All About Estates

Multiple testamentary trusts for tax purposes: Are they always treated as one?

This issue was recently tested in Court with a “bittersweet” result.

Three testamentary trusts were created for 3 children in the late 2000’s. Their mother was an income beneficiary in each trust, and entitled to receive all the net income derived from each trust during her lifetime. A child and his/her children were income and capital beneficiaries of each respective trust and would be paid the net income after their mother’s death.

The Canada Revenue Agency (“CRA”) assessed such trusts for the three subsequent taxation years as a single trust, pursuant its interpretation of the relevant provision in the Income Tax Act (“The Act”).

The CRA contended that the test associated with The Act must be applied on an annual basis to determine whether, in the particular taxation year, the income of the trusts accrues to the same beneficiary or will ultimately accrue to the same beneficiary, or group or class of beneficiaries. This is because liability for income tax is determined on an annual basis for a taxation year. In this case the CRA said that it was clear that during the years under appeal, the income from each of the three trusts accrues only to one individual (the spouse) and therefore the condition in the provision of the Act is met for the years under appeal.

One of the trusts (represented by Mr. A) disputed such assessments on the basis that the statutory requirements for such assessment as a single trust had not been met and set out to appeal the assessments accordingly.

Mr. A maintained that the condition in The Act is satisfied only if, during the entire existence of the three trusts, the income accrues or will ultimately accrue to the same beneficiary, or group or class of beneficiaries. Mr. A said that while the income of the three trusts in issue accrued to the mother during the years in issue (and will continue to do so during her lifetime), the income will accrue to different beneficiaries after her death. Since the three trusts will not have common income beneficiaries after their mother’s death, Mr A contended that the trusts cannot be treated as a single trust pursuant to the Act during their mother’s lifetime.

The Court noted that the purpose of the provision in issue is to prevent income splitting between trusts that are identical over the entire period the trusts are in existence. It could not find any indication that the designation of multiple trusts vs single trust would be done annually, or that it could be revoked at some future point.

In fact, The Court held that the text of the provision appeared to contemplate a consideration of the right to receive income of the trust over the entire lifetime of the trust rather than for each taxation year. The Court reviewed the terms of each of the testamentary trusts and held that there were no “cross-over” beneficiaries amongst the children and grandchildren of the testator in any of the three trusts. It concluded, therefore, that those trusts were not conditioned so that the income would ultimately accrue to the same group or class of beneficiaries,

The appeal was allowed. That’s the good news. But it is bittersweet, because for the 2016 taxation year and on, the Act has been amended to limit an estate’s access to graduated tax rates.

Happy Reading

About Steven Frye
Baker Tilly WM LLP is a leading, independent audit, tax, and business advisory firm based in Vancouver and Toronto, serving clients across Canada. Drawing on well-trained teams across a variety of disciplines, we ensure the alignment of our professional’s skills and experience with client requirements, resulting in exceptional service and business outcomes.


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