Income Tax Severed Letters - 2018-10-03

Principal Issues: When is the final trust return due in the year of wind up of a personal trust?

Position: For a graduated rate estate, the final return is due 90 days from the date of wind up. For all other trusts, the final return is due 90 days from the end of the calendar year in which the wind up occurs; however, the trustee may choose to file the return early.

Reasons: The law does not allow for a trust, other than a graduated rate estate, to have a taxation year end other than a calendar year in the year of wind up.

Principal Issues: Various issues relating to the reference to "income" in the proposed amendments to Section 120.4.

Position: General comments provided.

Reasons: Wording, scheme and underlying policy of the proposed amendments to Section 120.4.

Principal Issues: Where a business has no business income because it derives income from property, would the corporation's shares qualify as excluded shares.

Position: No.

Reasons: In accordance with the legislation and tax policy.

Principal Issues: Requirements for a trust to have all interests in the trust vest indefeasibly.

Position: Question of fact - but general guidance given.

Reasons: Based on previous ITRD positions.

Principal Issues: 1. For taxation years ending in 2016 and subsequent years, on the death of the primary beneficiary of an alter ego trust (AET) paragraph 104(13.4)(a) provides for a deemed year end of the trust. How is the trust income which became payable to the beneficiary prior to their death treated?
2. For an alter ego trust, are the taxable capital gains arising from a deemed disposition under subsection 104(4) taxed in the AET?
3. Does the result in 1 and 2 also occur where the AET is subject to subsection 75(2)?
4 Would the result for 1 and 2 also occur if the trust was a post-1971 spousal or common-law partner trust?

Position: 1. Income of the trust which became payable to the beneficiary prior to their death is included in the beneficiary’s income in their final T1 return. 2. Yes 3. The results in 1. and 2. are the same. 4. The results in 1, where subsections 104(13) and 104(6) apply, also apply to a post 1971 spousal or common law partner trust. The results in respect of capital gains or income arising from subsections 104(4) to 104(5.2) or subsection 12(10.2) also apply to a spousal or common law partner trust; however one additional result is available. Where certain conditions are met, a joint election may be made to have the income or gains caused by the deemed dispositions to be taxed in the beneficiary’s final T1 return.

Reasons: 1. The deduction available to the trust under subsection 104(6) may be claimed by the trust to the extent the income became payable to the primary beneficiary before death. 2. Clause (i)(B) of element B in paragraph 104(6)(b) denies the trust a deduction that arises from the application of any of subsections 12(10.2) or 104(4) to (5.2). 3. Where subsection 75(2) applies to the AET, income received by the trust prior to the primary beneficiary’s death is attributed to the beneficiary. Where subsection 75(2) otherwise applied to the trust, at the end of the day of the settlor’s death the settlor (person referenced in subsection 75(2)) no longer exists and, as a result, subsection 75(2) would no longer apply. Any taxable capital gains arising from the subsection 104(4) deemed dispositions would be taxed in the AET. 4. The conditions for the joint election are provided in paragraph 104(13.4)(b.1).

Principal Issues: Where an alter ego trust under which dividends on foreign stocks it holds are attributed to the settlor, is the foreign tax paid by the trust attributed to the settlor as well?

Position: No.

Reasons: Consistent with the law.

Principal Issues: Whether paragraph 112(3.2)(b) is applicable in respect of taxable dividends received on the share by a trust that designates the dividends under subsection 104(19) in respect of a beneficiary trust that in turn designates the dividends under subsection 104(19) in respect of an individual beneficiary.

Position: No.

Reasons: The exception in subsection 112(3.32) should be applicable to exclude from the calculation in paragraph 112(3.2)(b) any qualified dividends that are ultimately paid in the year to a beneficiary that is an individual (other than a trust).

Principal Issues: Whether subsection 84.1(2.1) will apply to deem a taxpayer to have taken a capital gains exemption in the event a taxpayer claims a subparagraph 40(1)(a)(iii) reserve on the disposition of shares to which section 84.1 applies, regardless of whether the taxpayer claims any capital gains exemption in respect of the disposition.

Position: Yes.

Reasons: See below.