9 March 2000 External T.I. 1999-0009365 - Dividends and discretionary trusts

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether subsection 56(2) applies to dividends received by a discretionary trust.

Position: General position on subsection 56(2).

The attribution rules in section 74.1 and section 74.3 may apply.

Proposed section 120.4 may apply.

Reasons: Interpretation of the law.

XXXXXXXXXX 1999-000936
F. Francis
Attention: XXXXXXXXXX

March 9, 2000

Dear Sirs:

Re: Subsection 56(2) of the Income Tax Act (the "Act")

This is in reply to your letter of September 28, 1999, wherein you requested a technical interpretation with respect to the following hypothetical situation:

• An individual (the "Parent") wishes to settle an inter vivos trust for the benefit of his adult son (the "Taxpayer") and the children and spouse of the Taxpayer. All the individuals are residents of Canada for purposes of the Act. The trust will be a "personal trust" as defined in subsection 248(1) of the Act.
• The trust intends to subscribe for and acquire common shares of a small business corporation as defined in the Act.
• The trust will contain the following provisions:

a) the 3 initial trustees will be Taxpayer, an adult sibling of and a person who deals at arm's length with Taxpayer;

b) a majority of the trustees may make decisions under the trust;

c) the trust will confer on the trustees the discretion to determine the beneficiaries to whom distributions of income and/or capital will be made;

d) the discretionary beneficiaries of the trust as to income and capital will be Taxpayer, the spouse of Taxpayer and the children of Taxpayer, some of whom are minors;

and

e) the trust will be irrevocable, the settlor will not be one of the trustees, and no property of the trust can revert to the settlor.

You request our views as to whether subsection 56(2) of the Act would apply to include in Taxpayer's income that income which is paid or payable to other beneficiaries. You further inquire as to whether our response would differ in a situation where all the trustees did not deal at arm's length with each other or in a situation where all the trustees dealt at arm's length with each other.

OUR COMMENTS

It appears that the opinion you seek relates to specific proposed transactions and, therefore, we bring to your attention Information Circular 70-6R3 issued on December 30, 1996. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Consequently, we will only provide the following general comments.

Subsection 56(2) of the Act will cause an amount not received by a taxpayer to be added to the taxpayer's income if the following conditions are met:

(a) there is a payment or transfer of property to a person other than the taxpayer;

(b) the payment or transfer is made pursuant to the direction of or with the concurrence of the taxpayer;

(c) the payment is made for the benefit of the taxpayer or as a benefit that the taxpayer wishes to confer on the other person; and

(d) the amount would have been included in the taxpayer's income if it had been paid to the taxpayer.

Generally, for subsection 56(2) to apply, the person directing the payment must have a pre-existing entitlement to the payment.

We note that the attribution rules in sections 74.1 and 74.3 of the Act may be applicable where an individual has lent or transferred property for the benefit of a "designated person" as defined in subsection 74.3(2) of the Act.

Finally we note that proposed section 120.4, contained in Legislative Proposals relating to the Income Tax Act that were released by the Minister of Finance in September 1999, introduces a special 29% tax applicable to certain passive income of individuals under the age of 18 years. The types of income which are taxed under this new section include taxable dividends on unlisted shares of Canadian companies.

We trust the above comments are of assistance to you.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch