Not'ember 2012

Alter Ego and Joint Partner Trusts:Where do they f¡t? tparr 2oî21

by Margaret R. O'SullivanO'Sullivan Estate Lav,yers

lntroductionThis is the second of twoarticles focusing on thelegal and tax attributes ofalter ego and joint partnertrusts. The first articleprovided an overview ofpossible uses of these typesof trusts as substitutes forwills and powers of attorneyand in succession planningfor those aged 65 and older.rThis article will focus onthe tax attributes of thesetrusts and how the tax rulescan influence the use andapplication of these trusts.Select issues relating to theuse of insurance in alterego andjoint partner trustswill also be reviewed.

TaxConsiderat¡onsin Using anAlter Ego orJoint PartnerTrust as a WlllSubstitutelal Exception

to the21-Year Rule

Under The Inconte Tax Act(Canada) (the "Act"), thercis a deemed realization ofthe assets ofan alter egotrust on the date ofdeathof the settlor, and on thedate of death of the survivorofthe partners in the case

ofajoint partner trust, andevery 2l years thereafterunless an election is madeto trigger an earlier disposi-tion.2 Accordingly, alter egoandjoint partner trusts havedifferent treatment thanmosT inter virros trustswhich are subject to adeemed realization on their2 I st anniversary date.3

lbl Taratlonon Death:Top MarglnalRates

While the deceased andtestamentary trusts are

subject to graduatedrates of tax, inter vivostt'usts are subject to tlietop marginal rate appl i-cable to individuals.a

Where assets are helddirectly by a deceased,capital gains arising fromthe deemed disposition ondeath of capital propertyand land inventory wouldbe taxed at his or hergraduated rates of tax.s

If instead such assets

have been transferred toan alter ego orjointpartner trust, and there isa deemed dispositionresulting from the deathof the settlor (or seconddeath under ajoint

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partner trust), any income or gainswill be subject to top marginal rates oftax, resulting in more tax than ifdirectly held.

lcl Loss of TestamentaryTrust Status

If part of the estate plan involvesthe use of multiple testamentarytrusts for income-splitting purposes,

(e.g., multiple trusts under the will forchildren and grandchildren to whomincome is to be paid or payable) an

alter ego or joint partner trust whichprovides for a plan ofdistribution on

death, establishing such trusts will notachieve these planning objectivesbecause the property was settledinter vivos.6 Consideration may then

be given to the relative advantages

and disadvantages of each approach,

as well as to whether a trust can be

used in tandem with a will, underwhich testamentary trusts are pro-vided for, and sufficient assets left at

the estate level in order that thisplanning opportunity may be optimallyutilized.

It had been suggested when alter ego

and joint partner trusts were firstintroduced that if an inter vivos frustis used, a power of appointment couldbe given to the settlor to appoint the

trust assets on his or her death

exercisable by deed or under will. Thepower could be exercised to directthat the trust assets be held on

continuing trusts, and if the view were

taken that only on death do such

trusts come into existence, it was

arguable they would qualify as

testamentary trusts. Alternativel¡ ithad also been suggested that trustagreements could be executed but leftunfunded during the settlor's lifetime,to be funded on death. The terms ofthe alter ego trllst orjoint partner trustcould name the trusts as beneficiarieson the settlor's death, directing the

property be paid to the trustees to be

held subject to the terms of the pre-

existing trust agreements.?

CRA has taken the position thatneither of these techniques are viablein order to enjoy testamentary trust

status.E CRA's view is that a person

cannot transfer his or her property on

or after his or her death except by a

will or other testamentary instrumentand therefore the transfer of property

from an alter ego trust to a trustcreated after the death of the settloris not a transfer of property by the

settlor of the trust. As well, propertytransferred to a trust prior to the

settlor's death does not belong to the

settlor at the time of his or her death

and therefore cannot be considered tobe a contribution by the seftlor as a

consequence ofthe settlor's death to

a trust created subsequent to the

settlor's death. Accordingly, CRAtakes the position that trusts created

upon the death ofthe settlor pursuant

to the provisions contained in an intervivos trust are inter vivos trusts and

do not qualify as testamentary trusts.

The specialelection perrnitting a trustto designate income which was paid

or payable as not having been paid ot'

payable for tax purposes under theAct should be considered since its

utility may either not be available orcompromised if not taken into accountwhere a trust is used as a will substi-

tute.e Where the beneficiaries are allat high rnarginal tax rates, the abilityto tax income in a testamentary trustat graduated rates presents a relevantincome-spl itting opporlunity, particu-

larly where there are continuingtestamentary trllsts. Again, a solutionmay be to ensure sufficient assets are

retained at the estate level to utilizethis planning opportunity, and the

surplus settled on trust.

ldf Separate Year ofDeath Returns

In the year of death, as well as the

basic final return, several separate

returns may be filed in which deduc-

tions and credits can be claimed.r0An income-splitting advantage arises

because the taxable income in each

return is taxed at marginal rates.

If an alter ego or joint partner trust isused as a will substitute, this opportu-

nity will be lost unless there are also

directly held assets ofthe deceased at

death which can take advantage ofthis opportunity and the trust has notbeen fully funded.

lef Fiscal Year-EndPlanning

While all inter t,lvos trusts must have

a year-end of December 3 l, testa-

mentary trusts have more flexibility.Often the date before the anniversary

date of the date of death of the

deceased person is chosen. However,

any date may be chosen provided the

first year-end of the estate is no

longer than one year from the date ofdeath.rr

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The ability to choose a year-endoffers a number of tax planningopportunities which will not beavailable where an alter ego or jointpartner trust is used as a will substi-tute. For example, where multiplelump-sum amounts are received ondifferent dates, choosing a year-endbetween the dates of such receiptscan result in a deferral. As well, forother reasons it might be advanta-geous to tie in the year-end with otherrelevant year-ends based on thedeceased's assets, for example, anycorporate or paftnership interests.

lfl Filing Deadlinesand Post-MortemPlannlng

For all inter vivos trusts, a T3 TrustTax Return is due on March 31,except in a leap year when the returnis due on March 30.12

The terminalTl Tax Return is

generally due on the later ofApril 30of the year following death and sixmonths after date of death.13 In thecase of testamentary trusts, the T3Return is due 90 days after thechosen year-end.

It would seem that if death occurslater in the year, such as in Novemberor December, if an alter ego or.jointpartner trust is used as a will substi-tuteo there willbe an extremely shorttime in which to prepare and file theT3 Return, and pay the tax due, whichmight be substantial if there is adeemed realization of the trust assets

on death. Raising the necessary cashin an orderly and advantageous way,including from an investment perspec-tive, is more problematic than in the

estate situation where a will is usedand there is more leeway in terms offiling dates. In particular, timingproblems can arise where compli-cated valuations must be obtained forbusiness and real estate assets forpurposes of computing the tax.

lgl lmpact onCharltable DonatlonTar Credit Planning

In the year of death, a charitabledonation credit equal to 100% ofnetincome is available fol gifts madeunder a deceased person's will to aregistered charity or other qualifieddonee.r{ As well, if bequests on deathare greater than the amount eligibleunder this limit, the excess may becarried back to the taxation year priorto death and applied against the taxpayable for that year, subject to thesame limits.r5

Sirnilar treatment is not afforded toalter ego andjoint partner trusts. Inthe year of death where an alter egoor joint partner trust is used, a deemeddisposition of the trust's assets mayresult in significant incorne in thehands of the trustees. It willaccord-ingly be important to plan for chari-table gifts, and how they may be besteffected and structured. It should benoted that whether or not a'ogift" lo acharity allows for a donation receiptat all will depend on the terms of thetrust. In some cases, CRA has takenthe position that a distribution from atrust to a charity is in satisfaction ofthe charity's income or capital interestwhich does not qualif,, for a donationreceipt, as opposed to a gift.r(' Whilethe one-year carry-back of charitable

gifts will not be available, the trustcan carry forward unused gifts forfive years.r? As well, the trust is onlyentitled to claims a credit of up to75Yo of income and capital gains inthe year as opposed to 100%.18 Giventhe short time period available to file a

T3 Return where death occurs nearcalendar year-end, it may be problem-atic to physically pay out charitablebequests in such a short time frameand provide the appropriate receiptson filing.

lht Amendment andVariation of the Trust

As discussed in the first article,re oneof the major perceived benefits of awill is its ambulatory nature (i.e., thatit can be changed at any time andonly comes into effect on death. As aresult, the client is free to change hisor her will provisions as he or she

sees fit, and because the ownershipinterests do not arise until the momentofdeath, there are no tax conse-quences to effecting such changes.

