7 October 2020 APFF Financial Strategies and Instruments Roundtable Q. 5, 2020-0851601C6 F - TFSA Exempt Contribution - Spousal Trust

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146.2(1), 207.01(1)(b), 248(8)(a)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: An amount paid out of an arrangement that ceased to be a TFSA upon the death of its last holder to the deceased annuitant’s estates is transferred to a spousal trust created under the terms of the deceased holder’s will. Whether the same amount, then distributed by the trustee of the spousal trust to the deceased's surviving spouse, would qualify as a survivor payment for the purposes of the definition of "exempt contribution"?

Position: Generally yes, provided that the distribution is in accordance with the terms of the deceased's will and it is made during the rollover period.

Reasons: When such an amount is distributed in accordance with the terms of the deceased annuitant's will, the CRA will generally consider that the amount is distributed as a consequence of the death of the deceased annuitant, consistent with paragraph 248(8)(a).

FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, OCTOBER 7, 2020
2020 APFF CONFERENCE

Question 5

Rollover of Tax-Free Savings Account on Death - Spousal Trust

Mr. X died in 20X1 and at the time of his death he owned, inter alia, a tax-free savings account ("TFSA") with a value at the date of death of $100,000. No valid beneficiary designation could be made in respect of the TFSA and Mr. X's last will and testament did not specifically provide to whom the TFSA was to pass. The TFSA therefore formed part of the residue of his estate. Mr. X's last will and testament bequeathed the residue of his estate to a spousal trust created under the terms of his will, with a lump sum capital payment of $100,000 per year to the beneficiary, Ms. X. Shortly after Mr. X's death, the executor of the estate liquidated the TFSA and transferred the value of the TFSA, $100,000, to the spousal trust. Subsequently, a payment of $100,000, representing the value of the TFSA, was made by the trustee to Ms. X prior to the end of the rollover period, i.e., before December 31, 20X2, by way of a distribution of capital from the spousal trust.

Question to the CRA

Does the payment from the TFSA to the surviving spouse by way of a distribution of capital from the spousal trust made during the rollover period satisfy paragraph (b) of the definition of "exempt contribution" in subsection 207.01(1) of the Income Tax Act (the "Act") (the "Definition")?

CRA Response

To satisfy paragraph (b) of the Definition, a payment directly or indirectly out of or under an arrangement that ceased, because of the individual's death, to be a TFSA, must be made to the survivor (footnote 1) during the rollover period, as a consequence of the individual's death. Such a payment is referred to as a "survivor payment" in the Definition.

For a payment made to a survivor during the rollover period to be a survivor payment, it must satisfy the following two conditions:

1) be derived directly or indirectly from an arrangement that ceased to be a TFSA because of the death of its last holder; and

2) be made as a consequence of the death of the individual.

With respect to the source of the payment, this is generally a question of fact. Given the words "directly or indirectly", a particular payment will qualify as a payment to the survivor whether the money is paid directly to the survivor under the TFSA or whether it is first paid to the executor of the estate and the trustee of the spousal trust before being paid by the latter to the survivor.

With respect to whether the payment is made as a consequence of the individual's death, paragraph 248(8)(a) provides that a transfer, distribution or acquisition of property made under or as a consequence of the terms of the will or other testamentary instrument of a taxpayer shall be considered to be a transfer, distribution or acquisition of the property as a consequence of the death of the taxpayer. Thus, to the extent that the payment to the surviving spouse is made in accordance with the provisions of the individual's will, the CRA is generally of the view that it is a payment made as a consequence of the individual's death.

Where amounts from a deceased holder's TFSA are first paid to the executor of the deceased holder's estate and then paid by the executor to the survivor, it is generally the CRA's view that the payment to the survivor is equal to the amounts paid out of the TFSA to the deceased holder's estate, to the extent that the survivor is entitled to the TFSA under the deceased holder's will, and the survivor receives an equivalent or greater amount from the estate as a consequence of the death of the deceased owner.

The same reasoning applies where amounts from the TFSA are paid by the executor of the estate to a spousal trust before being paid to the surviving spouse. Thus, the fact that the will provides for the payment of the residue of the deceased holder's property, including the TFSA, to a spousal trust would not, in and of itself, preclude the surviving spouse from receiving a survivor payment within the meaning of paragraph (b) of the Definition, provided that the spousal trust pays the surviving spouse an equivalent or greater amount during the rollover period. A lump sum payment from such a trust is deemed to be made as a consequence of the death of the deceased holder for the purposes of the Definition, provided that such payment is made in accordance with the terms of the will.

Nathalie Boyer
(450) 926-7039
October 7, 2020
2020-085160.

FOOTNOTES

Due to our system requirements, footnotes contained in the original document are reproduced below:

1 Within the meaning of subsection 146.2(1).

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Text of Severed Letter

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.

