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.
Principal Issues: 1. Does subsection 127.53(2) apply to require the basic exemption for the short taxation year of the trust ending on the distribution of the trust assets to be shared with other trusts created by contributions of the same contributor?
2. If the basic exemption for the short taxation year of the trust ending on the distribution of the trust assets is required to be shared with other trusts having a common contributor, would the trustee able to amend the allocation submitted with the testamentary trust returns for their taxation year ending on April 25, 2006 (assuming that the original allocation filed with those returns did not contemplate that the trust in question would be wound up in 2006), to allow a portion of the basic exemption to allocated to the short taxation year for the trust that is winding up?
3. Assuming that the basic exemption for the short taxation year of the trust ending on the distribution of the trust assets is not required to be shared among the other 2006 taxation years of the trusts with a common contributor, is the basic exemption for that taxation year prorated because of its short taxation year?
4 Would our response be different if the testamentary trust wound up in 2007 instead of 2006?
Position: 1. Yes. 2. Yes, provided the relevant returns are not statute barred. 3. No. 4. Essentially, no.
Reasons: 1. The allocation of the $40,000 basic exemption required by subsection 127.53(2) is required for each taxation year ending in a particular calendar year. See 104(23)(b) and 249(1) and (2) for comments on the naming conventions used for taxation years.
2. Informal consultations with IPPRD. In addition, this position is consistent with the revisions permitted to the basic exemption allocation among associated corporations as set out in ¶30 of IT-73R6.
3. There is no provision in the Act which would require the basic exemption described in subsection 127.53(1) to be prorated for the trust's short taxation year.
4. If the trust were wound up in 2007 such that it had one taxation year ending in 2006 and one ending in 2007, the basic exemption for 2006 would be allocated among the 3 taxation years ending in 2006 and the basic exemption for 2007 would be allocated among the 3 taxation years ending in 2007.
XXXXXXXXXX 2005-016462
Annemarie Humenuk
Attention: XXXXXXXXXX
April 3, 2006
Dear XXXXXXXXXX:
Re: Allocation of the Basic Exemption as Required by Section 127.53 Among Trusts
This is in reply to your email of December 20, 2005, in which you ask several questions relating to the allocation of the basic exemption for minimum tax among trusts which were established with contributions from the same contributor.
In the situation you describe, two testamentary trusts and one inter vivos trust which meets the criteria described in subsection 122(2) were created by the contributions of one individual. The testamentary trusts have a taxation year that ends on April 25 and the inter vivos trust has a taxation year that ends on December 31. One of the testamentary trusts will be wound up following its April 25, 2006 taxation year. If the wind-up process is completed before December 31, 2006, the trust will have two taxation years ending in 2006 whereas if the process is completed after December 31, 2006, it will have one taxation year ending in each of 2006 and 2007.
Assuming that the testamentary trust is wound up in 2006 such that it has two taxation years ending in 2006, your questions are as follows:
1. Does subsection 127.53(2) apply to require the basic exemption for the short taxation year of the trust ending on the distribution of the trust assets to be shared with other trusts created by contributions of the same contributor?
2. If the basic exemption for the short taxation year of the trust ending on the distribution of the trust assets is required to be shared among the trusts having a common contributor, would the trustee be able to amend the allocation submitted with the testamentary trust returns for their taxation year ending on April 25, 2006 (assuming that the original allocation filed with those returns did not contemplate that the trust in question would be wound up in 2006), to allow a portion of the basic exemption to allocated to the short taxation year for the trust that is winding up?
3. Assuming that the basic exemption for the short taxation year of the trust ending on the distribution of the trust assets is not required to be shared among the other 2006 taxation years of the trusts with a common contributor, is the basic exemption for that taxation year prorated because of its short taxation year?
4. Would our response be different if the testamentary trust were not wound up until 2007 such that the trust being wound up only had one taxation year ending in each calendar year?
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
1. Subsection 127.53(2) requires trusts that were created by the contributions from the same individual to allocate the $40,000 basic exemption among one or more of them for a particular taxation year. For this purpose, the allocation is required for each taxation year ending in a particular calendar year. Thus, in the example given, if one of the three trusts has two taxation years ending in 2006, the basic exemption must be allocated among all four of the 2006 taxation years of the three trusts created by the same individual.
2. After the trusts have filed a valid agreement under subsection 127.53(2) allocating the $40,000 basic exemption among themselves for a particular taxation year, there may be an event, such as a change in the taxable income for the year of one or more of the trusts, or an event such as you describe in which an additional taxation year that forms part of the group of taxation years which share in the allocation described in subsection 127.53(2) is created, which may cause the trusts to want to revise the allocation originally agreed upon. The Canada Revenue Agency will accept a revised allocation agreement as long as it does not change the amount allocated to any trust for a taxation year that is statute-barred for purposes of an assessment, reassessment or additional assessment.
3. There is no provision in the Act that would require the basic exemption described in subsection 127.53(1) to be prorated for the trust's short taxation year.
4. As stated above, the allocation of the basic exemption is made among the trusts created by contributions from the same contributor for all taxation years ending in a particular taxation year. As a result, if the trust winds up in 2007, the allocation for 2006 will be shared among the 3 taxation years ending in 2006 and the allocation for 2007 will be shared among the 3 taxation years ending in 2007.
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.
We trust our comments have clarified the application of subsection 127.53(2) in the situation you describe.
T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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