TITLE:

Problems in the Application of Tax Law to Civil Law Trusts.

AUTHOR(S): 

Bruneau, Diane

EDITOR:

This research report inspired an article that was published in:

• Bruneau, Diane, “Problems in the Application of Tax Law to Civil Law Trusts”, Canadian Tax Journal, Canadian Tax Foundation, Toronto, 2003, Vol. 51, No. 1, pp. 252-310 .

PAGE(S):

SERIE(S):

Canadian Tax Journal – Special Edition on Canadian Bijuralism and Harmonization

SUBJECT(S):

Canadian Bijuralism
Tax law

ABSTRACT:

The abstract is an exact copy taken from the Canadian Tax Journal, 2003, Vol. 51, No. 1.

Historically, federal tax legislations has been based on common law principles.  The author analyzes specific elements of the Income Tax Act (ITA) that have their source in common law and create an interpretation problem when they are applied in a civil law context.  The author first addresses the problem of the interaction between the new rules governing self-benefit trusts and the Civil Code of Quebec.  From a civil law standpoint, the author is of the opinion that two questions arise in the context of these provisions: (1) what is beneficial ownership; and (2) what mechanism can be used to vest property after the death of the settler?  The author analyzes four methods of vesting used by civil law practitioners with the self-benefit trust and asks which is th most consistent with the intention of Parliament.

Second, the author analyzes the concept of indefeasible vesting in a trust, the interpretation of which in tax law actually refers to the common law concept of “vested.” More specifically, the author describes two kinds of situations: the vesting of property in the trust patrimony, and the vesting of property in a beneficiary while the trust continues to administer the property.  After discussion, she notes that the parameters for indefeasible vesting should be defined.

Third, the author demonstrates that the use in common law of constructive trusts and resulting trusts between spouses is particularly unfair in relation to the civil law, because it is assumed that there was never a transfer between spouses, and thus the attribution rules are avoided, or ITA section 160 does not apply. To mitigate the unfairness that results from these trusts, the author proposes four options and discusses their respective advantages and disadvantages.

Fourth, the author explains the concepts of income and capital, in relation to possible distortions that result from their application to tax law.  To avoid such distortions with respect to trusts for the exclusive benefit of the spouse, the author prefers the solution of changing the requirement regarding the distribution of all income to the spouse, to require instead that all distributions from such trusts should be made to the benefit of the spouse, during the spouse’s lifetime, without distinguishing between income and capital.

The author closes her analysis by examining other matters to be considered  - specifically, the application of ITA section 43 to a usufruct or a substitution of civil law to permit the same tax benefit when a gift is made; the suggestion to revisit the concept of revocable trust in ITA subsection 74(2) to ensure that it means the same thing in civil law as in common law; and the new tax treatment of the bare trust, which deems that the person who created the trust continues to be the owner of the property, as is the mandatory in Quebec.

In conclusion, the author observes that the harmonization of tax legislation may result in a major improvement if it enables civil law practitioners to answer some of these questions using their own tools, without having to try to determine the meaning of concepts and expressions used in the common law.

TABLE OF CONTENTS

INTRODUCTION

1. PROBLEMS ARISING FROM THE INTERACTION BETWEEN THE CIVIL CODE AND THE NEW RULES FOR SELF-BENEFIT TRUSTS

1.1. Self-Benefit trust

1.2. I.T.A. Criteria

 1.3. The civil law problematics

1.3.1. Concept of beneficial ownership

1.3.2. The mechanism of devolution on the settlor’s death

1.4. Conclusion

2. VESTED OR VESTED INDEFEASIBLY (DÉVOLU ou DÉVOLU IRRÉVOCABLEMENT)

2.1. Indefeasible vesting to the trust

2.2. Vesting in the trust beneficiary

2.2.1. Indefeasible vesting in a beneficiary

2.2.2. Non indefeasible vesting

3.  CONSTRUCTIVE AND RESULTING TRUSTS

3.1. Constructive trusts

3.2. Resulting trusts

3.3. What makes such trusts so attractive from a tax standpoint

3.4. Solutions for Quebec

3.4.1. The government could reverse its position of recognizing the existence of a constructive trust or even a resulting trust as a trust for tax purposes;

3.4.2. The family as a tax unit (or eliminating the attribution rules between spouses)

3.4.3. Prevent resulting and constructive trusts from having a retroactive tax effect by enacting measures similar to those adopted for Quebec’s community property regime

3.4.4. Recognize everywhere in Canada that a reasonable consideration, corresponding to the payment of a spouse’s entitlement based on enrichment, constitutes a valuable consideration

3.5. Conclusion

4. THE CONCEPT OF INCOME AND CAPITAL

4.1. Spousal and similar trusts

4.1.1. Distinction between income and capital

4.1.2. Solution for the spousal trusts

4.2. Income vs capital – other aspects

4.2.1. Income payable

4.2.2. Losses

4.2.3. Nature of expenses

4.3. Conclusion

5.  INVESTMENT TRUST FOR A MINOR CHILD

5.1. Tutorship vs trust

5.2. Types of accounts

5.2.1. Traditional trust for a child drafted on instructions by a lawyer or notary

5.2.2. Opening an account in the child’s name

5.2.3. Opening an “intrust” account in the parent’s name

5.2.4. Trust constituted on a form supplied by the financial institution

5.3. C anada child tax benefit

5.4. Proposals to promote consistency in the use of child investment trusts

5.4.1. Gift subject to a term

5.4.2. Opening an account created by the government

5.4.3. The Canada Child Tax Benefit

5.4.4. Immediate solutions

6. MORE FOOD FOR THOUGHT

6.1. Section 43.1

6.2.  Trust with a reversionary interest

6.3. Bare trust (Simple fiducie )

CONCLUSION