Principales Questions: An amount paid out of an arrangement that ceased to be a TFSA upon the death of its last holder to the deceased annuitant’s estates is transferred to a spousal trust created under the terms of the deceased holder’s will. Whether the same amount, then distributed by the trustee of the spousal trust to the deceased's surviving spouse, would qualify as a survivor payment for the purposes of the definition of "exempt contribution"?

Position Adoptée: Generally yes, provided that the distribution is in accordance with the terms of the deceased's will and it is made during the rollover period.

Raisons: When such an amount is distributed in accordance with the terms of the deceased annuitant's will, the CRA will generally consider that the amount is distributed as a consequence of the death of the deceased annuitant, consistent with paragraph 248(8)(a).

TABLE RONDE SUR LA FISCALITÉ DES STRATÉGIES FINANCIÈRES ET DES INSTRUMENTS FINANCIERS DU 7 OCTOBRE 2020

APFF – CONGÈS 2020

Question 5

Roulement du compte d’épargne libre d’impôt au décès - fiducie exclusive au conjoint

M. X est décédé en 20X1 et au moment de son décès il possédait notamment un compte d’épargne libre d’impôt (« CELI ») dont la valeur à la date du décès était de 100 000 $. Aucune désignation de bénéficiaire valide ne pouvait être faite dans le cadre du CELI et le dernier testament de M. X ne prévoit pas spécifiquement à qui le CELI doit être dévolu. Le CELI fait donc partie du résidu de ses biens. Or, son dernier testament lègue le résidu de ses biens à une fiducie exclusive au bénéfice de sa conjointe créée selon les termes de son testament, avec remise en capital d’un montant de 100 000 $ par année en faveur de la bénéficiaire, Mme X. Peu après le décès de M. X, le liquidateur de la succession liquide le CELI et transfère la valeur du CELI, soit 100 000 $, à la fiducie exclusive. Par la suite, un paiement de 100 000 $, représentant la valeur du CELI, est remis par le fiduciaire à Mme X avant la fin de la période de roulement, soit avant le 31 décembre 20X2, par distribution de capital provenant de la fiducie exclusive au conjoint.

Question à l’ARC

Le paiement du CELI à la conjointe survivante par distribution de capital de la fiducie exclusive au conjoint effectuée au cours de la période de roulement satisfait-il à l’alinéa b) de la définition de « cotisation exclue » prévue au paragraphe 207.01(1) de la Loi de l’impôt sur le revenu (« L.I.R ») (« Définition »)?

Réponse de l’ARC

Pour satisfaire à l’alinéa b) de la Définition, un paiement provenant directement ou indirectement d’un arrangement qui a cessé d’être un CELI en raison du décès du particulier doit être fait au survivant (footnote 1) au cours de la période de roulement, par suite du décès du particulier. Un tel paiement est appelé « paiement au survivant » à la Définition.

Pour qu’un paiement fait à un survivant au cours de la période de roulement soit un paiement au survivant, il doit respecter les deux conditions suivantes :

1) provenir directement ou indirectement d’un arrangement qui a cessé d’être un CELI en raison du décès de son dernier titulaire; et

2) être fait par suite du décès du particulier.

En ce qui concerne la provenance du paiement, il s’agit généralement d’une question de fait. Compte tenu des mots « directement ou indirectement », un paiement donné pourra se qualifier de paiement au survivant, que les sommes soient versées directement au survivant dans le cadre du CELI ou qu’elles soient d’abord versées au liquidateur de la succession et au fiduciaire de la fiducie exclusive au conjoint avant d’être versées par ce dernier au survivant.

En ce qui concerne la question de savoir si le paiement est fait par suite du décès du particulier, l’alinéa 248(8)a) L.I.R. prévoit qu’un transfert, une distribution ou une acquisition de biens effectué en vertu du testament ou autre acte testamentaire d’un contribuable ou par suite d’un tel testament ou acte testamentaire est considéré comme un transfert, une distribution ou une acquisition de biens effectué par suite du décès du contribuable. Ainsi, dans la mesure où le paiement au conjoint survivant est effectué conformément aux dispositions du testament du particulier, l’ARC est généralement d’avis qu’il s’agit d’un paiement fait par suite du décès du particulier.

Lorsque des sommes provenant du CELI d’un titulaire décédé sont d’abord versées au liquidateur de sa succession avant d’être versées par le liquidateur au survivant, l’ARC est généralement d’avis que le paiement au survivant est égal aux sommes versées dans le cadre du CELI à la succession du titulaire décédé, dans la mesure où le survivant a droit au CELI en vertu du testament du titulaire décédé et qu’il reçoit une somme équivalente ou plus élevée de la succession par suite du décès du titulaire décédé.

