10 June 1998 Internal T.I. 9814350 - DISCRETINARY TRUST, 60(L)

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

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

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

Principal Issues: Can the executor purchase a qualifying annuity for a financially dependant child?

Position: Yes

Reasons: As long as the child is the sole beneficiary of the annuity held by the trust then the Department will accept the acquisition.

STRATEGY INSTITUTE

1998 Round Table
Question

A refund of premiums is defined in subsection 146(1) of the Income Tax Act (the “Act”) to be any amount paid out of or under an RRSP to the spouse of the annuitant or to a child or grandchild of the annuitant, if the annuitant had no spouse at the time of death, who was at that time financially dependent on the deceased for support. Where the estate is the beneficiary of the RRSP, subsection 146(8.1) of the Act permits an executor to elect to designate an amount received in a year from the RRSP as a refund of premiums if the amount would have qualified as a refund of premiums had it been paid directly to the beneficiary of the estate.

Where an executor of a deceased annuitant’s estate elects under subsection 146(8.1) of the Act in respect of a financially dependent child or grandchild, can the executor purchase a qualifying annuity for the child or grandchild or does the amount have to be distributed to the child or grandchild’s guardian to purchase the qualifying annuity in order to qualify for the deduction provided under paragraph 60(l) of the Act? If the executor can acquire the qualifying annuity, can the estate receive the annuity payments under the annuity contract as part of a discretionary trust for the child or grandchild’s benefit and would the income received by the discretionary trust still be taxable in the hands of the child or grandchild?

Response

The Department’s views as to whether a payment out of an RRSP would qualify as a refund of premiums and whether the payment could be transferred to an RRSP under paragraph 60(l) of the Act can be found in paragraphs 17 and 27, respectively, of Interpretation Bulletin IT-500R titled “Registered Retirement Savings Plans - Death of an Annuitant”.

Paragraph 27 of IT-500R states that an individual may obtain a deduction under paragraph 60(l) in respect of all or part of any amount included in the recipient’s income under subsection 146(8) in the year to the extent the amount is paid in the particular year or within 60 days after the end of the particular year to accomplish one of the alternatives described in subparagraphs 27(c) to (g). We refer you to subparagraph 27(f) wherein we state that a deduction under 60(l) of the Act will be allowed when a refund of premiums is used to acquire an annuity under which a beneficiary child or grandchild, or a trust under which the child or grandchild is the sole person beneficially interested in all amounts payable under the annuity, is the annuitant for a term of years not exceeding 18 minus the age of the beneficiary at the time of its acquisition. Paragraph 28 of IT-500R states that the deduction under paragraph 60(l) of the Act is available when amounts are received by the estate, provided the amount is designated in accordance with subsection 146(8.1) and the legal representative receives the amount from the RRSP under which the deceased was the annuitant immediately prior to death. We are of the view that paragraph 60(l) will apply where the legal representative acquires an annuity that meets the requirements described in subparagraph 27(f) of IT-500R.

The determination of whether a discretionary trust for the benefit of a child or grandchild would be a trust under which the child or grandchild is the sole person beneficially interested in all amounts payable under the annuity is a question of fact that could only be determined after a review of all of the terms of the particular trust. Generally, any deduction under paragraph 60(l) would be contingent on the child or grandchild being the sole beneficiary of the discretionary trust.

A trust for the benefit of a child or grandchild will have to include the annuity payments received in any year in its income. However, the trust will be entitled to a deduction in respect of the income that is paid to or payable to the beneficiary in the particular year, including amounts deemed payable under subsection 104(18) of the Act. In this regard, we would refer you to IT-342R titled “Trusts - Income Payable to Beneficiaries” wherein you will find the Department’s views on the amounts that may be included in a beneficiaries income and the meaning of the term “payable” for determining the amount to be included in the beneficiaries income.

Prepared by M.P. Sarazin
June 12, 1998
981435