Use of an alter ego or joint partnertrust is more problematic because onsettlement of the trust, the trust'sownership interest in the transferredproperty comes immediately intoeffect. As a result, if at a future datethe settlor wishes to make changesto the provisions of the trust, the issuewill arise of whether such changesresult in a taxable event and a

possible disposition with tax conse-quences. Ahhough the legislation foralter ego andjoint partner trustspermits tax-free transfers into thetrust, it does not address the tax

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consequences ofan amendment or

variation of the trust and whether

these events give rise to a taxable

disposition in respect of caPital

property or land inventorY held bY

the trust.2o

lll Capltal GainsEremptlonAvallable on Death

On death, a $750,000 caPital gains

exemption is available in respect ofqualifred small business corporation

shares and qualified farm and fishing

property, provided the deceased has

not previously utilized this exemp-

tion.2' This exemption, which would

otherwise apply if the property were

owned directly bY the deceased,

cannot be claimed bY an inter vivos

trust, although it is possible in certain

instances to allocate gains out to a

beneficiary who can then claim the

exemption in his or her return in

respect of the gains. On death of the

settlor or the survivor of the partners

in the context ofan alter ego trust orjoint partner trust, however, any gains

on the deemed disPosition of trust

property is taxable to the trust and

cannot be allocated to a beneficiary

under the provisions of the Act'Accordingly, in resPect of such

property, consideration will need to be

given to utilizing the capital gains

exemption prior to transfer of qualif,-ing property to an alter ego or jointpartner trust.

l¡l Land Transfer TarAnother consideration in funding an

alter ego or joint Partner trust is

whether any provincial or municipal

land transfer tax, also known as

property transfer tax, where appli-

cable, is payable on the transfer ofreal property or any interest therein to

it.22 For example, in Ontario, property

settled on a trust for no consideration(including the assumPtion of anY

encumbrances), while constituting a

change of benefi cial ownership, does

not trigger a liability for land transfer

tax. An Affidavit sworn bY the

Trustees rnay be required to be

subrnitted to the relevant provincial

authorities in resPect of a land

transfer.23

lkl HST or GSTConsideration should also be given

to whether Harmonized Sales Tax

(HST) or Goods and Services Tax

(GST) applies on transfer of propefty

to an alter ego orjoint partner trust or

a distribution from it. Generally, HST

should not be payable if the transfer

was for no consideration and was not

done in the course of a commercial

activity. A transfer ofreal estate is

considered a commercial suPPlY

unless exempted. An exemPtion

applies for used residential property'

The rules in this area are complex and

beyond the scoPe of this article'

lll Prlnclpal ResldenceEremptlon

An asset commonly transferred to an

alter ego orjoint partner trust is a

principal residence. While probate fee

minimization may be accomplished by

a variety of means for financial

assets, such as using a holding

company in conjunction with a

primary will and a secondary will, the

latter of which will govern assets

which may not require Probate such

as private company shares, holding

companies are typically not used to

hold personal use properties because

ofthe shareholder benefit rules under

the Act. The princiPal residence

exemption is generally available to a

perconal trust, including an alter ego

trust and ajoint partner trust. It can

be claimed bY the trust Providedcertain requirements are met under

the Act, including that the trust

designates the property as a principal

residence and the trust has a'ospeci-

fied beneficiary'o who ordinarilY

inhabits the residence, or the specifred

beneficiary's spouse, common-lawpartner, former spouse or common-

law partner or child of the specified

benefrciary does so.2'

lmf U.S. Estate TarMlsmatch lssues

Where a client has potential exposure

to U.S. estate tax on his or her death,

either because he or she is a U.S.

person for u.S. estate tax purposes or

if the trust holds U.S. situs assets, use

ofan alter ego trust orjoint partner

trust may not be appropriate. Under

the Protocol to the Canada-U'S. Tax

Treaty, relief is given between the twojurisdictions with respect to payment

of U.S. estate tax and Canadian

capital gains tax on the same assets in

order to avoid double taxation.2s IfCanadian capitalgains and U.S.

