxes paid by the secondary trusts will be transferred from their accounts to the account of the designated trust.
• Once the accounts are flagged as combined, the accounts will be combined for all subsequent years and the accounts of the secondary trusts will not appear on the ATS, but remain open in the Trust Subledger.

Federal and provincial taxes will be increased for the designated trust and decreased to nil for the secondary trusts.

Reassessment procedures in doubtful cases

If there is any doubt that subsection 104(2) applies, the auditor should refer the case to the local Aggressive Tax Planning section to consider if the General Anti-Avoidance Rule (GAAR) should be added as an alternative position.

To protect the minister's position, auditors should not reassess the secondary trusts and transfer their tax payments to the designated trust, unless they are certain the reassessment will be upheld by both Appeals and the courts. There is no provision of the ITA that would permit us to reassess secondary trusts beyond the statute-barred date to reduce their income to nil, if and when the reassessment of the designated trust is upheld or a settlement is reached. However, the secondary trusts can protect their position by filing a waiver. This approach is consistent with the CRA's position in paragraph 13 of Interpretation Bulletin IT335R2, Indirect payments, with respect to indirect payments, which states that the CRA will reduce the recipient's income to prevent double taxation, but will require a waiver if the recipient's return is about to become statute-barred at the time of the assessing action.

If a decision is made not to reassess the secondary trusts, the auditor should send a memo to Data Assessment and Evaluation Program and request that a Pass Code 3 be put on the accounts to stop the automatic issue of a notice of reassessment. Auditors should also request that the tax payments not be transferred to the account of the designated trust and that a note be put on the accounts requesting that no refunds be made. Data Assessment and Evaluation Program will have to forward the request to Headquarters (Individual Returns Directorate, Trust Returns Processing Section) for approval. Therefore, the auditor should explain the necessity for the Pass Code 3 and state that Data Assessment and Evaluation Program will be advised when the matter has been resolved and the Pass Code 3 can be removed from the accounts.

In the proposal letter issued to the designated trust, the auditor should advise the trustee that, to protect the position of the minister, the CRA will not reassess the secondary trusts to reduce their income to nil for the relevant years and will not transfer the taxes paid by the secondary trusts for those years to the account of the designated trust as tax collected on its behalf until the matter has been resolved and the designation under subsection 104(2) has been upheld.

Since all of the trusts are affected by the designation, the auditor should also advise the trustee of each secondary trust that the CRA proposes to tax its income in the hands of the designated trust under subsection 104(2) and that, to protect the minister's position, the CRA will not reassess the secondary trust to reduce its income to nil for the relevant years and will not transfer the taxes paid by the trust for those years to the account of the designated trust as tax collected on its behalf until the matter has been resolved and the designation under subsection 104(2) has been upheld. The auditor should also advise the trustees to file a waiver within the normal reassessment period to permit the CRA to reduce the income of the trust to nil once the matter has been resolved.

References

• Income Tax Rulings - Other document - 9M19190 APFF 1999 Round Table On Federal Taxation Question 8

Income tax rulings

• 2005-0113521I7(E), 54 superficial loss – February 25, 2005
• 2004-0090941E5(E), Application of 104(2) - December 13, 2005
• 2002-0162865(E), Unification of Trusts – November 19, 2002
• 9714835(E), Aggregation of Testamentary Trusts – June 30, 1997
• 9704805(E), 21 Year Rule – Two Trusts – May 26, 1997
• 9509257(F), Choix Bénéficiaire Privilégié et Règles d'attribution – le 2 mai 1995
• 9304865(E), Multiple Trusts Settled by a Single Person – May 20, 1993
• 9238787(E), Minister's Discretion 104(2)

Appendix 17.2.0 Forms, templates, checklists, etc.

A-17.2.1 Forms of wills

There are three forms of wills under which a person can dispose of property on death:

1. A will under common law must be written or typed and signed by the testator before two witnesses, who must sign in the presence of each other and the testator. The witnesses cannot be the beneficiary or the spouse of a beneficiary.
2. A notarial or authentic will must be witnessed by two notaries or one notary and two witnesses, all in the presence of each other. This type of will is found in Quebec and is based on Civil Code.
3. A holograph will must be written in the handwriting of the testator and signed and dated by the testator. No witnesses are required. This is legal in Alberta, Manitoba, New Brunswick, Ontario, Quebec, and Saskatchewan.

A-17.2.2 Contents of a will

The executor may take the will before a proper officer or court to obtain legal assurance that the will is the last will and testament of the deceased person. The establishment of the validity of the will is called probate. Not all provinces require that the will be probated. Refer to provincial legislation to establish if probate is necessary. A list of estate assets and liabilities is included when wills are probated.

A-17.2.3 For future use

A-17.2.4 Checklist – Estates

This checklist for estates is not exhaustive. Add or delete steps, depending on the circumstances.

A-17.2.5 Checklist – Trusts

This checklist for Trusts is not exhaustive. Add or delete steps, depending on the circumstances.

A-17.2.6 Glossary – Estate of deceased taxpayers

These are terms the auditor may encounter during audits of estates:

A-17.2.7 Additional legislative authority – ITA