2015-0605111E5 QDT - Preferred beneficiary election

Principal Issues: 1. Has the introduction of the QDT rules affected the availability of the preferred beneficiary election? Have there been any changes to the method in which the preferred beneficiary election is made? 2. Does a trust that otherwise qualifies to make the joint election to be a QDT and to make the preferred beneficiary election have the ability to choose which election to make, if any? 3. Can a trust that has elected to be a QDT for a taxation year also make a preferred beneficiary election in the same year? 4. Can an existing trust make a joint election to be a QDT in 2016?

Position: 1. No. 2. Yes. 3. Yes. 4. Yes.

Reasons: 1. There have been no changes to the preferred beneficiary election rules as a result of the changes to the rules applicable to testamentary trusts, including the introduction of the QDT. Similarly, there has been no change to the method in which the preferred beneficiary election is made. 2. Both the QDT and preferred beneficiary election are elective provisions. As such, the trustees together with the disabled beneficiary can choose which joint election will be made, if any. 3. QDTs and the preferred beneficiary election are not mutually exclusive elections. It is possible for a trust that has made a joint election to be a QDT to also make a preferred beneficiary election. 4. Provided that the trust meets the requirements to be a QDT as outlined in the definition of QDT in subsection 122(3), the trust can make a joint election to be a QDT. There is no requirement that the trust is created after 2015.

Author: Panourgias, Marina
Section: 122(1)(c); 122(2); 122(3); 104(14); 104(12); 104(15); 108(1)

                                                                                                                              2015-060511
XXXXXXXXXX                                                                                                      M. Panourgias
                                                                                                                              (416) 973-9524

April 27, 2016

Dear Mr. XXXXXXXXXX,

Re: Qualified Disability Trusts and Preferred Beneficiary Election

We are replying to your letter regarding the preferred beneficiary election under subsection 104(14) of the Income Tax Act (the “Act”) and the qualified disability trust (“QDT”) election under Clause (a)(iii)(A) of that definition in subsection 122(3) of the Act.

You described a hypothetical situation in which an individual with a disability has four grandparents and each grandparent establishes under his/her will a trust for the individual.  You indicated that since the individual with a disability is a beneficiary of each of the four trusts, it would only be possible for one of the trusts to be a QDT for the 2016 and subsequent tax years.  You also noted that effective in 2016, only the QDT will be taxed at graduated income tax rates pursuant to section 117 of the Act while the remaining three trusts would be subject to tax at the highest marginal tax rate pursuant to section 122 of the Act.

You asked whether a testamentary trust can make a joint election to be a QDT where the trust was created prior to 2016, or whether the election can only be made by a trust created after 2015.  You also asked whether a trust is obliged to make a QDT election.

In addition, you asked whether the trustees of the additional three testamentary trusts created for the benefit of the same individual can make a preferred beneficiary election for each additional trust.  You note that by making the preferred beneficiary election, the taxable income earned in each additional trust will be included in the income of the disabled beneficiary, hence will be taxed using his/her graduated income tax rates.

Our comments:

This technical interpretation provides general comments about the provisions of the Act.  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

For 2016 and subsequent taxation years, a QDT for a taxation year is a testamentary trust that arose on or as a consequence of the death of a particular individual, that jointly elects, with one or more beneficiaries under the trust (electing beneficiaries), to be a QDT for the year. In addition, the following conditions have to be satisfied:

*     the election must be made in the trust’s T3 return of income for the year;

*     the election must include each electing beneficiary’s Social Insurance Number;

*     each electing beneficiary must be named as a beneficiary by the particular individual in the instrument under which the trust is created;

*     each electing beneficiary must, for the beneficiary’s taxation year in which the trust’s year ends, be eligible for the disability tax credit;

*     no beneficiary who elects with the trust to be a QDT for the year can elect with any other trust for the other trust to be a QDT for the other trust’s taxation year that ends in the beneficiary’s taxation year;

*     the trust must be resident in Canada; and

*     the trust is not subject to the new recovery tax under subsection 122(2) of the Act.  [For more information regarding the recovery tax, see “Graduated Rate Taxation of Trusts and Estates and Related Rules” on the CRA website at http://www.cra-arc.gc.ca/gncy/bdgt/2014/qa15-eng.html]

It is possible for a trust that was created prior to 2016 to meet the conditions to be a QDT.  Where all of the conditions have been met, the trust could choose to make a joint election together with a disabled beneficiary for the trust to be a QDT for a particular tax year.  A trust is not obligated under the Act to make a QDT election.

The introduction of the QDT provisions has not restricted the availability of the preferred beneficiary election under subsection 104(14) of the Act, nor have there been any changes to the method in which a preferred beneficiary election is made. Further, many of the requisite conditions for making a preferred beneficiary election differ from those required for a trust to be a QDT.  Accordingly, where the respective conditions of each election are met, the trust has the ability to choose whether to make a preferred beneficiary election or a QDT election.  It is also possible for a trust which jointly elects to be a QDT to also make a preferred beneficiary election (jointly with the beneficiary) in a given tax year.

We hope this information is of assistance to you.

Yours truly,

Steve Fron, CPA, CA
Manager, Trust Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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