11 March 1998 Internal T.I. 9718547 - INTEREST ON CAPITAL ASSETS ASSIGNED TO BANKRUPTCY TRUSTEE

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.

		March 11, 1998

	Winnipeg Taxation Centre	HEADQUARTERS
	Enquiries and Adjustments	J. Gibbons
(613) 957-8953
	Attention:  Brenda Gibb
		7-971854

Proposal Pursuant to Bankruptcy Act

We are replying to your memorandum, which we received on July 8, 1997, requesting our comments on interest received in respect of a taxpayer’s capital account and retiring allowance that were assigned to XXXXXXXXXX as trustees of a proposal under the Bankruptcy & Insolvency Act ( the “B&I Act”). We apologize for the delay in replying. As we understand it, the trustees, XXXXXXXXXX, have filed a separate trust return to report this interest and, as well, to claim a deduction for their trustee fees.

Since the taxpayer has filed a proposal under the B&I Act, which was accepted by the Courts, he is not a “bankrupt” as defined in subsection 128(3) of the Income Tax Act (the “Act”). Accordingly, subsection 128(2) of the Act, which outlines the tax treatment of bankrupt individuals, does not apply.

Thus, it is the relationship between the trustee and the insolvent person, i.e., whether the relationship is that of a trust or an agency, that will determine the taxation of income derived from an insolvent person’s assets that, according to the terms of a proposal, have vested with the trustee. If the trustee is acting as an agent for the taxpayer in the matter of the proposal, the income earned on the assets held by the trustee will be considered income of the taxpayer. On the other hand, if the assignment of the assets with the trustee has created an inter vivos trust, the income will be income of the trust.

In a contract of agency, the agent administers property, usually vested in the principal, according to the principal’s instructions, which can be varied at any time according to the instructions of the principal.

In order for a trust to exist, three elements must be present: certainty of intention, certainty of subject matter (the trust property) and certainty of objects (the beneficiaries). The trust, once created, is beyond later intervention by the settlor, unless powers have been reserved for some express purposes, and, generally, the beneficiaries have no authority to instruct the trustee on how to employ the trustee’s powers.

From the information provided, it appears likely that the assignment of the taxpayer’s capital account and retiring allowance has created an inter vivos trust. Thus, the interest income should be reported by the trust thus created.

With respect to the trustee fees, in order to be deductible from the income of the trust, they must meet the usual criteria for the deductibility of outlays or expenses, that is, they must be made or incurred for the purpose of gaining or producing income from business or property, they must not be outlays on account of capital, and they must be reasonable in the circumstances (pursuant to paragraphs 18(1)(a) and 18(1)(b) and section 67 of the Act respectively). Alternatively, where the fees are charged to a capital account or an income account and the purpose is other than to gain or produce income, the fees may instead qualify for deduction under paragraph 20(1)(bb) of the Act. To qualify under this paragraph, the fees would have to be paid for either advice as to the advisability of purchasing or selling a specific share or security of the taxpayer or services in respect of the administration or management of shares or securities of the taxpayer. Since the letter from XXXXXXXXXX, which was included with your memorandum, clearly states that the trustees fees relate only to the administration of the proposal, we are of the view that such fees are not deductible for income tax purposes.

P. Spice
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

.../cont’d