estate tax is PaYable on the same

assets, a credit is available equal to

the amount of the U'S' estate tax,

which can be aPPlied against the

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Canadian tax paid on the capitalgains. However, a mismatch couldoccur ifthere is a personal trustwhich holds the assets. While theU.S. estate tax liability can occur atthe client's personal level as U.S. taxrules "look through" the trust to theindividual (including the situationwhere the individual is the beneficiaryof a revocable trust), the Canadiancapital gains liability occurs at thetrust level. A mismatch results whichcould result in double tax that mightotherwise have been avoided if theassets were held personally. The rulesare complex and cross-border taxadvice is required in such situations.

Legal Considerat¡onsin Using an Alter Egoor Joint PartnerTrust as a W¡llSubstitutelbl Structuring the

Trust used as aWill Substitute

(t) During the Settlor's Lifetime

For the transfer of property to thetrust to qualif, for rollover treatment,and for the trust to qualify as an alterego or.joint partner trust, its termsmust meet the requirements under theAct. In this regard, the followingconditions must be met:

. the transfer to the trust must be a

"qualifying transfer" ;

. the transferor (i.e., the settlor) arrd

the trust must be resident inCanada, the latter without refer-ence to any deeming provision inthe Act.

As well, the trust must have been

created after 1999 and the settlormust have been age 65 or older at thetime the trust is created.2r'

Due regard must also be paid to aspecific anti-avoidance rule whichprovides that the transfer to the trustmust not be part of a series oftransactions or events that included a

transfer to the individual where one ofthe main purposes of such transac-

tions was to avoid a disposition underthe 2l-year rule.27

In order to qualiff as an alter ego

trust, the settlor must be entitled toreceive all of the income of the trustthat arises befole the settlor's death,and no person other than the settlor,before his or her death, may receiveor obtain the use of any of the incomeor capital of the trust.rs

In order to qualify as a joint paftnertrust, the settlor and his or her spouse

or common-law partner must, incombination with each othero be

entitled to receive all of the income ofthe trust that arises before the later ofthe death of the individual and the

spouse or common-law partner, and

no other person may, before the laterof those deaths, receive or obtain the

use of any of the income or capital ofthe trust.2')

To ensure the above requirementsare met requires careful review ofthe trust agreement, including the

trustees' powers, to ensure that theincome riglrts are correctly preserved

and not in any way "tainted," similarto the issues that arise in constructinga qualifoing post- 1971 spouse trust.

If the trust is being used as a probate

avoidance technique, the tern,s ofthetrust will usually attempt to maximizethe settlor's control and beneficialenjoyment during his or het'lifetime,an issue which will undoubtedly be ofprime concern to clients.

To ensure maximum control and

benefrcial enjoyment, many clients willwish to ensure that as settloç theyhave some or all of the followingpowefs:

. A power to revoke the trust or toamend or modify it;

. A power to withdraw trust assets

further to a direction to the trustee

to do so;

. A power to direct the investtnentof the trust assets but with thepower to delegate this power tothe trustees;

. Powers allowing the settlor controlover the trusteeship, includingappointment and removal powers;

. Power to determine who receives

the trust fund on the settlor's death

or termination of the trust.

Ifthe trust is also to be used forincapacity planning, it may containadditional provisions for how the

determination of incapacity will be

made, and create tailored provisionsto deal rvith the above issues. In

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addition, the trust agreement couldprovide for it to become irrevocableupon incapacity. Alternately, a con-tinuing or enduring power of attorneyfor property could contain provisionsthat the attorney's powers are limitedand do not include any power torevoke the trust. This may be themore flexible alternative and betteraddress the situation of a settlorregaining his or her capacity who maywish to have the power to revoke thetrust to ensure maximum control.

It must be recognized that once atrust relationship is established, and ifthere is a plan of distribution on deathunder the trust, there are potentialcontingent beneficiaries who haverights, including the right to scrutinizethe administration of the trust and theconduct of the trustees. The settlor isno longer the sole beneficial owner ofthe property and cannot act as such.If the integrity of the trust relationshipis to be maintained, due regard mustbe had to this underlying changein ownership. As well, additionalconsideration must be given toproviding protection to the settlor andco-trustees who are acting during thesettlor's lifetime. In this regardconsideration should be given to thefollowing:

I ) broad investment powers;

2) private approval ofthe trustaccounts without resoft to thecourts;

3) power in the settlor during his orher lifetime to approve trusteecompensation;

4) broad release and indemnityprovisions for the trustees duringthe seftlor's lifetime.

