11 December 1995 Ministerial Letter 9530718 - PERSONAL LIVING EXPENSES PAID BY A TRUST

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 personal living expenses of the beneficiaries of a trust are deductible expenses to the trust in calculating its income

Position:

No, they are not. However, trust income is reduced by amounts paid or payable to the beneficiaries.

Reasons:

Deductible expenses are only those incurred for the purpose of earning income

MINISTER/DM'S OFFICE YS# 95-06782M
ADM'S OFFICE

RETURN TO RULINGS, 15TH FLOOR, 25 NICHOLAS ST.

PENDING
December 11, 1995

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable David Anderson, Minister of National Revenue, has asked me to reply to your letter of September 18, 1995, concerning an article on the subject of family trusts which appeared in the publication "Business in Vancouver". I apologize for the delay in replying.

The article indicated that a family trust established for the benefit of a professional practitioner's children can deduct the cost of the children's living expenses from the dividend income received from the practitioner's incorporated business. In addition, it stated that any dividend income in excess of those expenses can be included in the children's income, resulting not only in substantial income tax savings, but also in no income tax being paid by the trust.

In general, the only expenses that a trust is entitled to deduct in computing its income for a year are those incurred for the purpose of earning that income. Deductible expenses do not include amounts paid by a trust for the personal living expenses of its beneficiaries. Once the income of a trust has been determined, that amount, which would otherwise be subject to income tax in the trust, will generally be reduced by payments made in the year to an income beneficiary of the trust in accordance with the terms of the trust indenture. Regardless of whether such payments received by the beneficiary are used to pay for personal living expenses or for other purposes, they must be included in that person's income and are subject to income tax. Unfortunately, this information is not contained in the article.

A number of issues concerning family trusts, including payments made for personal living expenses of a beneficiary, are currently under review by Revenue Canada. Upon completion of that review, Revenue Canada will publish its official position.

I wish to thank you for bringing this matter to my attention.

Yours sincerely,
Pierre Gravelle, Q.C.

Catherine Bowen
957-2131
November 29, 1995
953071