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 a clearance certificate is required when a settlement is distributed to trust beneficiaries. Trust funds had been lost due to poor investing by the trustee, and question arises whether the trust ceases to exist when all the trust property disappears. Whether Part XIII tax should be withheld when such settlement proceeds are distributed to non-resident beneficiaries.
Position:
Trust does not cease to exist. Trustee owes amount to the trust to make it whole. Clearance certificate is required before a distribution can be made. To the extent that the settlement proceeds distributed to non-residents are on account of trust capital, no withholding tax is required.
Reasons:
Trust law.
970482
XXXXXXXXXX V. Plant
(613) 957-2120
Attention: XXXXXXXXXX
April 4, 1997
Dear Sirs:
Re: Estate of a deceased taxpayer
This is in reply to your letter of February 18, 1997 in which you requested a technical interpretation concerning subsection 159(2) and paragraph 212(1)(c) of the Income Tax Act (the "Act"). You have described an actual situation arising out of the estate of a deceased Canadian resident taxpayer. Pursuant to the will of the testator, the executor was directed to keep the residue of the estate invested for the benefit of the income and capital beneficiaries, some of whom are Canadian residents, and some of whom are non-residents. The executor invested the capital of the estate into one or more risky investments and ultimately lost all of the capital of the estate.
Several of the beneficiaries of the estate commenced proceedings against the executor on the basis that they personally suffered damage as a result of the gross negligent conduct by the defendant. The other beneficiaries were not parties to the proceedings and no claims were asserted for any losses which they may have suffered. The proceedings were settled with a payment by the defendant's law society to the firm of Canadian solicitors (the "Solicitors") in trust for the benefit of the litigants. However, in order to obtain the settlement, the litigants were required to obtain releases of the executor from the other beneficiaries of the estate. The litigants agreed that the other beneficiaries of the estate may participate in the settlement funds.
The Solicitors have now been asked to distribute the settlement funds. A portion of the settlement funds will be distributed to the resident beneficiaries of the estate and the remainder of the funds will be transferred to a foreign solicitor to be held on the terms of a trust agreement executed in the foreign country for the sole benefit of the non-resident beneficiaries.
You have asked us whether the Solicitors who will be distributing the funds will be a responsible representative within the meaning of subsection 159(2) of the Act, such that they would be required to obtain a clearance certificate prior to distributing the funds. You have also enquired whether the distribution of the settlement funds to the non-resident beneficiaries will be subject to Canadian withholding tax under Part XIII of the Act.
It is your view that the Solicitors holding the settlement funds would not be a responsible representative. Once all the estate capital was lost as a consequence of the actions of the executor, you have indicated that the estate ceased to exist as a matter of law. The settlement funds therefore do not represent capital of the estate which is being distributed, so no clearance certificate is required. You are also of the opinion that the Solicitors are merely a conduit for the ultimate transferee of the settlement funds and, for that reason, cannot be said to have control over the settlement funds, such that the wording of subsection 159(2) would not be met.
You are also of the view that the settlement funds do not represent amounts paid from an estate, since the estate ceased to exist at the time that the executor fully depleted the corpus of the estate. The negligence action was initiated by the litigants as individuals, each of whom may have had a capital interest as a beneficiary of the estate. Since there was no estate in existence (or alternatively no executor or trustee of the estate), it was not possible for the litigation action to be commenced by the estate on behalf of the beneficiaries. The settlement amount is partially payable to the beneficiaries of the estate (other than the litigants) purely as a result of a separate agreement entered into between the litigants and the other beneficiaries. It follows that the settlement funds never formed part of the estate and the distribution of such funds would not be subject to paragraph 212(1)(c) of the Act. In any event, it seems clear to you that the settlement proceeds represent a recovery of part but not all of the capital of the estate to which the litigants and the other beneficiaries would otherwise have been entitled.
The interpretation you seek relates to a proposed transaction to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Where, however, the issue to be considered involves a question of fact, the Department will not rule unless all of the relevant facts are known. Nevertheless, we can offer the following general comments.
As stated by D.W.M. Waters, Law of Trusts in Canada, 2nd ed. at page 984, in the context of remedies available to the trust beneficiary, "The beneficiary's principal right is to require that the trustees, who have caused loss to the trust through their breach of trust, shall out of their own pockets indemnify the trust for its loss. This is the right of damages." The implication is that the trust does not cease to exist where all its property has been lost due to a breach of duty of the trustee to administer the trust property correctly. The trust in fact is due an amount from the trustee in order to make the trust whole. Any property restored to the trust would appear to be subject to the original trust terms.
The conclusion flowing from the above is that the Solicitors are in fact a responsible representative, since they would be an administrator, executor or other like person and are administering, winding-up, controlling or otherwise dealing with a property, business or estate of another person. A clearance certificate as described in subsection 159(2) would be necessary before making any distribution.
Absent the settlement agreement, our comments can only be general, but it appears that where such payments to the non-resident beneficiaries are capital in nature they would not be subject to withholding pursuant to paragraph 212(1)(c) of the Act. We note that subsection 212(11) of the Act would not necessarily render the payment of trust capital subject to Part XIII withholding; it must still be an amount described in one of subparagraphs 212(1)(c)(i) or (ii) of the Act. Where the amount distributed represents capital of the estate it would not appear to meet the requirement of subparagraph 212(1)(c)(i) of the Act, in that if the non-resident beneficiary were a person resident in Canada to whom Part I applied, the capital distributed would not be included in computing the income of such person under subsection 104(13) of the Act. A distribution of trust capital would not constitute trust income payable to the beneficiary as described in subsection 104(13) of the Act.
We trust you will find our comments helpful.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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