(ir) After the Settlor's Death

It is critical to ensure that the trust isproperly integrated with the client'swill. As well, it is important to ensurethe client has a will to dispose of anyassets not transferred to the trust.Some of the issues which will need tobe addressed include the following:

. if there is a deficiency in theestate, whether testamentary debtsand expenses and tax liabilities canbe paid out ofthe trust;

. if there is a deficiency in theestate, whether any bequests orlegacies under the will are to besatisfied out ofthe trust assets;

. if a claim is made by a survivingspouse against the estate forequalization, whether any benefitsprovided for the spouse under thetrust should terminate

lbl Funding the TrustA number of possibilities exist withrespect to funding the trust. Someclients may be reticent to transfer alltheir property 1o the trust due toconcerns with respect to control andmanagement, particularly if there isneed for a co-trustee, as furtherdiscussed below

To properly operate as a probateavoidance vehicle, the assets must,however, have been transfèrred to thetrustees prior to death. Considerationcan be given to ensuring the clientalso has a continuing or enduring

power of attorney for propertywhich specifically empowers theattorney to fund the trust. Of course,this approach will only assist ifthetransfer process is cornpleted prior todeath.

As well, to operate as an incapacityplanning vehicle, it will be necessaryto fund the trust with the bulk of theindividual's assets. The continuing orenduring power of attorney forproperty can also be used in suchevent to fund the trust.

Where the dispositive provisionsunder the will are different than thoseunder the trust, however, carefulconsideration must be given to thesituations in which the attorneysshould be able to fund the trust toensure the client's objectives are

carried out, and his or her dispositiveplan not thwarted.

ldf ErecutionRequirements

Where a trust is used as a willsubstitute, and the settlor retains sucha significant degree ofcontrol overthe trust arrangement, that in fact, thetrustees may be seen to be agents,then no immediate trust may havebeen created and that the purportedinter virros lrust may be considered a

testamentary disposition. The upshotis that unless the trust has been

formally executed in accordance withrequirements for the execution ofwills, the testamentary disposition willfail on death of the settlor.

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In determining whether the trust has

immediate effect, I4/aters' Lav, ofTrusts in Canada provides someguidance on these issues, as follows:

"The control issue ... lies in thebackground, especially with'alterego' trusts where the settlor retainsfull interest in his lifetime, and is

also trustee... The diffìculty there,

tax law aside, is whether thepurported trust instrument createsinstead an agency relationshipbetween 'settlor' and 'trustee'.. ..

Interests are provided for on the

settlor's death, and this means thatthe tlust dispositive terms embrace

another or others beyond the settlorhimself. But is there a trust only onthe settlor's death? ln the U.S. therevocable inter vivos rules are tothe effect that the trust arises on itscreation... ln Canada in the absence

of direct authority the better viewappears to be that, ifthe settlor has

standard trustee powers, and bona

fide conducts himself as a trustee,

the purported trust will be receivedas a trust."3o

It may be suggested that whereco-trustees are appointed, on apractical basis, the demonstration thatthe property is held as trustees maymore easily be demonstrated than bythe sole settlor/trustee. In any event, a

cautious approach, depending on the

terms of the trust, is to execute the

trust in accordance with the require-ments for wills. Alternately, consider-ation could be given to contemplating

possible failure by incorporating the

terms of the trust by reference in the

client's will or providing for a disposi-tive plan under the terms of the will.

ldl MergerAn issue which is well-developedunder U.S. trust law involves what issometimes termed merger of interest.It is trite law that given the creation ofa trust involves the separation of legaland beneficial ownership of property,ifone person has the entire legal and

beneficial interest in property, there isno trust.

Canadian trust law on these matters is

by no means as well-developed as the

extensive case law that exists in the

United States. What can be said, how-ever, is that the situation of a "self-settled" trust, or declaration oftrustwhere the settlor holds the propertyas sole trustee, is more problematicthan where there is a transfer totrustees. Older Canadian case lawis ambiguous even on the issue ofwhether a trust is binding where itcontains a power of revocation,although the modern view wouldclearly accept there is no legalconceptual impediment to reserving a

power of revocation.3r

It would seem that where a person

acts as his or her sole trustee, and

also has a life interest in the income,as well as a power to revoke, and todraw on the capital as he or she sees

frt, and if fur-ther complicated by the

retention of a general powel ofappointment over the trust property,

an argument can be made that a validtrust has not been established, and

that there was no true intention to

establish a trust, nor any real alien-ation of beneficial interest on others,

The ambiguous state of the law inCanada on these issues leaves the

matter unclear.

A transfer to trustees where the

settlor acts with co-trustees obviatesmany of these issues. Anotherapproach may be to create a vested

interest in a portion of the trustpropefty which cannot be defeated bythe actions of the declarant/trustee.

Should the disposition plan on death

under the trust differ from that underthe estate, the issue ofattacks on the

trust on the basis that no trust existedbecomes very germane in particularwhere a purpose of the trust was as a

defense against such attacks. It iscritical in such instances to ensure

that the trust cannot be attacked and

set aside in order to claw-back assets

from the trust into the estate.

Uses of lnsurancein an Alter Ego andJoint Partner Trust32There may be circumstances whereit is appropriate and desirable foran alter ego orjoint paftner trust toacquire, pay the premiums and/or be

the beneficiary of an exempt lifeinsurance policy on the life of the

settlor or jointly on the life of the

settlor and partner/spouse. Forexample, the trust may own assets,

such as the shares in a private

corporation, with signifi cant accumu-

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lated capital gains that will be realizedon the death of the spouse. Lifeinsurance under which the trust isthe owner and/or benefìciary can

ensure there is sufficient liquidity inthe trust to pay any resulting taxes.

This is particularly beneficial whenthe trust properfy is illiquid or the trustbeneficiaries want the property to be

retained and distributed in specie tothem.

However, atthe2012 CALU AGM,the Canada Revenue Agency (CRA)indicated that its position relating tospousal testamentary trusts and lifeinsurance (discussed below) also

extends to alter ego andjoint partnertrusts. As a consequence, the owner-ship of insurance on the life of the

settlor or settlor and paftnerlspousemay "taint" the trust such that the

rollover of property to the trust maynot be available.

In TI 2006-0174041C6 and 2006-0185551C6 the CRA was asked the

following question:

o'If a testamentary trust is obligatedto fund a life insurance policy onthe life of the surviving spouse and

the trust is the benefrciary of thepolicy, would this taint the trust andpreclude it being a spousal trustpursuant to subsection 70(6) oftheAct? If trust income is used to paythe premium, would this cause the

trust to fall offside? Ifthe trustcapital is used to pay the premium,would this cause the trust to falloffside?

The CRA responded as follows:

"For purposes of our reply we have

assumed that the insurance policyis not an annuity or segregatedfund contract and that the policyprovides only benefits in respect ofpure life insurance (i.e. benefitsarising only on the death of the lifeinsured) such that no part ofthepolicy premium payments relates toany benefit other than pure lifeinsurance protection.

"Principles of insurance law and

trust law both would apply ininforming our understanding ofthe nature of the legal relationsinvolved in the circumstancesdescribed in your question. Theseprinciples may vary from provinceto province. Therefore, to provide a

detailed reply to your question wewould require additional informa-tion, including: ( I ) the applicableprovincial law governing the policyand the trust, (2) the nature of the

life insurance provided under thepolicy (e.g., an annuity, segregated

fund, or pure life insurance), (3)whether the premiums are fullypaid, (4) whether policy beneficia-ries have been designated by the

owner or named in the contractand, if so, whether the designationsare irrevocable, (5) an analysis ofwhether under the applicable law atrustee can acquire an ownershipinterest in the policy and, if so, (6)whether the policy beneficiariesare trust beneficiaries.

We are prepared, however, to offersome general comments on the

potential income tax consequences

in the circumstances you describe.

We have limited our analysis to the

application of subparagraph

70(6XbXii) of the Act.

In order for property to be trans-ferred on a tax-deferred("rollover") basis from a deceased

taxpayer to a trust, subparagraph70(6XbXii) requires that the trustbe one under which no person

except the surviving spouse orcommon- law partner ("survivor")of the taxpayer may, before thesurvivor's death, receive or other-wise obtain the use of any of the

income or capital of the trust. Ourposition is that the mere possibilityofa person other than the survivorreceiving or obtaining, before the

survivor's death, use ofthe trustcapital or income is sufficient todisqualifu the property transferfrom the rollover.

A duty to fund a life insurancepolicy out of trust capital or trustincome would, in our view, be one

under which a person may obtainthe use of the trust capital or trustincome. This is because thepremium payment is assumed tomaintain, for the period covered bythe premium, the rights to receiveinsurance proceeds. Therefore, the

existence of such a trust termwould be relevant in determiningwhether a rollover of property can

occur to the trust under paragraph

70(6Xb) of the Act.

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In the circumstances contemplatedby your question, as a result of the

duty to pay insurance premiums outof trust propefty it would appear

that persons other than the survivormay, before the survivor's death,obtain the use of the trust incomeor capital. Therefore, we are of the

view that the trust would notsatisfu the conditions of subpara-graph 70(6)(b)(ii) of the Act.

As a final comment, whether the

trust is one that seeks to satisfy the

requirement of paragraph 70(6Xb)of the Act or not, and whether the

duty to pay the premium out oftrust income or trust capital, itwould appear that the policybeneficiary would have a benefit,from the trust's payment of thepolicy premium, resulting in the

application of section 105 oftheAct."33

It appears that the underlying ratio-nale for the CRA's position is thatthe trust beneftciaries (and perhaps

the trust itself if the beneficiary is

changed to a third party) will notbenefit from the insurance policyownership and therefore income and

capital is being "diverted" to otherbeneficiaries of the trust. However,this position doesn't appear to recog-nize that the insurance policy remainsan asset of the trust while the settlorand/or spouse/partner is alive andpresumably can be surrendered ortransferred for value, for the benefitofthose beneficiaries.

It is therefore very important to under-stand the implications of transferringor owning insurance within an alter ego

or joint paftner trust on the rollover of

property. It may be appropriate to

have the insurance owned by anotherperson (including another trust) withthe alter ego or joint paftner trust as

beneficiary, to avoid a dispute with the

CRA concerning the availability oftherollover.3r

ConclusionThis article and the earlier one have

surveyed various benefits ofì and

opportunities for, using an alter ego orjoint partner trust in estate planning.

Intrusive legislation governing powersof attomey, and the punitive level ofprobate fees create a real incentive tothe use of these types of trusts, whichif properly drawn and in appropriatecircumstances allow greater flexibility,tax and fee minimization and contin-ued private management of one'saffairs.

Reliance on the traditional "tried and

true" but often simplistic will andpower of attorney in planning fordisposition ofassets on death and

incapacity do not fulfill many clients'needs and consideration ofthe use ofalter ego and joint paftner trusts is afurther option to be explored incomprehensive estate planning.

About the AuthorMargaret O'Sullivan's practiceinvolves all aspects of private clientwork, including estate planning; willand trust planning; incapacity plan-ning; estate litigation; advising execu-tors, trustees and beneficiaries and

administration of estates and trusts.

Margaret is recognized inEuLomoney's Guide lo the World'sLeading Trusl and Estate Practitio-ner.s (2011 - 2012), in The CanadianLegal LEXPERT Directory 20ll as

a leading practitioner in estate plan-ning and in The Best Lau,¡ters inCanada 20l l . Prior to establishingan independent practice, Margaretwas a partner in the Toronto offìce ofthe national Canadian law firmStikernan Elliott where she directed its

trusts and estates practice. She has

practiced exclusively in the area oftrusts and estates since 1983.

O'Sullivan Estate Lawyers isnamed one of Canada's "Top 5 Trusts

& Estates Law Boutiques" byC ct nacl i an Lttv'1, ¿ ¡'.

You can call her at(416)363-3700or e-mail her at

mosullivan@osul I ivanlaw.com.

EndnotesI The first article was contained inthe February 2012 issue of CALUReporl.

2 Para. l0a(aXa) of the Act.

3 Para. 104(4Xb) of the Act.

a Subsection 122(1) and section I l7of the Act.