Le même raisonnement s’applique lorsque des sommes provenant du CELI sont versées par le liquidateur de la succession à une fiducie exclusive au conjoint avant d’être versées au conjoint survivant. Ainsi, le fait que le testament prévoie la remise du résidu des biens du titulaire décédé, dont le CELI, à une fiducie exclusive au conjoint n’empêcherait pas, en soi, la conjointe survivante de recevoir un paiement au survivant au sens de l’alinéa b) de la Définition, dans la mesure où la fiducie exclusive au conjoint verse à la conjointe survivante une somme équivalente ou plus élevée au cours de la période de roulement. Un paiement par remise de capital de cette fiducie sera considéré être effectué par suite du décès du titulaire décédé aux fins de la Définition, en autant que ce paiement soit effectué conformément aux dispositions du testament.

Nathalie Boyer
(450) 926-7039
Le 7 octobre 2020
2020-085160

FOOTNOTES

En raison des exigences de nos systèmes, les notes de bas de page contenues dans le document original sont reproduites ci-dessous :

1 Au sens du paragraphe 146.2(1) L.I.R.

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Exempt Contribution - Paragraph (b)

bequest of TFSA to spousal trust which, in turn, distributed the TFSA proceeds per the will to the surviving spouse would qualify as an indirect transfer as a consequence of death

Mr. X’s TFSA formed part of the residue of his estate which, as such, was bequeathed by the terms of his will to a spousal trust, with a lump sum capital payment of $100,000 per year to the beneficiary, Ms. X. Shortly after Mr. X's death, the executor liquidated the TFSA and transferred its value of $100,000, to the spousal trust. Subsequently, a payment of $100,000, representing the value of the TFSA, was made by the trustee to Ms. X prior to the end of the rollover period, by way of a distribution of capital from the spousal trust.

Does such payment from the TFSA to the surviving spouse by way of a capital distribution from the spousal trust satisfy para. (b) of the definition of "exempt contribution"? In responding, CRA first noted:

Given the words "directly or indirectly", a particular payment will qualify as a payment to the survivor whether the money is paid directly to the survivor under the TFSA or whether it is first paid to the executor of the estate and the trustee of the spousal trust before being paid by the latter to the survivor.

Since s. 248(8)(a) provided that a transfer, distribution or acquisition of property made under or as a consequence of the terms of a taxpayer’s will is to be considered to be a transfer etc. as a consequence of the taxpayer’s death, CRA was generally of the view that the payment was made as a consequence of the individual's death. CRA then stated:

Where amounts from a deceased holder's TFSA are first paid to the executor of the deceased holder's estate and then paid by the executor to the survivor, it is generally the CRA's view that the payment to the survivor is equal to the amounts paid out of the TFSA to the deceased holder's estate, to the extent that the survivor is entitled to the TFSA under the deceased holder's will, and the survivor receives an equivalent or greater amount from the estate as a consequence of the death of the deceased owner.

The same reasoning applies where amounts from the TFSA are paid by the executor of the estate to a spousal trust before being paid to the surviving spouse. Thus, the fact that the will provides for the payment of the residue of the deceased holder's property, including the TFSA, to a spousal trust would not, in and of itself, preclude the surviving spouse from receiving a survivor payment within the meaning of paragraph (b) of the Definition, provided that the spousal trust pays the surviving spouse an equivalent or greater amount during the rollover period. A lump sum payment from such a trust is deemed to be made as a consequence of the death of the deceased holder for the purposes of the Definition, provided that such payment is made in accordance with the terms of the will.

Summary Under

Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) - Paragraph 248(8)(a)

indirect transfer made in accordance with deceased’s will would be as a consequence of death

The TFSA rules contemplate that the surviving spouse of a deceased TFSA holder can make an “exempt contribution” of the payment to him or her of the TFSA proceeds (the “survivor payment”) to the survivor’s own TFSA within the “rollover period” (ending on December 31 of the year following the holder’s death). One of the requirements for an exempt contribution is that the survivor payment have been made to the survivor during the rollover period “as a consequence of the individual’s death, directly or indirectly out of or under [the holder’s TFSA].”

CRA found that a bequest of TFSA proceeds to a spousal trust which, in turn, distributed the TFSA proceeds in accordance with the deceased’s will to the surviving spouse would qualify as an indirect transfer as a consequence of death, so that this requirement was satisfied. This turned on s. 248(8)(a), which deems a transfer to be as a consequence of death if it occurs as a consequence of the terms of the will, and of the breadth of “directly or indirectly.” After referring to s. 248(8)(a), CRA stated:

[T]o the extent that the payment to the surviving spouse is made in accordance with the provisions of the individual's will, the CRA is generally of the view that it is a payment made as a consequence of the individual's death.

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7 October 2020 APFF Financial Strategies and Instruments Roundtable Q. 5, 2020-0851601C6 F - TFSA Exempt Contribution - Spousal Trust

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