11 September 1996 External T.I. 9613875 - definition of a testamentary trust

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principales Questions:

1-Could trusts created pursuant to the death of a lifetime beneficiary of an intervivos trust qualify as testamentary trusts for the purposes of the Income Tax Act (the "Act"). 2- Does subsection 107(2) of the Act apply to a transfer from an intervivos trust to trusts created upon the death of the lifetime beneficiary of the intervivos trust

Position Adoptée:

1- yes 2- yes

Raisons POUR POSITION ADOPTÉE:

CCm# 901078 and definition of testamentary trust 108(1) and personal trust 248(1)

									5-961387
XXXXXXXXXX							(613) 957-8953

Attention: XXXXXXXXXX

September 11, 1996

Dear Sirs:

Re: Trusts

We are replying to your letter of April 18, 1996, wherein you requested our opinion whether trusts created pursuant to the death of a lifetime beneficiary of an intervivos trust could qualify as testamentary trusts for the purposes of the Income Tax Act (the "Act"). In addition, you requested our opinion whether subsection 107(2) of the Act applies to a transfer from an intervivos trust to trusts created upon the death of the lifetime beneficiary of the intervivos trust. We apologize for the delay in responding to your inquiry.

As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate tax services office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

The term "testamentary trust" is defined in subsection 108(1) of the Act. A testamentary trust means a trust or estate that arose on and as a consequence of the death of an individual and was not created by a person other than the individual. Paragraph (b) of this definition excludes trust created after November 12, 1981 if property has been contributed to the trust otherwise than by an individual on or after his death and as a consequence thereof.

As mentioned in the Technical Notes which were published on May 9, 1985 with the Notice of Ways and Means Motion amending the Act, the Department of Finance's opinion concerning paragraph (b) of the definition of testamentary trust was as follows:

"it is not intended that a contribution to a trust by an individual that takes effect after the death of his surviving spouse would disqualify a trust as a testamentary trust."

Therefore, if after November 12, 1981, an individual creates an intervivos trust specifying that he is the sole beneficiary during his lifetime and upon his death the trust indenture specifies that the residue of the trust is to be held by another trust created after his death, it is our opinion that the latter trust qualifies as a testamentary trust unless property is contributed otherwise than by the settlor on or after his death and as a consequence thereof. Based upon the Department of Finance's commentary cited above, it is our opinion that such a trust created as a consequence of the settlor's death would not disqualify the trust as a testamentary trust by virtue only of the fact that the contribution to the trust takes effect after the death of the settlor-beneficiary of the intervivos trust.

Paragraph 107(2) of the Act provides a rollover on the distribution of properties from a personal trust to a beneficiary in satisfaction of all or any part of the beneficiary's capital interest in the trust. Where an intervivos trust transfers a property to another trust (the "Beneficiary Trust"), it is our opinion that paragraph 107(2) of the Act will be applicable to such transfer provided that the intervivos trust is a personal trust, as defined in paragraph 248(1) of the Act, and provided that the Beneficiary Trust received the property in satisfaction of its capital interest in the intervivos trust.

In addition, we would bring to your attention that where a settlor transfers properties to an intervivos trust having himself as a lifetime beneficiary and having a contingent beneficiary in the event of his death, it is our opinion that the disposition will take place at the fair market value even if the settlor is the sole beneficiary during his lifetime.

The above comments are an expression of opinion only and, as explained in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

We trust that these comments will be of assistance to you.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch