Tax practitioners treat estates as trusts, but trusts are seldom classified as estates. A Canadian trust beneficiary is obliged under subsection 233.6(1) to file form T1142, "Information Return in Respect of Distributions from and Indebtedness to a Non-resident Trust." Form T1142 is due when the Canadian beneficiary's income tax return is due; failure to timely file results in a late-filing penalty of $25 a day, up to a maximum of 100 days (subsection 162(7)). However, "an estate that arose on and as a consequence of the death of an individual" is specifically exempt from the filing obligation, making the distinction between an estate and a trust critical. The recent TCC decision in Hess (2011 TCC 360) dealt with whether a specific trust was an estate and thus exempt from filing.
The CRA historically has interpreted the form T1142 filing exemption as applying only to distributions from estates that were not yet fully administered; it has rejected the view that a US testamentary trust was an estate (CRA document nos. 2007-0233741C6, June 8, 2007, and 2009-033252117, March 23, 2010). Hess is the first judicial consideration of whether the filing exemption applies to a testamentary trust.
In Hess, a testamentary trust was created on the death of the taxpayer's great-uncle. Its beneficiaries were the taxpayer's father and, after his death, the taxpayer. The taxpayer failed to file T1142 forms disclosing distributions received from the trust, and the CRA levied late-filing penalties on the taxpayer for the 2002 to 2006 taxation years for failure to file those forms.
The TCC's analysis turned to the minister's pleadings, which did not challenge the taxpayer's classification of the US trust as a testamentary trust. A testamentary trust is defined in subsection 108(1) as a trust or estate that arose on and as a consequence of an individual's death. Thus, the TCC concluded that the parties' agreement that the trust was a testamentary trust did not preclude it from being part of the great-uncle's estate. The court further said that the minister had failed to address whether the great-uncle's estate had been wound up so that the testamentary trust was a distinct trust administered separate and apart from the estate by, for example, being administered by trustees who were not executors. Because the minister had not addressed the issue of whether the estate had been wound up, he could not argue that the testamentary trust was not an estate. The TCC thus allowed the taxpayer to rely on the form T1142 filing exemption afforded to an estate.
CRA document no. 2011-0407681E5 (November 2, 2011), issued after Hess, appears to concur with the TCC's decision. In response to the question "[w]hether a dual resident of Canada and xxxxx must fill out a T1142 if she is a beneficiary of a foreign trust and received a distribution in the year," the CRA says,
[W]e note that beneficiaries are exempt from filing form T1142 in respect of "an estate that arose on death" when such distributions have arisen before the estate is fully administered (which is normally the year following the death of the individual). However, once the estate has been administered, a Canadian beneficiary of any ongoing non-resident testamentary trust must file form T1142 in any year where a distribution is received from the trust or where the Canadian beneficiary becomes indebted to the trust.Sunita Doobay
Canadian Tax HighlightsVolume 20, Number 4, April 2012
©2012, Canadian Tax Foundation
Update - April 9, 2017
This article was written in 2012 and since then there has been legislation passed in Canada wherein a Canadian estate is deemed to be a trust. I have not updated the article and hope to so within the next few months.