Last week I was fortunate to be able to attend STEP Canada’s 20th National Conference, along with 780 other trust and estate practitioners. This was my third consecutive year attending the Conference, and yet again, it did not disappoint. Individuals from not only across Canada but also around the world gave insightful and interesting presentations on various estates and trusts related topics.
The STEP Canada/Canada Revenue Agency Round Table is always a well-attended session at the Conference, as attendees are eager to hear from senior representatives from the CRA on the CRA’s answers to questions prepared by trust and estate practitioners about cases and issues of concern to both practitioners and their clients.
One issue that was addressed this year was the timing of when the CRA considers testamentary trusts to come into existence for the purposes of the 21-year deemed disposition rule.
CRA considers most testamentary trusts to arise on the date of death of the testator, so that the 21-year rule generally is computed from that date.
But what did the CRA have to say where the creation date of a testamentary trust may not be concurrent with the testator’s death? For example:
- The will of a deceased person creates a graduated rate estate and several testamentary trusts for the deceased’s children and grandchildren. For various reasons, no property is transferred to the testamentary trusts at the date of the testator’s death and all property remains in the graduated rate estate for a period of time.
- The will of a deceased person provides for a spousal trust and on the date of death of the spouse the trustee is directed to divide the remaining property in equal shares and hold each share in a new trust for each of the testator’s children.
In the first example, the testamentary trusts for the deceased’s children and grandchildren, and in the second example, the children’s testamentary trusts, come into existence some time after the date of death of the testator. However, the CRA takes the position that the deemed disposition date of these trusts in the first example would still be based on the date of death of the testator because of the rule in s. 104(5.8) of the Income Tax Act, which is intended to prevent any restarting of the 21-year clock through trust-to-trust transfers. Though, where the testamentary trust is established for the testator’s spouse or common-law partner, the deemed disposition of the trust’s property occurs on the beneficiary’s death, pursuant to s. 104(4)(a) of the Income Tax Act.
It’s important to be cognizant of when the 21-year clock starts, as there may be significant income tax consequences when the 21st anniversary of the creation of the trust approaches (and every 21 years thereafter). Read my blog on The 21-Year Deemed Disposition Rule for a refresher on the implications of the rule!