2019-0823751E5 Lifetime Benefit Trust

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
Section: -

XXXXXXXXXX                                                                                                           2019-082375
                                                                                                                                   D. Odubella

December 3, 2020

Dear XXXXXXXXXX:

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.

Our comments

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.

Yours truly,

Kimberly Duval, CPA, CA
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

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”).

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