5 Subsection 70(5) and section I l7 ofthe Act.

(' Re income splitting, see subsections

104( I 3), 104(6),and 104(24) oftheAct.

7 See Howard M. Carr, "Taxation ofTrusts," Death and Taxes II, Law

O Conference for Advanced Life Underwriting. 20 I 2 November2012

@ CALU Report

Society of Upper Canada, June 14,

2000, pp. 25-26.

I Income Tax Technical Bulletins2000-007928 (Nov. 2,2001) and2001 -007 537 (March 23, 2001).

" Paragraph 104(6Xb) and subsec-tions 104(13. l) and 104(13.2) oftheAct.

f o Subsection 7 0(2), paragraph104(23)(d) and subsection I 50(4) ofthe Act.

lr Paragraph 104(23)(a) of the Act.

12 Paragraph 150(lXc) of the Act.

13 Paragraphs 150(lXb) and (d) ofthe Act.

ra Subsections ll8.l(l) and (3) of theAct.

15 Subsections 1 I 8. I (4) and (5 ) of theAct.

ró For a thorough consideration ofcharitable donations and related taxissues reference please refer to IanWorland, 'oAlter Ego and Joint PartnerTrusts," Estates, Trusts & Pensions

Journal, Yol.27 [2008] pp,306 - 333.See also Technical Interpretation2003-0182905, "Gifts of Interest inAlter Ego Trust."

r7 See definition of "total charitablegifts" in Subsection I l8.l ( I ) of theAct.

18 See definition of "total gifts" insubsection 1 l8.l( I ) of the Act.

re See footnote L

20 Re tax-free transfers into ceftaintrusts: see subsections 73( I ),73( I .0 1 )and73(1.02) of the Act.

2r Section I10.6 of the Act.

2: Land transfer tax typically variesby province. Alberta does not haveland transfer tax, Ontario and BritishColumbia have land transfer tax, as

does the City of Toronto.

23 For Ontario, see Ontario Ministryof Finance, Ontario Tax Bulletin: LandTransfer Tax, LTT 1-2005 (Toronto:June 2008), and Ontario Ministry ofFinance, Guide to the Requirentenlsto Evidence NIL Value of Consider-ation for Conveyances InvolvingTntsts (Toronto: April 2004, contentreviewed September 2009). ForBritish Columbia, contrast Proper4,Transfer Tax Act, R.S.B.C. 1996,c.378.

21 CRA, Form T1079, Designationof a Property as a Principal Resi-dence by a Personal Trusl.

2s Convention Betv,een Canadaand the United States of Anterical(ith Respect to Taxes on Incomeand On Capital(signed 26 Septem-ber 1980), as amended.

2ó Supra note 20.

27 Subsection 107(2) of the Act,

2E Subsection 248(l) and paragrapht0aØ)@) of the Act.

2e Ibid.

3{) Waters, Gillen, Smith, Waters'Lctwo.f Tntsts in Canada,3rd edition,(Toronto: Carswell, 2005), p. 211.

3r For a discussion on these pointssee Waters ', supra note 30.

32 This section has been excerptedfrom the June 2012 issue of CALUReport lelating to the 2012 CRARoundtable.

33 CRA TI 2008-030188, dated

Oct. 9 2009, confirmed that no benefitunder subsection 105(1) arises forbeneficiaries of a trust when the trustowns and is the beneficiary of a lifeinsurance policy.

3a In CRA TI2010-035846185, datedDec. 15, 2010, the CRA was asked toconsider whether the payment ofinsurance proceeds to the trustees ofa testamentary spousal trust could"taint" the trust for purposes of the

rollover under subsection 70(6) oftheAct. The CRA responded that "if theproceeds ofthe insurance policy are

validly designated in favour of thetrustees and the trustees in thatcapacity and wholly in accordancewith the terms of the designation add

the proceeds to the capital of thetrust, this would not, in our view, ofand by itself preclude the applicationof subsection 70(6) to determine thetax consequences in respect ofotherproperties transferred to the trust."Presumably a similar position wouldapply with respect to an alter ego andjoint partner trust being the benefi-ciary of a life insurance policy.

10 November20l2 @ Conference for Advanced Life Underwriting, 20 I 2