The Canada Revenue Agency (CRA) provided guidance on when a testamentary trust is considered to have been created for purposes of the 21 year deemed disposition rule.
A trust is deemed to have disposed of its capital property for proceeds equal to the fair market value of the property at the end of the deemed disposition date and to have re-acquired the property immediately after the day for an amount equal to that fair market value. The deemed disposition date will be 21 years after the date the trust was created.
The CRA response was written in the context of two scenarios, (i) the will of a deceased person creates a graduated rate estate and testamentary trusts for the testator’s children or grandchildren and (ii) the will directs the executor and trustee to hold the residue of the estate in the trust for the testator’s child during their lifetime. On the death of the child, the will of the testator then directs the trustee to continue to hold the residue in the trust for the testator’s grandchildren.
In both scenarios, the testator’s will establishes only one trust for the beneficiary, which is created upon the testator’s death. The CRA considered the timing of the 21 year deemed disposition to be based on the testator’s date of death. The CRA went on to acknowledge there may be situations where the creation date of the trust is not concurrent with the testator’s date of death such as, in the case that the first generation beneficiary passes away, a new trust is to be created with the remaining property divided into equal parts for each child. In this situation, the trust is created at the later point in time.
Personal representatives of trusts facing the 21 year deemed disposition rule may have some additional time to get their affairs in order.