A lifetime benefit trust (LBT) is a personal, testamentary trust for beneficiaries that are financially dependent due to mental infirmity.
Most people are aware that the taxable income inclusion of a RRSP on death can be avoided by rolling it over to a spouse. If the circumstances are appropriate, the same can be done by rolling the RRSP in an LBT and purchase a qualifying annuity under the relevant clauses of the Income Tax Act (“ITA”).
Some benefits of LBTs include:
- income supports can be provided to mentally infirm children;
- the income is taxable in the hands of the beneficiary, therefore subject to the beneficiary’s marginal tax rates rather that those of a trust, which are typically at the top marginal rate;the payments can be administered by a trustee of the deceased’s choosing; and
- upon death of the beneficiary, the assets may be distributed according to the will of the deceased settlor.
The Canada Revenue Agency (“CRA”) discusses the conditions for establishing an LBT in a recent Technical Interpretation (2019-0823751E5).
A trust is defined in the ITA to be a LBT with respect to a taxpayer and the estate of a deceased individual if the following two conditions are met:
- 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
- the trust must be, always, a personal trust under which:
- 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
- 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 CRA notes that 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 ITA. The provision does not apply to a physically infirm dependent 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 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.
If a mentally infirm beneficiary of a LBT immediately deposits amounts received to a separate discretionary trust arrangement (for instance a Henson Trust), these payments could possibly contravene the requirements under the ITA and therefore jeopardize the status of the initial trust as an LBT. It appears that an advance tax ruling might be advisable.
As featured on All About Estates Blog where Baker Tilly WM Partner, Steven Frye, is a regular contributor.
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