2015-0578541C6 2015 STEP – Q10 - Interest in a Trust as TCP

Principal Issues: A testator leaves an estate, more than 50% of which is comprised of real property situated in Canada, (the testator’s principal residence). The testator’s will directs that on completion of the estate administration, the executors shall transfer one half of the residue, comprised entirely of cash, to a Canadian resident trust for the benefit of a non-resident beneficiary son. The estate is administered within one year of the testator’s death, one half of the cash residue is transferred from the estate to Son’s Trust and one year later the Trust makes a capital distribution to the non-resident son. Would the son's interest in Son's Trust be taxable Canadian property (TCP)?

Position: We would consider son's interest in Son's Trust, or son's interest in the estate, to be TCP.

Reasons: Where the transfer of the cash from the estate to Son's Trust meets all of the conditions of paragraph (f) of the definition of "disposition" in subsection 248(1) there would be no change in the beneficial ownership of the property. Subsection 248(25.1) deems Son’s Trust to be the same trust and a continuation of the estate. Since the distribution of cash by Son’s Trust to the son occurs within 60 months of the sale of the principal residence and the son’s interest in Son’s Trust is derived directly or indirectly from that real property, the 60-month look-back rule in paragraph (d) of the definition of TCP in subsection 248(1) is met. Alternatively, where the transfer of son’s share of the cash from the estate to Son’s Trust does not meet all of conditions in paragraph (f), we would determine whether the son’s interest in the estate is TCP. Since the son’s interest in the estate is derived within 60 months from the sale of the principal residence, the 60-month look-back rule is met.

Author: deLang-Lenters, Saskia
Section: 116(5), (5.01), (5.02), (6), (6.1), 248(1)

STEP CRA Roundtable - June 18 2015

QUESTION 10.  Interest in a Trust as Taxable Canadian Property

The definition of “taxable Canadian property” (TCP) in subsection 248(1) provides that an interest in a trust (other than a unit of a mutual fund trust or an income interest in a trust resident in Canada) will be TCP if, at any particular time during the 60 month period that ends at that time, more than 50% of the fair market value (FMV) of the interest was derived directly or indirectly from one or any combination of real or immovable property situated in Canada, Canadian resource properties, timber resource properties, and options or interests in such properties. The CRA has previously indicated that where such a trust makes a distribution of capital to a non-resident beneficiary, the notification and withholding requirements of section 116 will apply.

It is common for a will to direct that the executors shall administer the deceased’s estate, and on completion of the administration, transfer the residue to one or more trusts for the benefit of various beneficiaries. At common law, the estate and a trust constituted out of a portion of the residue are separate trusts.

In the following situation, would an interest in the “Son’s Trust” be TCP at the time of the distribution?

A testator dies leaving an estate, more than 50% of which is comprised of real property situated in Canada, for example, the testator’s house (a principal residence).

The testator’s will directs his executor to administer the estate by converting the assets, paying the testator’s debts and testamentary expenses, and upon the completion of the administration, to divide the residue into two shares. One of the shares is transferred to a resident trust (the “Son’s Trust”) for the benefit of the testator’s son, who is a non-resident. Assume the executor and the trustee of the Son’s Trust are different people. 

The estate is administered within the first year after the testator’s death. At the conclusion of the administration, the estate is comprised entirely of cash. The executor transfers half of the estate to the Son’s Trust.

One year later, the trustee of the Son’s Trust makes a capital distribution to the non-resident son.

CRA Response

We assume that in the above situation, the estate can or must transfer son’s share of the cash to Son’s Trust with no direction or agreement required from the son.

In a likely scenario, the transfer of the cash from the estate to Son’s Trust would meet all of the conditions of paragraph (f) of the definition of “disposition” in subsection 248(1) such that there would be no change in the beneficial ownership of the property. As paragraph (f) applies, subsection 248(25.1) provides that Son’s Trust is deemed to be the same trust and a continuation of the estate.

As a result, at the time the cash is distributed by Son’s Trust to the son, to determine whether the son’s interest in Son’s Trust is TCP, one must consider the 60-month look-back rule described in paragraph (d) of the definition of  “taxable Canadian property” in subsection 248(1). As more than 50% of the residue of the estate results from the sale of the principal residence (real property situated in Canada), we would consider the son’s interest in Son’s Trust to be derived directly or indirectly from that real property. Since the distribution of cash by Son’s Trust occurs within 60 months of the sale of the principal residence by the estate, the son’s interest in Son’s Trust is TCP.

In an alternative scenario, the transfer of son’s share of the cash from the estate to Son’s Trust would not meet all of the conditions of paragraph (f) of the definition of “disposition”.  Therefore, subsection 248(25.1) would not apply and we would look to determine whether the son’s interest in the estate is TCP.

Since more than 50% of the residue of the estate results from the sale of the principal residence, we would consider the son’s interest in the estate to be derived directly or indirectly from that real property. As the disposition of son’s interest in the estate occurs within 60 months of the sale of the principal residence by the estate, the son’s interest in the estate is TCP.

Saskia deLang-Lenters
2015-057854

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