Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: (1) Are there any tests, or standard guidance, issued by the CRA to determine eligibility for mental infirmity? (2) What are the tax implications of annual distributions from a lifetime benefit trust which are immediately deposited into a separate discretionary trust? (3) What are the tax implications of the final distribution from the trust to the other beneficiaries, after the death of the primary beneficiary?
Position: (1) No, it is a question of fact. (2) Relevant legislation and question of fact.
Reasons: (1) The term “mental infirmity” is not defined in the Act; determination is a question of fact. (2) Relevant provisions of the Act for distributions from a personal trust; certain payments made from the trust may jeopardize the status of a lifetime benefit trust – subject to the conditions of paragraph 60.011(1)(b). (3) Relevant provisions of the Act for distributions from a personal trust.
Author: Odubella, Darren
December 3, 2020
Re: Lifetime Benefit Trust
We are writing to you in response to your email to the Department of Finance Canada, which was subsequently forwarded to our office for consideration, wherein you requested clarification regarding certain aspects of a lifetime benefit trust under the Income Tax Act (footnote 1)
Specifically, you asked for clarification concerning the meaning of the term “mental infirmity” as it relates to a mentally infirm beneficiary of a lifetime benefit trust. You also requested comments concerning the tax implications of annual distributions from a lifetime benefit trust that are immediately deposited into what you refer to as a “Henson Trust”, as well as the final distribution of remaining property of a lifetime benefit trust following the death of the infirm beneficiary.
We apologize for the delay in our response.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). 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 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
The lifetime benefit trust rules are relevant for the rollover provision in paragraph 60(l) with respect to certain registered plan proceeds received on death of the plan holder.
A trust is defined in subsection 60.011(1) to be a lifetime benefit trust with respect to a taxpayer and the estate of a deceased individual if the following two conditions are met:
a) the taxpayer must be, immediately before the death of the deceased individual, a mentally infirm spouse or common-law partner of the deceased individual, or a mentally infirm child or grandchild of the deceased individual who was dependent on the deceased individual for support by reason of that infirmity; and
b) the trust must be, at all times, a personal trust under which
i. no person other than the taxpayer may, during the taxpayer’s lifetime, receive or otherwise obtain the use of any of the income or capital of the trust, and
ii. the trustees are empowered to pay amounts from the trust to the taxpayer and are required to consider the taxpayer’s needs (including the taxpayer’s comfort, care and maintenance) in determining whether or not to pay an amount to the taxpayer.
The determination of mental infirmity for purposes of the first condition above is a question of fact as this term is not defined in the Act. The provision does not apply to a physically infirm dependant unless there is also a mental infirmity, and it does not require that the infirm individual be eligible for the disability tax credit. In addition, it must be possible to clearly demonstrate a causal connection between the mental infirmity and the dependence of the child or grandchild for support.
In the determination of mental infirmity and whether or not an individual is dependent on a taxpayer because of a mental infirmity, the CRA will consider all the facts of a particular situation as opposed to applying a standardized set of tests. We would be pleased to consider a specific set of facts in the context of an advance income tax ruling request submitted in accordance with IC70-6R10.
As outlined in paragraph (b) above, in order to qualify as a lifetime benefit trust, the trust itself must be a personal trust (as defined in subsection 248(1)). As a result, the general trust rules found in subsections 107(1) and (2) will apply to distributions of a lifetime benefit trust in determining: (i) the adjusted cost base and the proceeds of disposition of the capital interest in the trust disposed of by the beneficiary; and (ii) the cost of the property acquired by the beneficiary in satisfaction of his or her capital interest in the trust.
Please note that whether or not additional tax implications will arise in circumstances where a mentally infirm beneficiary of a lifetime benefit trust immediately deposits amounts received to a separate discretionary trust arrangement is ultimately a question of fact and outside the scope of this response. However, depending on the circumstances surrounding subsequently deposited amounts, these payments could possibly contravene the requirements under paragraph 60.011(1)(b) and therefore jeopardize the status of the initial trust as a lifetime benefit trust. Again, we could consider such a situation in the context of an advance income tax ruling request, should that be of interest to you.
We trust our comments will be of assistance.
Kimberly Duval, CPA, CA
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained
in the original document are shown below instead:
1 Unless otherwise stated, statutory references in this document are to the Income Tax Act (the “Act”).
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.
© Her Majesty the Queen in Right of Canada, 2021
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2021
For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses, see Video Tax News Monthly Tax Update newsletter.
This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and clients are fully supported and armed for whatever challenges are thrown your way.
Packages start at $399/year.